Debt Consolidation More Effective Than Mortgage Modifications? |

Is the federal government’s massive mortgage modification program little more than a giant debt consolidation program for struggling homeowners? And if that’s all it is, is it even working at providing debt relief to the homeowners who need it? A growing number of critics, ranging from angry bloggers to politicians to consumer advocates, are criticizing the federal government’s Home Affordable Modification Program. Some say that it is little more than consumer debt consolidation with some fancy dressing from the federal government. Others say it simply hasn’t been effective: Too many homeowners are still falling into foreclosure to be able to say that the government’s modification program has had any real success.


The Obama administration announced the Home Affordable Modification Program in 2009 with great fanfare. The goal was to help three to four million homeowners avoid foreclosure. Under the program, the government provided financial incentives to banks and lenders who agreed to modify the mortgage loans of homeowners struggling to pay their monthly bills. Lenders can lower the monthly payments of these homeowners in one of many ways: They can reduce the interest rates on their loans, restructure loan terms or forgive a portion of their principal balances. Critics came out right away, saying that it wasn’t the government’s place to bring debt relief to homeowners who overspent on their residences. Supporters, though, said that anything that could cut down on the soaring number of housing foreclosures had to be good for the national economy.

A Sluggish Start

The problem so far has been that the Home Affordable Modification Program has helped nowhere near the initial 3 million to 4 million targeted. In fact, the U.S. Treasury Department reports that fewer than 1 million homeowners have received permanent loan modifications under the program. At the same time, a study by Fitch shows that nearly 65 percent of homeowners who do receive mortgage modifications default on their new loans within 12 months. Those are all abysmal numbers, and highlight a program that’s simply not working.

What Now?

What other options do homeowners have to stop foreclosure? Critics have said that the mortgage modification program acts a bit like debt consolidation, under some of the options that lenders have, because banks and lenders are taking existing consumer debt and reworking it, leaving homeowners with payments that they are supposed to be able to afford. Why not, then, advise more homeowners to look into traditional debt consolidations? It’s true that these loans do come with some disadvantages – taking one out lowers the credit scores of consumers; these loans often come with high interest rates – but they can also help consumers get a handle on their debts. Struggling homeowners who take out debt consolidation loans might be able to get their finances in enough order to be able to make those mortgage payments comfortably each month.