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How to Help People Whose Home Values Are Underwater
WSJ ^ | Nov 18, 2008 | By MARTIN FELDSTEIN

Posted on 12/19/2008 3:57:17 PM PST by fightinJAG

[snip]

None of the existing proposals to help homeowners with negative equity would eliminate the incentive to default.

In an earlier article on this page I proposed a plan to prevent declines of house prices back to the prebubble level from pushing current positive-equity homeowners into the negative-equity group. The essential feature of that plan is to replace 20% of the homeowner's existing mortgage with a separate, full-recourse loan from the government. That "mortgage replacement loan" would have a very attractive, low interest rate. Because it would be separate from the mortgage and would have full recourse, it would establish an important firewall. Even if house prices fall another 20%, all mortgages would still have positive equity. The mortgage-replacement loan would involve no actual government spending and therefore no increase in the budget deficit.

The key to preventing further defaults and foreclosures among current negative-equity homeowners is to shift those mortgages into loans with full recourse, allowing the creditor to take other property or a fraction of wages. But the offer of a low-interest-rate loan is not enough to induce a homeowner with substantial negative equity to forego the opportunity to default and escape the existing debt. Substituting a full-recourse loan requires the inducement of a substantial write-down in the outstanding loan balance. Creditors have an incentive to accept some write-down in exchange for the much greater security of a full-recourse loan. The government can bridge the gap between the maximum write-down that the creditor would accept and the minimum write-down that the homeowner requires to give up his current right to walk away from his debt.

(Excerpt) Read more at online.wsj.com ...


TOPICS: News/Current Events
KEYWORDS: bailout; default; mortgages; underwater
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1 posted on 12/19/2008 3:57:17 PM PST by fightinJAG
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To: fightinJAG

Well, if you said pay or the gulag, that might work.


2 posted on 12/19/2008 3:58:09 PM PST by Tarpon (America's first principles, freedom, liberty, market economy and self-reliance will never fail.)
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To: fightinJAG

And the enumerated power specified in the Constitution which allows this transaction is found in what paragraph?

I didn’t think so.


3 posted on 12/19/2008 3:59:01 PM PST by RKV (He who has the guns makes the rules)
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To: fightinJAG

This is an interesting proposal for stemming the coming tide of foreclosures in non-subprime categories.

Although interest rates are falling, many homeowners who bought in the last five years cannot refinance because lenders (now) require a 80% LTV. When a home has lost 20% of its value, as many have, the owner can forgetabout refi.

Offering a separate loan, as suggested here, might work. Thoughts?


4 posted on 12/19/2008 3:59:22 PM PST by fightinJAG
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To: Tarpon

0bama did say he’d put us all to work.

That salt isn’t going to mine itself...


5 posted on 12/19/2008 4:00:12 PM PST by null and void (Hey 0bama? There will be a pop quiz every day for the next four years...miss a question, people die.)
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To: fightinJAG

You help people by making them help themselves.


6 posted on 12/19/2008 4:00:37 PM PST by TheWasteLand
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To: fightinJAG
Let's nationalize home ownership.

/s

7 posted on 12/19/2008 4:02:19 PM PST by BipolarBob (Even the earth is bipolar.)
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To: Tarpon

Agreed.


8 posted on 12/19/2008 4:02:42 PM PST by ConservativeMind (What's "Price Gouging"? Should government force us to sell to the 15th highest bidder on eBay?)
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To: fightinJAG
My bet is that cutting the loan balance in half of people who are going to default anyway is a lot cheaper than letting them default and then their empty house get gutted by looters who leave it an empty, worthless shell with no plumbing, wiring or metal hardware.
9 posted on 12/19/2008 4:04:28 PM PST by E. Pluribus Unum (Selective serotonin reuptake inhibitors are the opium of the people.)
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To: fightinJAG

A: Don’t.

They need to learn a lesson.


10 posted on 12/19/2008 4:04:36 PM PST by Uncle Miltie (Women were treated like livestock by Mohammad, so Allah must want women treated like cows forever.)
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To: fightinJAG

Don’t do anything. They knew what the payment was going to be. If the value drops, just don’t borrow more until it comes up or the balance goes down.

If you were stupid enough to get funny financing, get a couple part time jobs so you can make those payments you signed for. Or file bankruptcy and move out.


11 posted on 12/19/2008 4:04:45 PM PST by Larry Lucido
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To: fightinJAG

Heck, the way we are headed they will be paying us to borrow money pretty soon, that should help. sorry, its Friday afternoon.


12 posted on 12/19/2008 4:05:00 PM PST by SFR
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To: Uncle Miltie

Yours was more succinct than mine.


13 posted on 12/19/2008 4:05:45 PM PST by Larry Lucido
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To: fightinJAG

Shall we protect everyone from the consequences of their actions everywhere and always?

What is this, Kindergarten?


14 posted on 12/19/2008 4:05:50 PM PST by Uncle Miltie (Women were treated like livestock by Mohammad, so Allah must want women treated like cows forever.)
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To: Uncle Miltie

An I’ve got cash and want to pick up a few homes cheap. And no there is not a damn thing wrong with that. My wife and i worked and saved and did without while others were living the high life and going into do. Now I want to set my kids up for life, and get the hell out of my way.


15 posted on 12/19/2008 4:06:51 PM PST by RKV (He who has the guns makes the rules)
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To: null and void
You just reminded me of what our “KGB” tour director said in Moscow: “Everyone works in Soviet Union.”

Throughout Moscow, a huge city, there are thousands of traffic intersections. Instead of a traffic light at each intersection, there was a kiosk with four uniformed men discussing just “when” they should change the light.

Yes, yes........everyone works in Soviet Union............

16 posted on 12/19/2008 4:07:03 PM PST by EggsAckley
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To: RKV

do = debt. My bad.


17 posted on 12/19/2008 4:07:26 PM PST by RKV (He who has the guns makes the rules)
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To: fightinJAG

I am in this situation. It’s really fuggin ugly. No Mortgage company or broker will touch you, and the bank REALLY does not want to talk to you.

From my perspective, I am screwed. I pay my Mortgage, I get screwed because I can’t sell. I don’t pay my mortgage and I get my credit screwed, and I have spent the last 6 years trying to recover my husband’s crappy, flat out crappy, Credit score to now face this.

I am telling you....... It really f’ing sucks. And we bought with EQUITY already in place. JOY.


18 posted on 12/19/2008 4:07:30 PM PST by Danae (Amerikan Unity My Ass)
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To: fightinJAG

Just why is it Mr. Feldstein’s perogative to debase the savings of those Americans who live within their means to the advantage of those who don’t?


19 posted on 12/19/2008 4:07:33 PM PST by Mr. Lucky
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To: RKV
"And the enumerated power specified in the Constitution which allows this transaction is found in what paragraph?"

That's the only problem with the Constitution...it's unenforceable.

20 posted on 12/19/2008 4:07:45 PM PST by gorush (History repeats itself because human nature is static)
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