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September 13, 2010

An underwater mortgage proposal

HSH Associates, a financial publisher, created waves last week when it proposed a new loan-help program -- not for homeowners facing foreclosure, but for people who are paying on time and can't refinance into a lower interest rate because they're underwater.

"If a borrower did not cause a decline in his or her home's value, has been meeting his or her obligations without fail and is now, outrageously, being asked to pick up part of the tab for failed homeowners, he or she ought to get some subsidized benefit for doing the right thing," the firm wrote. "If it works, there would be a declining cost to the taxpayer over time, with the actual cost of 'assistance' possibly falling to zero."

The details:

Offering as an example a homeowner who owes $180,000 on a home now worth $150,000, HSH suggests a deal between the lender and the government. If the borrower sells before either rising home prices or mortgage payments have made up all of the $30,000 gap between the amount owed before the refinancing and the amount owed afterward, the government would pay the lender the difference. HSH calls this the "value gap refinance" plan:

To produce incentives to participate, and to help ensure fair return, the same market rate for the refinance mortgage should be applied to the value gap contract, so the investor would receive just as much as any fully refinanced loan amount would bring ($180,000 per our example). This interest cost could be borne by the borrower, just as the mortgage interest cost would be.

As time goes on, and home prices eventually recover, the amount of the value gap contract would diminish. ...

In exchange for the ability to refinance to a new mortgage with a lower face amount and a present-market interest rate, the borrower gives up rights to future appreciation -- but not forever. Any price appreciation would be committed to the value gap until such time as the value of the home once again exceeds the value of the original mortgage (per the example above, $180,000). The borrower would not be responsible for any shortfall, but only for interest payments on the amount of the shortfall.

More details, along with a tweaked version of the idea, are here. (The tweaked version, called the "shared obligation" plan, would have borrowers pay a "fee" in the form of an interest rate a half-percentage point above market rate to reduce the gap more quickly.)

Why have a program of this sort? HSH's argument: "A value-gap coverage program provides borrowers with a more compelling reason to remain in their homes -- a disincentive to walking away. It also alleviates the stressful short-sale process, leaving borrowers free to sell their homes at a value their markets will support. It can also allow for greater mobility ... the kind of mobility that may allow a homeowner to pick up stakes and pursue a better job in another locale. The change in a homeowner's cash flow can also provide meaningful budgetary relief, which in turn could support some additional consumer spending beyond simple necessities, providing a lift to the economy."

Fortune's senior editor-at-large, Allan Sloan, gave it a thumbs up. (The headline of his piece: "A reward for responsible homeowners.")

HSH posted a variety of comments from readers here, most of the "please yes" variety.

Underwater homeowners aren't the only unbailed-out folks out there, of course, and some of the others have had it.

"And what about folks like me who bought a home, lived within a tight budget, purchased what I could afford instead of pie in the sky dream homes, and then paid off the home in 7 years time. Where's my damn reward?" one Fortune reader wrote in the comments. "You know what my reward is so far??? Property taxes going UP. ... All I get is more hands in my pocket taking more money, to cover everyone else who made bad decisions in their life. I feel like Atlas supporting everyone."

What do you think of the HSH proposal, folks? Here, have a poll:

Posted by Jamie Smith Hopkins at 7:00 AM | | Comments (10)
Categories: Underwater
        

Comments

The first sentence of the proposal negates the entire proposal:

"If a borrower did not cause a decline in his or her home's value..."

The borrower was the MAIN CAUSE of the decline of the home value by ignorantly PAYING TOO MUCH!!!

This is just another attempt to keep the market moving, such that the real estate industry can continue to skim off of the top.

Sickening. Problem is, I would not be surprised if our elected corrupticians bought into this type of aberrent behavior to garner votes.

At the very least I would like to see a waiver of the PMI for refis. In 2006 I purchased a condo and put 20% down. In 2009 I went to refi, but the appraisal came in at 10% less than what I paid in 2006. I wasn't underwater, but in order to avoid the PMI I had to bring extra cash to the table.

Now, doesn't it seem a little odd that if I would have stuck with my old mortgage that had a higher interest rate I wasn't considered a risk to default; however, when I looked into lowering my rate I became a risk to default? Wouldn't I be more likely to default with a higher monthly payment than a lower one?

What is in it for first time buyers? What is good for first time buyers at all in this market? (please don't tell me the free $8,000 handout that went directly to banks through closing costs, etc)...all current homeowners are saving upwards of tens of thousands of $$$ on refi's and even more on principle write-downs, etc but what is in it for a first time buyer? Why can't market forces win over? Why won't everyone face reality? STOP BAILING PEOPLE OUT!! Let the people who want to buy a house for the first time do so responsibly!!! Anyone (ANYONE) who buys a house right now is CRAZY!!!

I only skimmed thru the proposal but, the overriding thought that comes to mind is the enormous cost of investigating it all.

""If a borrower did not cause a decline in his or her home's value" --->who is the judge and jury?

Have we not seen time and again in both this era and ancient that propping up asset bubbles has never worked. Let the free markets work. There is a saying, "Bad news gets worse the longer you take to deliver it." Obama needs to get on TV and tell everyone there house is probably worth what it was worth in 1999. Initially, there will be panic, then acceptance, then everyone can start healing from the "equity pipe dream" that they got conned into.

I just took a trip down south and the housing market there is doing pretty well. Sells are down but there has only been a marginal price decline. The key is that prices there never escalated.

When I got back to town I happened to get the opportunity to tour a ~300K property in Rodgers Forge. Let's just say that the Maryland area has a long way to go before prices finally stabilize.

Yet another attempt to artificially maintain already over inflated prices. Let prices come down, as they must.

Ummm... am I missing something here? How will the cost to the taxpayer decline if MORE money goes to subsidize MORE homeowners? I must be an idiot since I think it would INCREASE the cost to the taxpayer because MORE money is being wasted for MORE homeowners. I don't know what is going on. I must be delusional today. Someone please explain this to me.

Frank, I took HSH's statement that "there would be a declining cost to the taxpayer over time" to mean that the program wouldn't be as costly as the total of the initial value gaps would suggest, because the longer homeowners stayed put, the smaller the gap could grow.

This is such a logical plan that will work, but it has been floated out there for quite some time now and no one in government is seriously looking at this. McCain actually floated this idea a month before the 2008 presidential race for example. In response to Frank's concern about cost to taxpayers, here is how it helps taxpayers. In exchange for a new mortgage adjusted to its correct value, the consumer essentially gives the government two benefits in return for the government's burden of taking on a debt for the difference between what the home is worth and what is owed. 1) any future appreciation and 2) interest income. Using the mortgage example in the article, say the consumer gets a 5.5% loan for the new $150,000 loan amount but is charged a 0.5% additional fee for the modification. The interest over a 30 year mortgage is over $17,000. So the government gets the $30,000 appreciation and over $17,000 in interest. It takes time, but the government over time makes out on this kind of deal and so do struggling homeowners. Let's get this done.

Yes, I don't need it personally but think it would help homeowners and/or the housing market. That is my vote Jamie and I would not be surprised if our elected corrupticians bought into aberrent behavior to garner votes.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie
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