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?)