Monday, August 22, 2011

Glad Someone Else Thinks So Too!

Last month I discussed a New York Times article about unilateral loan modifications that certain banks were offering to property owners. These modifications were outside the judisdiction of HAMP and were proactively offered by the banks.

Yesterday, the New York Times published an editorial urging President Obama to be very aggressive in creating homeowner aid programs. We all know that HAMP was basically a failure, with very few loans modified. The Times attributes this to the government (both legislative and executive branches) practice of urging, but not forcing, banks to do all they can do to help. The Times called upon the government to create programs - both through bank mandates and through Fannie and Freddie - to do the one thing I said needed to happen - reduce principal.

Let's face it: from 2004-2008 homeowners paid inflated prices. Now they are stuck with loans based on those inflated prices, while the air has gone out of the property value. It's possible the original loan can still be paid off, but this amounts to the banks taking the net worth that thousands of middle class folks are counting on.

People who couldn't afford their homes have, for the most part, lost them. People who weren't going to pay for their homes have, for the most part, walked away. Now what is left is the ever-harder-working, ever-shrinking middle class who would pay their mortgages if they could. And maybe today they can, but with more job losses on the horizon from big companies (including Bank of America, in a most wrenching irony), maybe tomorrow they can't.

The problem with refinancing on a young mortagage (less than 10 years old) is that once you lump the closing costs and taxes onto the mortgage principal, you effectively have the same payment that you did, which, we have already established, the borrower cannot afford. To lower payments, you have to lower principal.

The Times argues that people who are underwater on their mortgages should have their mortgage principal lowered. I think we should go one step further: all mortgage holders should have their principal lowered by 5-10%, and their payments recast at the same time to lower them over all. This may reward what few bad apples that are left, but it will reward all the good hard working homeowners who have scraped and struggled to make their mortgage payments as well.

If that's too much to swallow, then lower the principal of all borrowers who bought between 2003 and 2008. That ought to account for most of the bubble mortgages. Should you count people who refinanced ad nauseum and took money out of their houses? That's a question for debate. But I agree with the Times; something must be done.

The U.S. government cannot be effective with further tax brea. People who aren't earning a lot of money don't get much back in the way of tax breaks. And let's face it, the government needs that money (see: debt ceiling, deficit). Lowering the housing cost of 65% of American households by lowering their mortgage payment? That makes sense. The government is still bearing the brunt of the burden because it, along with GSEs Fannie and Freddie, own or guarantee more than 80% of residential mortgages in the country. 

In other words, it's within the government's power. We need to seriously study it as a possibility.

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