In a recent paper, the New York Fed studies the likelihood of a continuing drop in homeownership. To address the question the authors propose that anyone who is underwater in their home should be considered a future renter:
“According to Haughwout, Peach and Tracy [the authors of the study], negative equity homeowners will face such daunting saving requirements to retain their home or purchase a new home that they will very likely convert to renters over time.”
See the study here: http://www.newyorkfed.org/newsevents/news/research/2010/rp100604.html
Bottom line: While the official government message is that underwater homeowners should do everything they can to hang in there, one could argue the New York Fed is already writing them off.
The Federal Reserve Bank states here that Loan mods with principal reduction are more likely to work than those with interest rate only modifications, no really? Underwater borrowers now top 25% and strategic defaults are up 40%. Where is the incentive for the homeowner that is ready, willing and able to pay their mortgage to continue while those who choose not to bail? Why not take all the TARP money and reduce the principal to current market value on “performing assets” as a reward to those who take their responsibilities seriously as opposed to refinancing those that can pay but choose not to pay or are simply working the system applying for a loan mod followed by a short sale followed by a foreclosure that can take up to 2 years in California with no house payments, no property taxes, no insurance, etc. When will we learn to reward good behavior as opposed to bad?
I agree CJ, but the problem may be bigger than you realize. I think we created roughly $4Trillion in excess debt during the bubble, and have best case worked through $750Billion so far. While 25% of folks are underwater, only 12.4% currently aren’t making their payment. If you start handing out principal reduction there is a pretty good change the other 12.6% will want theirs too.
Add on top of that the fact that those who aren’t upside down, don’t want to foot the bill for homeowner bailouts, so I’m not sure its politically possible regardless. Would certainly take some amazing leadership to convince the country that it was the right course… leadership I don’t think we’ve had for a long time.
So instead we extend and pretend by doing all sorts of whacky things that as you point out reward the bad, and punish the good.
Good point Sean. But remember that these are the same leaders that told us there was no bubble and there is no shadow inventory. How can we trust anyone that allows Fannie & Freddie to run amock? No accountability whatsoever for the taxpayers Billions of dollars squandered. I for one will help clean house in November with my vote. Hope others will do the same.
C J – You’re blaming the Obama administration for the mess that the Bush administrations put us in? You’ve got to be kidding me !!!!
I am not blaming any administration. There is enough blame to go around. Administrations, ploiticans, lenders, wall street, consumers that committed fraud and lied on their loan apps, a society and government that wants what they can not afford, and so on, and so on, and so on. My point is that those of us that are paying our mortgages, property taxes, etc on time are the only ones no on cares to “BAIL OUT”. Fannie & Freddie are loosing water like BP is loosing oil. It is a travesty on the American Public and all of us who will eventually pay more and more taxes for their total lack fo accountability.
Who cares whose fault it is… there was housing bubble that Greenspan refused to identify early on…. there were greedy people that targetted others for toxic loans (most are out of biz) the banks did fraud and the courts closed their eyes. The current administration interfered to much with correction and the banks are greedy. MANY did not WANT government bailout money because they make more without it. IMHO.
my blog has segments of upclose and personal for those wondering what its like to fight and hang in… and go through eviction process etc….
SEAN this is brilliant blog you have. In this post I would say that the government has no incentive to help homeowners… .banks are fighting principle reduction. The government is tightening down on those fighting foreclosure too…. this is truly a sad day in America where banks can KEEP down payment money simply by refusing to work with you during hard times.
The blame game won’t solve the bigger problem. The bigger problem is the government continues to spend our money on loan modification programs on those who cannot or will not make their loan payments and will strategic default ultimately. The billions being spent by the feds and the states will not solve it. What will solve it is to allow the free market to create jobs and to give tax incentives to businesses in the private sector to create jobs. The unemployed homeowner needs a job. So if you take a close look at who is getting the money now, it is all short sighted and will generate votes in next election. It is very political and its not about helping the economy in the long run. When we are in a deeper recession then maybe some people will wake up and realize the real problem.
Denise.. .the government isn’t spending a DIME on those who are getting modifications which is precious few. Those 1 % or less than 1% of delinquent borrowers receiving a modification are not receiving ANYTHING.. … it simply changes the terms in the loan and often results in higher payment immediately or lowered payments with a higher principle balance than before.
The banks WANT foreclosure because it pays all the way around.. They were paid to get the loan, service the loan, sell the loan to investors and then they get TARP money as well as the Insurance money if defaulted.. After that they then sell the house and get a little bit more… and if they want they can go after the home owner.
The only ones not getting help are the homeowners trying for modification only to have the bank turn around and sell it back (usualyly to themselves). The homeowner is not getting one DIME from you or me or the government.
The government gave almost 30 billion to the banks to bailout Abnd actually much more.. MUCH of it ended up in foreign hands… and it would only take about 10 billion to bailout the homeowners….. now who is making out here?
The main thing though is that HOMEOWNERS are not receiving anything from the government… There is so much fraud involved it boggles the mind…… but make no mistake if this country wants to recover blaming homeowners that are underwater and refusing to lower principle will just prolong agony.. the banks are bailed out, the insurance agencies are bailed out but people need help. If someone can’t sell their home because it lost value then they are drowning without any life-preservers in sight.