By NICK TIMIRAOS
Policy makers are wrestling with a dilemma about the overhang of mortgage debt from the housing bust: to forgive or not to forgive?
With prices down by one-third from their 2006 peak, more than 11 million homeowners are underwater, or owe more than their homes are worth. That is about 24% of all homeowners with a mortgage, according to data firm CoreLogic.
The massive debt overhang—totaling almost $700 billion—is troubling not only because it leaves homeowners more exposed to foreclosure, which further erodes property values. It also weighs on the economy, making homeowners less likely to spruce up their properties and unable to tap equity to start businesses or pay for things like college tuition.
Housing demand also suffers. Without equity, young families are less likely to trade up to bigger places while empty-nesters may be unable to downsize. Perversely, in some of the hardest-hit markets, home prices appear to be stabilizing because there aren't enough homes for sale—in part because so many homeowners are frozen in place.
Recent home-price gains will help a little. CoreLogic estimates that during the first quarter, about 700,000 borrowers climbed out of negative equity thanks to modest price appreciation. But in a handful of states, more than one-third of borrowers are still underwater.
That is reviving calls for policy makers to embrace principal forgiveness. One problem is deciding who deserves help and who doesn't—and who will absorb the losses: taxpayers or mortgage investors. Often the two are the same because taxpayer-supported entities like Fannie Mae and Freddie Mac back about 60% of all mortgages.
Economists are split. "There's no question that in many cases, [principal forgiveness] is the only way to assure people will stay in the house," says Kenneth Rosen of the University of California, Berkeley.
Others say what really matters to borrowers is an affordable monthly payment. "If people have a huge debt burden but the mortgage is not the problem, why are we reducing the mortgage?" asks Thomas Lawler, an independent housing economist in Leesburg, Va.
Fannie and Freddie's federal regulator has been wary of debt forgiveness, saying there are cheaper ways to help homeowners avoid foreclosure.
The Treasury Department tried to force the issue this year when it offered to pick up part of the tab for Fannie and Freddie if the government-supported mortgage giants adopted an existing federal program that subsidizes such write-downs for struggling borrowers. Economists estimate the firms could reach about 300,000 borrowers.
Cost isn't the only issue. Trimming debt only for homeowners who are behind on their mortgage payments could lead other homeowners to default in hopes of getting a break—and could inflame those who believe it is unfair.
Another concern: Many borrowers who are underwater have second mortgages, which are primarily owned by banks, sitting behind the first mortgages that are primarily owned by Fannie, Freddie, and private investors. Writing down taxpayer-backed first mortgages without extinguishing bank-owned seconds is both politically dicey and an inversion of property rights. Is there a way to end this stalemate? Among the ideas offered by economists, private investors and government agencies:
First, Fannie and Freddie could cover closing costs for underwater borrowers who refinance into shorter-term loans with lower rates, a proposal the White House first put forward and that Sen. Jeff Merkley (D., Ore.) introduced in a bill earlier this year. Already, Fannie and Freddie have relaxed refinancing rules so that anyone with a loan backed by the firms can refinance, no matter how underwater, as long as they are current on payments. Accelerating amortization provides less of a break than principal reduction, but it nevertheless returns the borrower to terra firma much sooner.
Columbia University economists Glenn Hubbard, Christopher Mayer, James Witkin and mortgage-bond veteran Alan Boyce spelled out in a paper how this might work. A homeowner who owes 117% of his home's value and who took out a 30-year loan with a 6.7% rate five years ago could refinance now into a 15-year loan with a 3.1% rate. That would increase the monthly payment by just $24. But it would leave the borrower with positive equity in less than three years, assuming home prices stay flat; within five years, the homeowner would have 17% equity. Doing nothing, the borrower would be underwater for more than seven years.
Second, mortgage investors could structure "earned" forgiveness programs that effectively pay deeply underwater borrowers to stay current on their mortgages. Loan Value Group, a Rumson, N.J.-based outfit, has designed such a program, called the "Responsible Homeowner Reward," and is working with about 25,000 borrowers from a half-dozen mortgage firms.
The program works like this: Participating mortgage investors enroll borrowers who receive a small cash "reward" every month that they make their payments. The reward might grow to 10% of the loan balance, but it can be claimed only at some time in the future, usually when the borrower pays off the loan.
Finally, if Fannie and Freddie aren't comfortable implementing a principal-writedown program of their own, they could ramp up sales of defaulted mortgages to investors who buy them at a discount, cut the loan balance, and make money by keeping the borrower in the house. The Federal Housing Administration this month said it would sell about 9,000 of those nonperforming mortgages later this year.
Other initiatives have run into a buzz saw of protest from mortgage investors, including a bid by the White House three years ago to allow judges to write down loans during bankruptcy proceedings. More recently, local governments in California have broached the idea of seizing mortgages through eminent domain and then restructuring them.
Principal reduction isn't a panacea for the nation's housing market. But in a handful of markets, the negative-equity problem will persist for many years. It makes sense for policy makers to at least experiment with how to speed along the clearing process.
No comments:
Post a Comment