Imagine if most of the homeowners whose mortgages are larger than their home values got a hand from the government. It may actually happen. According to The New York Times, "With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater."
Helping these people out will almost certainly cost taxpayers money because the federal government will have to take on the risk of refinancing most of these mortgages. The FHA may expand its program to insure mortgages so homeowners can replace adjustable mortgages with lower fixed-rate plans. The government could also buy a huge number of delinquent mortgages and allow homeowners to replace them with ones that have lower monthly payments.
The Feds are damned it they do and damned if they don't. A full collapse of the housing market could cause a financial catastrophe and pull many financial institutions under. The government might have to support big banks with special lending from the Fed. That will cost taxpayers money as well.
If the government creates a true safety net to reduce foreclosures, it might not lose a lot of money at all. If home prices become more stable, defaults will fall and home prices should start to move back up. The Feds may have lost very little capital in the process because people will be able to handle their obligations and FHA insurance won't be needed to cover failed mortgages.
No one knows what will happen, so it is a crap-shoot either way.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
2-22-2008 @ 11:11AM
william lindblad said...
The latest proposal involves a so-called "negative equity" certificate with the basic concept being for the FHA/HUD to re-write the original note to present value and balance being converted to a certificate of somewhat dubios value. There remains some debate as to "who"gets to hold what presently appears to be an empty bag. This idea has only one chance at success and that is based on housing prices at least stabilizing and upward momentum returning in the near future. I do not see anything that would indicate that this is going to be the case as new and after market inventory remains at record levels and contruction still continues. If anything, prices will continue to slide and if so, this program is doomed before it begins. For example - if a note is at 300,000 at orginiation and present market it at 270,000 than the FHA would re-write at the lesser and issue at certificate for the 30,000 balance. However, how do the solve the potential problem of their 270,000 note decreasing to say, 240,000? Do they issue a negative equity note to themselves?
The current probelm is quite serious - more than anyone is ready to admit. I have been paying federal taxes for nearly 50 years and I cannot remember remember any "cash rebates". Tax incentives - yes, cash - no. When both parties of Congress act quickly - it's serious.
2-22-2008 @ 12:52PM
Jayson C. said...
God i hope they don't do this. People in California can't afford to buy homes (responsibly) as it is now. The market needs to crash and the government shouldn't be bailing out these financial institutions who put our whole economy on ice so a small percentage of people would make a lot of money. The ethics of this bail out are what's gone wrong with politics lately. everyone wants their hand in the cookie jar but no one wants to replace the cookies when they're gone.
2-22-2008 @ 2:43PM
Keith Johnson said...
The proposed gov. bail-out is Bull___. Why should the rest of us subsidize homeowners who knowingly participated in high risk ARM'S or interest only loans and enjoyed the attractive terms of their loans while the vast majority stayed in more conservative loan structures (30; 20; or 15 yr. fixed) with higher payments? The majority of the folks in foreclosure deserve to be there. Ignornace is no excuse.
2-22-2008 @ 2:53PM
Keith Johnson said...
The proposed gov. bail-out is bull___. Why should the rest of hard working Americans agree to bail-out those who chose high risk ARM's or interest only loans; while the majority of us stayed in more conservative (and higher priced) conventional loans. I would have enjoyed paying 50% or less of my current mo. mortgage over the past several years as well; but felt the terms of these loans were too risky. The vast majority of homeowners in foreclosure deserve to be there. It is a cold but true fact.