Government and private-lender attempts to stem the home foreclosure crisis so far have mostly focused on loan modifications or refinancing — giving borrowers a temporary or permanent reduction in their monthly payments.
But some housing experts say the next wave of help will have to address the core problem for many homeowners: negative equity.
This camp believes that there is no alternative but outright forgiveness of a substantial chunk of mortgage debt for many people who are underwater in their homes and at risk of foreclosure.
If your mortgage is worth significantly more than your house, your incentive to walk away may rise even if your monthly payment goes down. The decision to walk becomes a matter of simple math: If you have no hope of having an equity stake in the home for years to come — if ever — trading your mortgage payment for a much cheaper rent payment may be an economic no-brainer.
Right about now, many readers’ outrage meters no doubt are in the red zone. Forgiveness? Let them off the hook, permanently, for some piece of a debt load they shouldn’t have taken on in the first place?The response from proponents of forgiveness is the same just-suck-it-up justification offered for every housing bailout program: The rest of us will pay, one way or another, if home prices keep falling because more foreclosed properties end up dumped on the market.
Given the alternative, the argument goes, why not try to sustain as much owner-occupied housing as possible?One proposal for a debt-forgiveness program was floated by the Milken Institute in Santa Monica, Calif. The plan, written by institute President Michael Klowden and regional-economics director Ross DeVol, would refinance existing mortgages of underwater homeowners with new loans from the government.Klowden and DeVol call it the “homeowner principal forgiveness vesting plan.” Here’s how it would work:Say an owner’s mortgage is worth $400,000 but his house is valued at $300,000. The government would refinance the $400,000 loan with two new loans.
Fannie Mae, the mortgage financier now under government control, would provide a first loan for the market value of the house, in this case $300,000. The Treasury would issue the second loan, in this case for $100,000.The Treasury loan would be interest-only and would provide the vesting part of the program. For each year that the homeowner keeps up payments on both loans, one-fifth of the Treasury loan would be forgiven.“This gives homeowners the incentive of returning to a positive net-equity position before their hair turns grey — maybe even in time to pay for their children’s college education,” Klowden and DeVol wrote in a summary.
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