Underwater borrowers have been offered various bail-out programs since the mortgage and market meltdown. Most of those programs failed to make a significant impact as they addressed variable high interest rates and not negative equity. Most financially strapped homeowners won’t pour money into a home where they owe significantly more than it is worth – even if they can refinance.
To help keep the American dream alive and allow struggling homeowners to stay in their homes various schemes have been devised and put forth. Mortgage balance write-downs is one. Also special cases when a divorced spouse can get alimony to help her until she can pay her debts.
Mortgage balance writedowns do occur all the time in the form of short-sales. In those cases the homeowner do lose the home though.
Mortgage write-downs is highly controversial. California actually is doing it all the way and writing down up to $100,000 of a borrowers mortgage balance. The full amount is coming from taxpayer funds… As Ricard Greene, a professor in real estate at the University of Southern California put it in a recent article:
“I think taxpayers would be furious at the idea that everybody gets completely off the hook for this,” Green said. “There are people that say, look, I’ve been a renter all these years, I’ve been paying my mortgage all these years, why am I bailing out these people who made a bad decision? I think the politics of it are very combustible.”
The article further says “The program, known as the Hardest Hit Housing Market fund, is part of a $7.6 billion federal effort to help underwater homeowners in 18 states. California received $2 billion. But when banks and lenders who service loans refused to write down even a small portion of the negative equity loans, California decided to use the taxpayer money to pay 100 percent of the mortgage reduction.”
Foreclosing homeowners do affect values in a neighborhood. There was abuse going on by lender. However, I believe there were even more wishful thinking. greed and willful ignorance on the side of borrowers. So, how would I solve this?
- Set up a task force to prosecute criminally real estate agents, mortgage brokers, lenders and homeowners that aided in and committed loan fraud (remember those notices on the mortgage papers about it being a federal crime to lie on the application?)
- For people that can afford the mortgage but choose to walk away, convert the outstanding loan balance to a judgment against the person and their other possessions. In many cases the loan is only secured against the residence – in those cases I would say too bad for the bank in question.
- For people that are in a bad situation due to unforeseen circumstances, show compassion by allowing all or part of the remaining debt to be forgiven or deferred after a foreclosure or personal bankruptcy. A bankruptcy court should be allowed to (and probably already is allowed to) discharge any remaining balance on a loan after a foreclosure if the person subsequently files for bankruptcy.
No to more bailouts and yes to larger sticks to make sure the unethical individuals among us have incentive to behave. The market will take care of the rest. Life is full of choices and choices have consequences.