XI. Debt Forgiveness for Underwater Homeowners

Christopher Whalen, a banking expert at Institutional Risk Analysis, says that in housing we are in a “reverse New Deal,” meaning that we are dismantling the engine that helped generate America’s broad middle class. That engine was home ownership.

Those who held the standard thirty-year, fixed-rate mortgage were saving for the future every time they made a payment, as they were acquiring greater equity in the home as they did so. That accumulated equity became a nest egg for retirement or an inheritance for the children.

The brokerage firm, Amherst Securities, says that among the 55 million families with mortgages, one in five is underwater — they owe more on their mortgage then the house is worth — or already delinquent. Those 10 to 11 million families are approaching failure and foreclosure. They are likely to become renters, because banks are not likely to give them new mortgages.

The prospect for the future is a depressed housing market, with too many houses for sale and too few buyers. Since the housing sector has always led the way out of a recession, economic recovery may need to wait until the surplus housing is gone. Amherst Securities sees an excess supply of 4 to 6 million houses in the next six years.

William Greider blames the Obama administration for following a very forgiving regulatory policy that “basically looked the other way and ignored the fictional claims on bank balance sheets.” He further claims that the government’s rationale for rescuing banks first was that the economy cannot recover until the financial system is healed; however, banks have at least partially recovered but the economy hasn’t.

The Obama administration’s main program to help underwater homeowners was the Home Affordable Refinance Program, designed to help five million homeowners; however, the news media, which has done an exceptionally good job of monitoring the Obama program, could find only 895,000 that were helped.

In October 2011, President Obama issued an executive order easing mortgage payments for about one million homeowners, about nine to ten percent of those in dire housing straits. The easing will apply to those with mortgage interest rates over five percent. Probably because of limitations on the use of executive orders, Obama’s newest program applies only to those holding mortgages under Fannie Mae or Freddie Mac.

Some banking experts contend that since President Obama was so lenient on banks to begin with, it will be difficult for him to come down hard on them at this late date. Thus, there seems to be no intent to penalize bank officials who used outside sources to robo-write mortgage contracts or violated minimum standards on ensuring that those approved for mortgages had the financial resources to make payments. Banks also lost control of monitoring mortgages when they bundled securities and sent them off.

What Should Obama Do or Have Done?

After checking with banking and housing experts, financial experts and even a few investment bankers, William Greider found broad agreement on the need to forgive the debtors. The nature of the forgiveness would be to write down the principal underwater homeowners owe on their mortgages to match the current market value of their homes. Then the loan would be refinanced with a reduced interest rate, so the monthly payment is at a level that the struggling homeowner can handle.


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