In an effort to help with the expecting tsunami of foreclosures, the government is putting pressure on Fannie Mae and Freddie Mac to modify their “underwater” mortgages when people fall behind on payments. But won’t this just encourage people to not make payments? I decided to get insight from James Lockhart, Former Federal Housing Finance Agency Director and Vice Chairman of WL Ross & Co. LL: Should loan modification be opened to people who are behind on their mortgages? JL: Everyone is in favor of modifications over foreclosures. The real issue is how do you do them? No one has figured out how to do them without causing some moral hazard. Meaning everyone that has an underwater mortgage wanting to get their principal reduced. We need structure where it would apply to people who are seriously underwater. You don’t want people to strategically default so they can get a write down on their mortgage.

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