New Hope for Underwater Homeowners

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Jason Reed / Reuters

Fannie Mae headquarters in northwest Washington, D.C.

Given the consistently good news we’ve seen from the housing market, it can be easy to forget just how much damage the bursting of the real estate bubble has wrought on the economy and the lives of average people across the country. According to analytics firm CoreLogic, 10.8 million homeowners remain underwater (meaning they owe more on their mortgages than their homes are worth), representing 22% of all mortgages in the country.

On top of the obvious human suffering caused by crushing debt, the fact that more than a fifth of the mortgages in this country are underwater is a huge drag on the economy. Underwater homeowners are much more likely to default on their mortgages, which puts downward pressure on home prices. They’re also generally unable to refinance at today’s low rates and thereby reduce their monthly costs, further increasing the odds of default and limiting their ability to spend. In addition, some economists have argued that the widespread phenomena of underwater homes has exacerbated the unemployment problem because it prevents the unemployed from moving to find jobs.

To counter these effects, the Obama Administration has rolled out programs incentivizing banks to reduce the amount owed on the mortgages of underwater homes. In theory, at least, this can be a win-win-win solution to the problem of underwater homes: Homeowners instantly reduce their monthly payments and begin building positive equity in their homes; mortgage lenders benefit because above-water homeowners are far less likely to default and the foreclosure process is very expensive for banks; and the process helps speed recovery for the entire economy.

(MORE: Is This Man Single-Handedly Stifling the U.S. Housing Recovery?)

But for years now Fannie Mae and Freddie Mac — which have been owned by the federal government since 2008, and which owns or guarantees more than half of outstanding residential mortgages — have not been writing down the value of mortgages at all. The reason? Ed DeMarco, acting head of the the government entity that overseas Fannie and Freddie, has refused to sign on to such a program, arguing that it would encourage so many folks to intentionally default on their mortgages that it would end up costing taxpayers more than it saves.

But a new research report from the nonpartisan Congressional Budget Office calls that analysis into question. According to the report, if Fannie and Freddie were to start forgiving mortgage debt in certain cases, it would save the federal government up to $2.8 billion, and help up to 284,000 homeowners lower their debt loads. The report does note that the overall effect on the economy would be muted because only mortgages that are in serious risk of default would be eligible for the program, and only a fraction of the total homes underwater in the country fit that profile. (If program eligibility were widened, it would have more simulative effect on the economy, but save the government less and potentially lose money in the long run.)

Even if the economic benefits of a limited program would be muted, though, isn’t something better than nothing? If the government can, at no cost, help hundreds of thousands of people whose lives were turned upside down by the bursting of the real estate bubble, shouldn’t we try?

Those questions send the discussion into the realms of morality and politics. As I’ve written before, an effective program of mortgage-debt forgiveness would effectly involve identifying those homeowners who are deepest in debt, and most willing to walk away from their obligations, and giving them tens of thousands of dollars in relief. Some would see this as simply immoral. But at the very least, it’s a tough program to defend politically because some folks will inevitably be denied relief for not being far enough underwater, and they’re likely to be upset that their “less responsible” neighbors are getting a break while they aren’t.

So will this report have any effect on the debate? It’s tough to say. As long as Ed DeMarco is running the FHFA, it’s unlikely that a principal forgiveness program would get off the ground. That being said, yesterday the Obama Administration nominated Congressman Mel Watt to replace DeMarco, and Watt has voiced his support for the program in the past. Whether Watt has any chance of garnering Senate approval for the post is another matter, as Republicans are almost universally opposed to any further government assistance to underwater homeowners. But with this latest report determining that a limited program would probably end up saving taxpayers billions, it may prove difficult for Republicans to maintain their opposition.

(MORE: Building a Better Bailout: Can Fannie and Freddie Help American Homeowners?)

8 comments
glekid
glekid

Some people just like seeing other people suffer and don't care about the other man or woman .The housing thing  the underwater thing is not good for  none of us even those who are doing good at time. So somebody better do something before it get worst help i'm underwater also.

NaveedXVO
NaveedXVO

NO NO NO NO NO NO NO....

Let the homeowners declare bankruptcy, that's what bankruptcy is for. There is no valid reason to give people houses. It's a completely screwed up incentive that taxpayers shouldn't be on the hook for. This is giving away other peoples money to buy votes.

goblue562
goblue562

"...government entity that overseas Fannie and Freddie.."

Editors must be asleep at the wheel.

MichaelMickeyAgee
MichaelMickeyAgee

Enough about Fannie Mae and Freddie Mac. WHAT ABOUT US THAT DONT HAVE EITHE ONE? Nobody is helping us. I have never missed a payment on a home that is 200K underwater. My interest rates on two mortgage loans are 8.65% and 6%. WHEN IS SOMEONE GOING TO HELP PEOPLE LIKE ME ??????

crabrockworld
crabrockworld

@MichaelMickeyAgee 

I agree with you and I am in relatively in the same boat. We make good money, have been with our respective employers for over 15 years each, have never missed a mortgage payment and have credit scores north of 750. We originally were eligible for a ‘top tear’ mortgage loan when we bought in 2008, but the bank (we had been customers there for over 30 years prior) worked very hard to talk us into what would end up being called a ‘predatory loan’.

We went with the pressure and hard sell and acquired a ‘second tear’ mortgage…two of them that both went to a single home purchase. We are now 100K underwater (we lost 40K in the first year we lived here) and we had to nearly sue our bank to at least get a decent APR (not as low as what is available now) on the first loan. They won’t touch the second loan because ‘another bank owns it’. So, our bank of three decades - that we proved lied to us during contract negations - not only never even attempted to apologize, but they told us that since we are such great customers with exceptional work histories, income and credit scores we ‘have something to lose’ and thus they will not help us. They actually told us to default on our mortgage on purpose and to this day we still receive from them short-sale packets a couple of times a month.

So, yes…what about people like us? The true heroes of the housing collapse. The ones who kept their awful mortgages and still pay on them without any modifications who only desire the ability to take advantage of the low interest rates available today that in theory are now available to those defaced borrowers who ran away from their mortgage based financial responsibilities many years ago?

One more thing for any fool who wants to spout retarded dogma regarding helping ourselves by bankrupting and/or that we are somehow looking for handouts, etc. - please reread the aforementioned information. If you still feel inclined to say we are not helping ourselves by being gainfully employed and paying our debts on-time then please explain what you mean because if you have the ignorance-born hubris to infer we are not helping ourselves and the US economy as a whole by not defaulting then I challenge you to state outright what you’re doing that makes you think for a second you’re doing something better for yourself and the economy.

goblue562
goblue562

@MichaelMickeyAgee   Maybe if you didn't have TWO mortgages..  You do know that the best helping hand is at the end of your own arm, right?  

MichaelMickeyAgee
MichaelMickeyAgee

Let me know when your have something contributing to say.  Grow up.