The loan modification plan sets a target of 31% for the ratio of loan payments to income on modified mortgages, and provides numerous government subsidies to motivate borrowers, lenders, and servicers to carry out successful modifications. I have 3 comments:

1) Why are we subsidizing loan modification? To bailout those that made a poor real estate investment? Remember, those borrowers can start over in a rental unit at a relatively low cost. Pensioners who just lost their life savings or lower-income renters who just lost their job might be deemed even more worthy of government support?

2) The Administration plan has not solved the existing technical problems that doomed past plans to failure. As one example, 2nd mortgages remain a fundamental impediment to successful modification because the 2nd lien holder takes the benefits from the lender. The Administration plan requires the 2nd lien holder to concede, but they have no motive to do so.

On this basis, I expect a low take-up rate on the plan in general, and a high reoccurrence of default just as was the disappointing experience with past plans.

3) The main new wrinkle in the Administration plan is to throw subsidy money—lots of subsidy money--at the problem. This is the same principle that allowed the FDIC program to have some success. But is subsiding defaulting borrowers the best current use of taxpayer money? Do the benefits exceeds the costs?