The latest update(.pdf) on the government’s Home Affordable Modification Program (i.e., HAMP) shows that, in addition to a big increase in canceled trial loan modifications, the back-end debt-to-income ratios of those moving on to “permanent” modifications has improved – from a ridiculous 64.3 percent to an only slightly less ridiculous 63.8 percent.
Recall that a central component of this program is to bring the borrower’s front-end debt service (i.e., PITI, etc.) down to a very reasonable 31 percent with a new government five-year teaser rate loan that will eventually adjust upward, while back-end debt service (i.e., all debt) is permitted to rise toward its theoretical maximum of 100 percent.
It looks as though the back-end ratio may have already reached its practical limit.
The greatest embarrassment for academic economics in the 2007-2009 crisis was not the failure to predict the crisis but the failure to provide any useful guidance for politicians and central bankers after the crisis struck. The failure of analysis was much more damning than the failure of prediction because economics has never seriously claimed to be a predictive science. Keynes never published an economic forecast, and neither did Hayek, Ricardo, or Adam Smith. What economics did claim to offer was a set of analytical tools to explain reality and suggest sensible responses to unexpected events. It was in this respect that contemporary economics revealed its inadequacy.
A major global currency suddenly looks shaky; a handful of European countries cling to life preservers in a sea of debt; the global recovery shows signs of sputtering; tensions across the Middle East rise; and the leaders of the free and not-so-free world can’t seem to agree on anything, from major financial reform to the tricky task of unplugging cash lifelines from ailing economies.
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