Consumer Law

The Case for Homeowner Debt Relief

By Alan White

Today's New York Times reports that nearly a quarter of Americans with mortgages owe more than their home's current value.  One example cited in the story is a homeowner with a $630,000 mortgage from 2005 on a home now worth $420,000.  His interest-only mortgage, once the initial period ends, will require monthly payments of $12,000.  On the other hand, a fixed-rate amortizing 30-year mortgage at 6% for the $420,000 actual home value would require payments of $2,500 (plus taxes and insurance.)  Dropping the rate temporarily to 3% could bring the payment down to $1,800, in the event of a bona fide hardship. 

Or, the lender could foreclose.  It would then incur additional interest advances and foreclosure costs or $20,000 to $30,000 or so while holding the property, and perhaps sell it for $350,000 to $400,000 next year, resulting in a loss to investors (that's us) of $250,000 to $310,000, not to mention a loss of all future interest.

Servicers could provide homeowners an incentive to make payments, and hedge against possible return of home price growth, by offering a principal writedown after 12 months of on-time payments, and linking it to a second mortgage for the difference between the old and the modified mortgage.  The second mortgage should be progressively reduced over five years, to provide equity build-up if home prices do not come back to 2005 levels.  Let's swap homeowner debt for equity, just as we have been doing with banks.

Full post as published by CL&P Blog on November 11, 2008 (boomark / email).