The economy continues to suffer, and one piece that no one seems to be able to agree on how to address is what to do with our continually failing housing market. With no ability to sell homes due to underwater mortgages, people are trapped in areas they may no longer wish to live in, unable to leave to other cities that might have better job opportunities or purchase different homes that would better fit the size of their families, opening up smaller homes for singles and couples just starting out, or retirees who finally have an empty nest.
For those who purchased a home for the first time in 2005 and 2006, many have seen the housing value fall as much as 50%, leaving them through no fault of their own with desperately undervalued homes they will be stuck in until they eventually hit a point of positive equity — a point that for many of them still lies 20 years down the road, since the first few decades of a loan is just paying off interest. As the largest section of their monthly budget flows to the banking industry, which not only already saw a government bailout, but on its own has very little ability to actually create jobs, home owners are forced to tighten their spending in other areas, causing a bad economy to slow down even further due to lack of money purchasing consumer goods.
The government has already tried a set of home loan modifications that have gone nowhere and had little effect other than to stagger out the timing of when homes finally fall into foreclosure. Now, they seem to want to try again, this time with a potential new set of refinance options. The idea would be to let many homeowners refinance their loans at a lower interest, regardless of how underwater the homes themselves are, opening up the refinance process to a group of owners unable to take part previously because their home value was just too low to participate (previous rules made anyone who needed to refinance for a loan that was greater that 125% of their current home value ineligible). For a large group of the potential takers, a refinance could free up hundreds of dollars a month, allowing them to loosen their belt buckles and bring other items back into their budget like eating out, buying more clothes or other spending that became “frivolous” during this time of austerity.
But is it enough? Bloomberg Businessweek contends that the answer is no, and that at some point we simply have to forgive housing debt. They point to one economist who says, “an underwater home is a new version of a debtor’s prison,” remarking that the owner is just as trapped as someone thrown into jail for lack of repayment. Although they also float the new “rental market” escape clause — the idea of either turning foreclosed homes into rental properties to bring down the number of vacancies, or letting home owners rent the homes themselves rather than continue owning them, one idea proposed, and the one that makes the most sense, is to simply rewrite all mortgages for the actual value of the house as it is currently, and let the owner start all over in a new mortgage.
Banks, of course, say no. They are utterly unwilling to take the loss that would occur. But how can it be a “loss” if the homes simply aren’t worth the money in the first place, and if the alternative is people walking away because eventually they simply can’t — or won’t — pay?
Banks, of course, are still hoping to ride out the storm, letting the homes fall to the wayside one by one and collecting as much money on them as they can until they do. And for them, it makes sense. After all, if worse comes to worse, we can continue to ignore the issue and in 20 to 30 years everyone will have either defaulted on their mortgages or finally paid them off.
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