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How about a mortgage bailout?

By Jay MacDonald · Bankrate.com
Monday, November 7, 2011
Posted: 10 am ET

It has been the elephant in the living room of our national debate since the housing bubble burst five years ago: Why not simply bail out homeowners who are upside down in their homes and facing foreclosure?

As Harvard economist Martin S. Feldstein points out in a recent op-ed in The New York Times, nearly 15 million homeowners currently owe more than their homes are worth. In half of these situations, the mortgage exceeds the home value by more than 30 percent.

The domino effect from the housing collapse continues to plague our economy. Consumers save more and spend less, nobody's borrowing, so businesses cut back production and lay off workers. Unemployment creates even more "underwater" properties to further feed the downward spiral of home values.

Understandably, the banks holding these troubled mortgages don't relish the thought of taking it full in the boxers, so they begrudgingly extend a few loan mods and wait for better days. Our current zero-sum political environment has thus far offered little more than tea and sympathy.

Feldstein dares to suggest the elephantine solution: a mortgage bailout.

"To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value. About 11 million of the nearly 15 million homes that are 'underwater' are in this category. If everyone eligible participated, the one-time cost would be under $350 billion. Here's how such a policy might work:

If the bank or other mortgage holder agrees, the value of the mortgage would be reduced to 110 percent of the home value, with the government absorbing half of the cost of the reduction and the bank absorbing the other half. For the millions of underwater mortgages that are held by Fannie Mae and Freddy Mac, the government would just be paying itself. And in exchange for this reduction in principal, the borrower would have to accept that the new mortgage had full recourse – in other words, the government could go after the borrower's other assets if he defaulted on the home."

Feldstein says his solution is fair because it would require sacrifice from lenders and borrowers alike. Lenders would accept the cost of the principal write-down because the resulting loan, with its lower loan-to-value ratio and full recourse feature, would make default much less likely. Borrowers would accept the full-recourse risk to receive the mortgage reduction and thus avoid foreclosure.

Feldstein admits chances are slim that any politician from the White House on down will acknowledge the elephant, especially in this election year.

"But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession," he writes.

What's your assessment of the elephant? Do you see a mortgage bailout as an obvious solution? Or just another government bailout for the banks?

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7 Comments
Bob
December 05, 2011 at 12:07 pm

I've paid my mills responsibly my whole life. And I don't like bailouts. But I like everyone else have been caught up in this. Responsible/irresponsible borrowers, investors, or those that have one house they call home, and yes the banks/lenders as well. We are all in this imaginary deflated bubble. In my opinion both side of this should be bailed out. Equal the field on both sides. So we can move forward together business, as close as possible, as usual.
No matter what position you are in, the fact is the prices should never have been what they where. Both sides of the balance sheet should be adjusted. It was a pricing error plain and simple. Adjust the mortgage principle on the loans to today's fair market value. Mortgage payments will be lower to help out the borrowers. And the lenders will continue to make a profit on those loans without the extra foreclosure/short sale/deed in lieu expanses. It is the only fair way to deal with this situation, both sides take a hit on the values and both sides get help.

Carl
November 09, 2011 at 12:26 pm

Won't fix the economy. And will not be supported by the people who have been financially responsible, or the "elected" "representatives" in charge.

Roger
November 08, 2011 at 9:41 pm

This is sensible solution. While I have a home that is under water, I ,like others responding here, also pay my bills on time. But the bigger picture needs to be addressed as discussed in this approach. The banks were bailed out, why not the people who were caught up in this trickery perpetrated by a few?

w sparks
November 08, 2011 at 8:28 pm

I have said something like this for a year or more the money was given to the wrong group. it should come back to the people we are the ones who will get it back into the flow again. Put some rules on the bail out like if you sell the house with in ten years at a large profit you must pay back some of what was used to bail you out. I am sure that the Gov. can come up with a way.

Tim
November 07, 2011 at 7:53 pm

Anyone who has been responsible with their debt management will be penalized by a bailout of this type. I assume we are under water on our property at this time (I don't know for sure because I'm a little afraid of what they might tell us!) but we pay ALL of our bills ON TIME, EVERY MONTH. To do that we must go without the "essentials" like wide screen TVs, Blu-Ray, movie channels, new cars, snow blowers, dining out, etc., etc.
Pay down those types of mortgages now, and watch what happens if the economy ticks up - all of the banks will fight to lend all of the money back to all of the people who took it - and then some.

Steve
November 07, 2011 at 6:05 pm

I've been responsible and not mortgaged more than I should. I've chosen to live a lifestyle below what I earn and have paid down my debt so I'm not underwater, even though my house has lost value. My tax dollars should not go to bail out people who were not wise with their debts, nor banks that were not wise with their lending. Let them learn the painful lesson about personal finance now instead of bailing them out and kicking the problem down the road, even at the expense of a possible miniscule uptick in our consumer economy.