There's a huge debt weighing on the economic and housing recovery: the nearly $700 billion overhang mortgage debt from a quarter of all homeowners who owe more on their mortgages than their homes are worth. According to the Wall Street Journal, that's leaving Congress with a big decision about whether to forgive any or all of the debt, and if such action would help improve the economy.
Underwater homeowners are more susceptible to foreclosure, which can drive down values of surrounding homes. Homeowners are also stuck in their existing homes, unable to relocate for a job or trade up to a larger home, which adversely affects a number of other home-related industries such as moving and construction companies. The fact that home prices are climbing again in many areas of the country has boosted some homeowners (700,000 in the first quarter, according to CoreLogic) into positive equity again, but the question is whether enough borrowers are being helped.
The problems with forgiveness programs are not small, including: how to handle bank-owned second mortgages, how to determine which of the underwater homeowners will get the benefit, whether mortgage investors or taxpayers should pick up the tab, and how to prevent strategic defaults among those who want out of their current home and don't think it's fair that others get loan forgiveness.
Several solutions are being floated. One would be for Fannie Mae and Freddie Mac (which together hold about 60 percent of mortgages) to cover the closing costs for homeowners who refinance to a lower mortgage rate. That will move the homeowner toward positive equity sooner, but it means taxpayers pick up some of the tab.
Another idea is for mortgage investors to set up a program where underwater homeowners earn cash rewards for remaining current on their loans, with the payoff occurring after the loan is fully paid. The Wall Street Journal reports that one firm in New Jersey is already doing this.
Do you think underwater homeowners should get mortgage forgiveness, and do you think Congress or the private sector should design the program? Or, do you believe the market should be left alone to correct itself?
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