So the holder of millions of mortgages has decided that reducing principal payments on underwater homes isn't going to be a good solution. I am a tad disappointed. It would seem to me that most of the people who walked away from their underwater homes have already done so. The rest of underwater people are paying their mortgages, even as they calculate how they will not be able to move for years unless they go through a very painful, very slow, very adversarial short sale process.
I think the government is looking at this completely wrong. Why not institute a principal reduction program for underwater homeowners who are current on their mortgages? Think of it as a reward to all those hardworking middle class homeowners who have managed to hang onto job and home by the skin of their teeth. These are the people who didn't take crazy risks and who would be more productive and able to productively contribute if they were a bit more secure.
Here is how I'd structure the program:
1) Homeowners must have a loan currently owned by Fannie or Freddie
2) Homeowners must be current on said mortgage
3) Homeowners must be using home as primary residence at least 2 years
4) Homeowners must apply for principal reduction and pay for an appraisal to prove that the home is underwater.
5) Homeowners would be eligible for principal reduction of half the underwater portion. In other words, If they are $200,000 under water, they would be eligible for $100,000 principal reduction. This way the homeowner still shares some of the burden.
6) Loan amortization schedule is recast so that payments are spread over the remaining life of the original loan. This drops homeowners' payments immediately.
I'll admit this might not really feel like much of a "stimulus" but it will have that effect. People need to feel secure in their lives to do the kind of consumption this economy needs. If they can't get a leg up on income, then helping them with the largest ongoing expense they have is a good way to go. Much more than a one-time handout, this will have a gradual and long lasting effect.
FHFA Says Fannie, Freddie Will Not Reduce Mortgage Balances | Realtor Magazine: