Are Homeowners About to Hit the Lottery?

If you're one of the millions of homeowners underwater on your mortgage, listen up. Your fortunes may soon change drastically for the better.

According to Reuters columnist James Pethokoukis:

Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages -- one in five -- are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help.

It's worth reiterating that this is a rumor, and nothing more. The Treasury plans to hold an Aug. 17 meeting to discuss Fannie and Freddie's future, which would be an obvious time to either confirm or deny this speculation.

For the moment, let's assume they're true. Sounds like another devastatingly expensive taxpayer giveaway, no? Probably. But there's actually an argument that doing this could save Fannie and Freddie money. Studies are in fair agreement that the propensity for homeowners to walk away from a mortgage rises as their homes sink deeper underwater. If the rumored program is designed so that the cost of mortgage forgiveness is less than the amount Fannie and Freddie would lose in foreclosure (and it easily could be), it'd make a good amount of sense.

There's just one small problem …
At least, that's the theory. Reality is sadly different, and there's almost zero chance of what I just described happening in real life -- although it's the argument you can be assured the administration will give you to justify this program's existence. 

Since Fannie and Freddie don't know exactly who plans on walking away from their house, a principal forgiveness program like this would have to be extended to a blanket group of homeowners -- including those who have no intention of defaulting. When you add in the cost of paying these homeowners to not do something they never would have done in the first place, the total cost of the program could look godawful. Cash for Clunkers and the first-time homebuyers credit ran into the same problem. It's inefficiency like you can't believe.

But who cares? Spending a couple dozen billion on Fannie and Freddie is called a slow Tuesday in Washington. We should ask not what this program might cost -- it would inevitably be huge -- but how it might affect the housing market.

Hello, unintended consequences!
And, oh, how it would. I consider the unending battle on homeowners' behalf a carryover of last decade's bubble mentality, which insisted that homeownership ranked among life's most sacred treasures. If you're a renter and you get into trouble, you can go pound sand. If you own a home and you get into trouble, the government's got your back. That's a dangerous signal to send.

But that's the least of my worries (and I'm a renter). What would be seriously awful about this potential program is that, from the sound of it, it would only apply to mortgages owned or backed by Fannie and Freddie. No, there aren't details on how this program might work (or even if it's real), but this seems obvious: Fannie and Freddie can't order private lenders to forgive mortgage principal, after all.

That's dangerous because Fannie and Freddie only hold about 50% of the nation's mortgages. Private lenders (mainly banks) hold billions more:

Bank

Residential Mortgages Held*

Bank of America (NYSE: BAC  )

$392 billion

Wells Fargo (NYSE: WFC  )

$340 billion

JPMorgan Chase (NYSE: JPM  )

$238 billion

Citigroup (NYSE: C  )

$219 billion

US Bancorp (NYSE: USB  )

$46 billion

SunTrust Banks (NYSE: STI  )

$42 billion

Source: Company filings.
*Most recent quarter.

If Fannie and Freddie loans were granted principal forgiveness, while private loans were left to fend for themselves, the message to borrowers would be clear: If you need a mortgage, demand that it's backed by Fannie or Freddie. They're a one-way ticket to wealth, whereas private mortgages actually hold you to your word. In the end, borrowers' addiction to government-backed mortgages would be strengthened, at a time when most economists agree the long-term policy should be a gradual weaning.

So this doesn't just sound like a terrible idea. It sounds like a terrible idea that would set a terrible precedent.

Disagree? Sound off in the comment section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


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Comments from our Foolish Readers

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  • Report this Comment On August 10, 2010, at 4:00 PM, rd80 wrote:

    There's at least one more small problem.

    If housing prices slide further - certainly a possibility - some of the mortgage holders will walk even after a principal mark down.

  • Report this Comment On August 10, 2010, at 4:33 PM, daninkeller wrote:

    Maybe we should just cut to the chase - Establish a fund of $6000 a year for anyone who meets the following criteria: 1. Low income not counting federal subsidies; 2. Voted for and promises to vote for Democrats next time, and 3. Doesn't pay taxes.

    Once again, those who bought a modest house, made the payments and paid taxes are not anywhere in the equation. Is it November yet?

  • Report this Comment On August 10, 2010, at 4:57 PM, Borbality wrote:

    Man this has all kinds of bad written all over it. But I would hope to meet the criteria! (no intention of walking away but still underwater). Got a call from my bank a few weeks ago saying I qualified under some affordable housing program to refinance. I figure sure, let's check it out.

    Freddie was going to back it, but it didn't even get me down a full percentage point, would only save me about $100 per month and it was going to take four years for the savings to offset the closing costs! ???

    No thanks! Not sure how I was supposed to get excited about that, and I'm glad this wasn't what was going to keep me in my home.

  • Report this Comment On August 10, 2010, at 5:07 PM, HadEnuf wrote:

    Buyer A purchases home for $60k but the home is now worth $55k wth 2k in equity. Buyer B purchases home for $2M but home is now worth $1.3M with $200k in equity. Oh well, we'll forgive both debts ($5000 = $700000) and let you keep your equity?

    For those that took a risk and bought a vehicle that depreciated, should their debt be forgiven too. What about boat purchases, business ventures, and lost assets in the stock market which also depreciated due to the uncertainity of the housing market.

    Is this administration trying to sabotage capitalism? No wonder the recovery is slow.

  • Report this Comment On August 10, 2010, at 5:10 PM, burrowsx wrote:

    TARP was supposed to buy up the very mortgages that you are soooo worried about Fannie and Freddie buying. Is there something different about buying toxic assets when Democrats propose the purchase; or were you wrong to support TARP back when Paulson engineered his bait and switch?

  • Report this Comment On August 10, 2010, at 5:23 PM, badnicolez wrote:

    I find BMFPitt's comment to be in extremely poor taste.

    This "rumor" is likely just that, a rumor, and a blatant ruse to prevent even more people from engaging in strategic default. I predict that this rumor will remain a rumor for the next several years, or until the housing market stabilizes.

  • Report this Comment On August 10, 2010, at 5:29 PM, HadEnuf wrote:

    Burrowsx wrote: "TARP was supposed to buy up the very mortgages that you are soooo worried about Fannie and Freddie buying. Is there something different about buying toxic assets when Democrats propose the purchase; or were you wrong to support TARP back when Paulson engineered his bait and switch?"

    Who supported TARP? TARP and this proposed debauchery are equally moronic. It doesn't matter if it is $100 or millions; if you borrow money than man up and pay it back any way you can.

  • Report this Comment On August 10, 2010, at 5:33 PM, rd80 wrote:

    TARP's original plan was to purchase mortgage securities from banks, mostly at a substantial discount to face value. That wouldn't have modified the loans.

  • Report this Comment On August 10, 2010, at 5:39 PM, Acesnyper wrote:

    "Gifts" like this make the safe buyer (myself included) kick ourselves for being stable and wise. I do regret being in a fixed rate and panicked so much I paid my mortgage off sooner then I should eating a large amount of capital on a home that's thankfully held it's own. I try to chalk that up to youth and being a first time buyer.

    Sure not everyone who got hit knew what was coming or understood it (predatory lending, area etc) but this is also a big flag to any of us in the know, to abuse the heck out of it.

    Can we get a craps table bail out as well? The ROI is pretty darn nice and with out the risk sign me up!

    Makes me think of the old saying there is always money to be made in Real Estate, but who'd have figured it might mean if you are the guy not paying his bills?

  • Report this Comment On August 10, 2010, at 5:46 PM, mywilson wrote:

    Show me the Money. I do not have an upside down mortgage. Give me some dough and i'll vote for anyone that gives me some cold hard cash. Maybe if this crazy ass scheme comes about , i'll even buy a homw i can't afford just to be on the next free money train.

  • Report this Comment On August 10, 2010, at 6:07 PM, Lot7 wrote:

    There would a great temptation to declare that your house is worth less than the loan, and get a partial loan forgiveness . You could expect a very corrupt program. If this program were to be done, there should be a lien on any future profits on any house sale sold by an individual who used such a program. This might reduce the incentive to cheat on the program and also potentially give the government something back some day when there is appreciation of prices.

  • Report this Comment On August 10, 2010, at 7:44 PM, rookie2009 wrote:

    Gee, thanks alot. I just wrote you an honest note on my life, and you burst my balloon for a bailout on my underwater mortgages. I"M WELLS FARGO!!! Where's my free money? Great job!!!

  • Report this Comment On August 10, 2010, at 8:16 PM, xetn wrote:

    We are all socialist now. We pay people to stay in their homes even though many were not qualified to purchase them in the first place. We invent all sorts of programs to "forgive" pending foreclosures or even principal. And we pay people to not work. Perhaps we should just cut to the chase, the government can just hire everyone and pay us all $1million per year. Then all will be equal and fair. The old level playing field. Nobody will have to actually perform any real work, just pretend. We can all sit around dreaming up more ways the government can pay us.

    Oh yeah, who is going to pay for all of this? The government has no money except what it can steal from producers in the form of taxes, or what it can borrow from others like China. The Fed can create trillions of new money out of thin air but what is the value (purchasing power)?

    It is great to moralize about the poor under-water homeowner, but where is the ethics? The answer of course is "WE DON'T NEED ANY STINKING ETHICS!"

  • Report this Comment On August 10, 2010, at 9:19 PM, rookie2009 wrote:

    I read Atlas Shrugged many yrs. ago. Great book You're right. We don't need no ethics. On that logic, though, we also need no religion, or children, or, or differences, or laws, or conventions, or mentors. We also need no tv's, radios, music, or honesty too. Computers are expendable, along with guns, beer, drugs, and fun. How about we do away with games,baseball, cars, solar energy, and the need to make a complicated decision based on 2 or 3 options. Why do we have all these things? It's called consiousness, baby...Our difference from all the other species on this planet.. Without ethics,admittedly only a piece of the pie, we could not possibly have all the trappings of 21ST century man. Do you really think that facebook would be possible in any suppresive society in history? I guess what I'm saying, is that I like ethics, even if it is harder to understand than a decent note.

  • Report this Comment On August 10, 2010, at 11:52 PM, BearishKW wrote:

    I thought we were past the shoot-from-the-hip, lets put all the blame on the banks attitude.

    There were no guns being held to the heads of the people purchasing these home loans.

    Oh yeah and the way many of these loans were structured (5/1 ARMS, etc): even if the home prices just stayed EVEN or climbed slower, many borrowers would still be underwater.

    If you live your life like an episode of cribs, you need to be a baller. It is that simple, you children.

  • Report this Comment On August 11, 2010, at 6:43 AM, d4winds wrote:

    "It's worth reiterating that this is a rumor, and nothing more. ...For the moment, let's assume they're true."

    No, let's not. Instead assume the market has enough stupidity to believe this for while anyway. Then the only question to someone interested in making money is "What is the best way to short this nonsense?"

  • Report this Comment On August 11, 2010, at 6:58 AM, ragedmaximus wrote:

    I thought only evil greedy hege betting banks get bailouts,not joe 6 pack.But the overall result would be good for the economy,less defaults,less bank debt and more money for average joe to spend in the downtrodden economy.RESULT everybody is happy. except the whining rich taxpayers

  • Report this Comment On August 11, 2010, at 8:05 AM, trdhrdr007 wrote:

    Here's a story of 2 neighbors.....both bought identical homes 5 years ago for $100k. One put down 20%, the other got a zero interest loan. 3 years ago the person with the zero interest loan refinanced for $125K, took the extra $25k, bought a car & went on vacation.

    Fast forward to today & the homes are now worth $80k. The responsible person is out his $20k down payment. The other guy is underwater because he didn't put any money down & then used his house as a bank. That's the guy congress wants to reward.

  • Report this Comment On August 11, 2010, at 8:34 AM, IIcx wrote:

    Fannie and Freddie should be Nationalized, broken up, and sold to repay taxpayer funding. If the companies who buy the assets want to write off principal its their business.

    Anything that can't be sold should be turned over to HUD and used for scattered site housing or redeveloped for the benefit of the region.

  • Report this Comment On August 11, 2010, at 10:25 AM, Ingalls2001 wrote:

    Sincere question...I make a payment through Wells Fargo's website each month for my mortgage. While scheduling my payment earlier this year, there was a "Click to see if you qualify" link for a refinance. So, I clicked and called two 800 numbers to see if I qualified. As it turns out, the number for Freddie Mac had a computer voice tell me that I qualified for refinance assistance. How in the heck did my mortgage end up with Freddie Mac? I did a "no-cost" refinance with Wells Fargo seven years ago and was never notified of any transfer of my loan... I have not, and do not plan to take advantage of other taxpayer's hard-earned money. I was confident I was not part of the problem, that my mortgage was with private lender, and that I was not a footnote in the downfall of Freddie Mac. Now my confidence has been shaken...somewhat?

  • Report this Comment On August 11, 2010, at 11:29 AM, dcrednek wrote:

    Here's yet another article which addresses what I believe to be a fundamental flaw in the administration's analysis of the current economic maelstrom. Providing incentive, stimulus, and other euphamistically-named perks to poor financial decisionmakers (i.e. those who overpaid and overborrowed to purchase their homes) will not modify their behavior; it merely rewards them for their mistakes and further alienates good decisionmakers. Let's address a fundamental flaw in the rumor mentioned in the article. If the debt forgiveness were offered only to those whose homes are worth less than the outstanding mortgage on them, THEN WHAT IS THE GOVERNMENT PREPARED TO OFFER TO THOSE 80% OF HOMEOWNERS AND 100% OF NONOWNERS WHO AREN'T IN THAT SITUATION? I personally do not believe at this time that the White House economic team and Congress would consider such a Third-World sort of plan. The current groupthink predominating Beltway politics to centralize our economy and to nationalize industry is horrifying.

  • Report this Comment On August 11, 2010, at 11:33 AM, TMFHousel wrote:

  • Report this Comment On August 11, 2010, at 11:47 AM, outoffocus wrote:

    Has anyone stopped to think that people are underwater on their house because that "value" never existed in the first place? Hence it being a housing "bubble". So now my taxpayer dollars are going to pay for imaginary housing value. Where will it end? And where is my free house?

  • Report this Comment On August 11, 2010, at 1:11 PM, lctycoon wrote:

    "Fast forward to today & the homes are now worth $80k. The responsible person is out his $20k down payment. The other guy is underwater because he didn't put any money down & then used his house as a bank. That's the guy congress wants to reward."

    And the other guy gets furious, closes down his business and fires every one of his employees, and leaves the country.

    This won't accomplish anything good for the economy if it's true.

  • Report this Comment On August 11, 2010, at 1:55 PM, nwav8tor wrote:

    trdhrdr007 wrote: :... took the extra $25k, bought a car & went on vacation. "

    Must not have been a very nice car or a good vacation in my book!

  • Report this Comment On August 11, 2010, at 2:43 PM, trdhrdr007 wrote:

    nwav8tor wrote::.....Must not have been a very nice car or a good vacation in my book!

    Well, I juts pulled those numbers out of thin air because they were easy to compute & believable...20% down, refi at 125%, & a 20% drop in home prices.

    However, I guess it depends on who you are & how you spend your money....for $25k the wife & I could spend 6 months in Mexico or Thailand laying on the beach drinking fruity drinks & still have enough left over to buy a reliable used car.

  • Report this Comment On August 11, 2010, at 6:03 PM, StockJockette wrote:

    Why do we live in a nation where the good are punished and the bad are forgiven over and over again? You know, they should go back and study the depression. Banks took homes, farms, businesses, etc. It was brutal, but somehow the country survived and that generation went on to become some of the best savers and most thrifty citizens. This generation neds to get used to the idea of personal responsibility. The party is over people --get on with your life!!!

  • Report this Comment On August 11, 2010, at 6:43 PM, Liviu2010 wrote:

    There are such things as 10-year interest-only mortgages. Why not convert those so called, under-water mortgages, to those 10-year interest-only mortgages, even fixed interest-only, given today's extremely low cost of money, and the payments for 10 years will be far lower, while the principal will remain untouched, protecting the lenders. After the 10-year ride, the home values should have been restored and there will still be 20 years of normal mortgage payments - principal + interest, or refinance again if conditions warrant.

    Or is this just too simple to come up with?

  • Report this Comment On August 11, 2010, at 11:10 PM, Financeguy611 wrote:

    On August 10, 2010, at 5:07 PM, HadEnuf wrote:

    Buyer A purchases home for $60k but the home is now worth $55k wth 2k in equity. Buyer B purchases home for $2M but home is now worth $1.3M with $200k in equity. Oh well, we'll forgive both debts ($5000 = $700000) and let you keep your equity?

    Actually, the horrendously stupid idea/rumor is about people who owe more than the house is worth and if someone owes more than the house is worth, there is no equity to keep.

  • Report this Comment On August 12, 2010, at 11:04 AM, mmargolies wrote:

    Not everyone who is stuck in an underwater loan were greedy, lazy, or unqualified for a loan.

    Many people now underwater simply bought at the high point, perhaps due to a job transfer, new job, relocation from military transfer or many other reasons. These could have been smart reliable people who simply had the misfortune of having to move and purchase at the housing bubble's high point.

    I fall into this category, I have never missed a payment, I put down 35% on my current house, I had bought a home in a new location due to a job transfer. My $320,000 house was the cheapest house in our area where the new employer resides, in fact it was the cheapest home in a safe neighborhood within 45 minute commute in any direction, it was considered a fixer-upper.

    I have not missed a payment, taken a bailout, or asked for a handout. However much more desirable homes in my area are now listing around $240,000. Having been laid off two years ago I found a similar job in another state. My house has been up for sale since then, with offers coming in $150,000 below what I paid.

    I continue to make my mortgage and rent a small apartment in a crappy neighborhood to support my family. In short I pay my bills and always have.

    I did not get our nation into this mess, I did not over purchase for the sake of wanting a McMansion, I did not spend my way into deep debt, or walk away from a house that many other people have. And I get tired of being called names or being blamed by the media or commenters that I am to blame for being reckless or selfish.

    There are many just like me, hard working people who pay our bills and taxes, who sacrifice and so our best, who work multiple jobs and live up to our commitments but at the same time have been burned by the system, the high tax burden, and the manipulators and speculators who screwed up the housing market. I am tired of people blaming us for all the housing market ills and accusing people like me of being lazy or somehow stealing from the system. There are many people who simply fall on hard times despite their best efforts, or others like me who find ourselves upside down in our mortgages due to no fault of our own who continue to pay them and live with the hardships to do so because we find it ethical and moral to pay our debts.

    Many of you and much of the media should be ashamed of taking the simplistic view of blaming some unknown, unqualified, greedy unethical none for all the housing markets problems when in fact it continues to be propped up by many people like me who continue to pay for overpriced homes simply because we had no other choice.

    Stop lumping us in with the zero down people who also did not cause the problem but only took what was presented and offered from the banks and told owning a home was cheaper than rent which most of us know is a huge lie. And this very site is guilty of encouraging people for years into buying homes as an almost guaranteed investment that would almost never go down in value.

  • Report this Comment On August 12, 2010, at 12:07 PM, jkipling wrote:

    On the one hand, I'm upset by this since I bought a home near the market bottom and don't anticipate ever being underwater, but on the other hand I'm happy because I bought a home near the market bottom and don't anticipate ever being underwater.

    Responsibility rewards itself, now if we can just stop subsidizing irresponsibility we may have a society here.

  • Report this Comment On August 12, 2010, at 7:05 PM, DDHv wrote:

    We shopped, and found a fixer-upper we could buy for about a year's gross pay. With plenty of room for a garden, and the energy improvements made from the first cost savings, it has done us well. Long paid for, and heating & cooling costs down over 50% in the last thirty years, even though fuel costs have risen. There is always some bargain somewhere, but you need to take time to look for it. We rented at first after moving here, while we checked things out. The only problem is that the house is much bigger than we need, which caused my wife to give up on keeping up with the cleaning. There isn't enough local demand for rentals to make that option work.

    PS always read the fine print, even if you need to buy a magnifying glass! ;-))

  • Report this Comment On August 12, 2010, at 7:17 PM, FutureMonkey wrote:

    jkipling "responsibility rewards itself" - excellent point. Aesop's fable The Ant and the Grasshopper should be required reading for everybody every week. I hope that through cautious approach to home-buying, living within means, and minimizing exposure to risk I can't afford, I will manage to never actually need a subsidy or bail out. An Ant's life will nearly always still be better than the Grasshoppers of the world. .

    Nevertheless, I think rather than doing this piecemeal, lets just be done with it, cut income tax to zero for the first 100,000 earned, 10% for the next 200,000, and bump 5% every $500,000 after that to a 40% cap. Make it temporary - say 5 years. In 5 years rewrite the entire tax code - get rid of itemized deductions like mortgage interest, childcare, medical, mileage, etc, everybody goes to 1040EZ single page filing. Seperate filing for everybody - none of this separate rates for married filing jointly. Break the public servant unions and let government, state, and private employers compete for employees and employees compete for jobs without all this public pension costs going forward. Anybody that doesn't make the cut and makes zero income gets a check for $1800 a month no questions asked. Sure we will run a deficit for a while, but everybody could take their money and pay down their mortages, pay off their credit cards, and make personal credit hard as hell to get and expensive! So nobody buys jack without being able to afford it.

  • Report this Comment On August 12, 2010, at 7:26 PM, dsp444 wrote:

    empskhc: I sympathize with you...but the fact still remains that you are part of the problem....you paid more money for a house than it should have been worth. You still had a choice...a choice to rent, a choice to find another area of the country (it couldn't have been that great of job if you are already laid off). I'm not saying you did these things intentionally, but you ARE part of the herd.

    I agree there were a lot of circumstances beyond your control...but signing on the dotted line was in your control and you have to take responsibility that that is part of the risk in buying a home in the area you did.

  • Report this Comment On August 12, 2010, at 7:58 PM, JestYourFool wrote:

    I'm not sure why the government thinks it should continually bail people out. So far all the money that has been thrown at the economic problems has not created jobs, made people feel more confident about spending, or truly helped the average American.

    We all make decisions that can be detrimental. While I bought a small, three-bedroom, one-bath house, paid more on the mortgage than necessary, and paid the loan off in 20 years, I'd like some bail out money, too. How about reimbursing me for the money I've lost in the stock market? If the banks had not been so greedy and the housing market collapsed, the market might be in better shape.

    Maybe we should bail out people who get divorced. They signed a contract, made a commitment, but it didn't work out. Therefore, the government should pay for the divorce and make them "whole" again by giving each person a car, house, and income. Or maybe we should all protest to work for the Federal government - higher pay than the private sector, better benefits, and a guaranteed job for life.

    I'm afraid that before Obama is out of office we will become a socialist society - has someone mentioned. Unfortunately, without competition and reward for work, everyone would work as little as possible and expect "their" government to bail them out. No workers - no taxpayers - no roads, hospitals, government service (which is definitely an oxymoron!), no social security, no medicare, no welfare. We'd all be farmers again!

    Jest

  • Report this Comment On August 12, 2010, at 8:12 PM, ragedmaximus wrote:

    To all you fools who think that you are not a victim of the corrupt overinflated stock market ,banking and fed corruption and helping the average joes that were swindled,you are stupid.Where do they get all that money?From us the taxpayers and we the people have been ripped off royally by the fed ,Evil bankers,housing,car makers,everything! We the taxpayers have been ripprd of more and more and when you wake up the better.

  • Report this Comment On August 12, 2010, at 10:04 PM, Sleddawg63 wrote:

    There we go rewarding those who took advantage of the system again.

    The media and politicians are in the same category, neither want to point the finger at those private citizens who took the overburdened mortgage and bought way above their means.

    It just wouldn't do well in getting votes or ratings now wouldn't it?

    Rewarding mortgage ignorance is like handing checks to drunk drivers. You knew better...but here is some cash anyways.

  • Report this Comment On August 13, 2010, at 10:41 AM, Piznit wrote:

    @empskhc:

    Along with what danpuperi wrote, you also need to not take it quite so personal. Someone in your situation, who is paying your bills, working 2 jobs, etc etc., while technically a part of the herd and the overall problem, is not the only source of the problem.

    Most people or the "media" arent called YOU specifically bad names. For every one person in your situation, there's just as many if not more who took a loan they couldnt afford from a bank who didnt even bother to care if they were high risk, and have since walked away from the house. Those are mainly the people they are focusing on.

    Now you ended up in your current situation because of a job transfer. Fair enough. At the time, your choices were:

    1.) Move and buy a home that was overpriced

    2.) Quit or job

    Quitting your job simply to not move to a new house might be extreme, I have no clue the exact situation you were in. I would have probably done the same thing. I'm not judging.

    You say you didnt spend your way into deep debt, but you did. You said yourself your only getting offers for your house that are about 150,000 less than what you paid. That is the very definition of debt...and at a potential loss of 150,000, I would qualify it as "deep".

  • Report this Comment On August 13, 2010, at 11:54 AM, EricTheRon wrote:

    There is one way this could cease being a terrible idea. If loan write-downs came with an "appreciation certificate", which would be like a lien attached to the deed. This would require that any appreciation in the price of the house (between buying and selling, at any time in the future) would go to Fannie/Freddie to pay back the write-down amount. Of course initially this would depress the sales price of the house (and make them less likely to try to short-sale it). But eventually houses will appreciate and some future owner (who got a good deal on the buy) will pay back the amount.

    Besides the unfair Socialist angle, the really bad part about just forgiving an amount is that it might not be the end of it. They might forgive an amount equal to the forclosesure costs, and then have to foreclose in the future anyway. This will just double-up the cost.

  • Report this Comment On August 13, 2010, at 12:10 PM, EricTheRon wrote:

    PS: Piznit,that is a badly construction choice you generated, i.e. buy an overpriced house or quit your job. The obvious choice is whether to buy an overpriced house or RENT! There are simple well-known calculations to tell whether you'd be better off renting a house instead of buying it--just google it (first, ask the realtor what this house would rent for). The ignorance of any sense about this is no excuse for buying anyway.

    BTW, this happens all the time in Washington, of course, where they frame a solution as either A or B (you must choose!) when these aren't the best solutions but you aren't allowed to discuss those.

  • Report this Comment On August 13, 2010, at 1:17 PM, holosys wrote:

    You said "a principal forgiveness program like this would have to be extended to a blanket group of homeowners -- including those who have no intention of defaulting." Not a problem considering there is zero job security even for degreed folks like me with 30 years of solid employment history.

    Therefore, I'm willing to go along with Obama in any case and have my underwater home equity line foregiven, in the spirit of this famous quote:

    "Ask not what your country can do for you -- ask what you can do for your country"

  • Report this Comment On August 13, 2010, at 2:08 PM, lfthnd wrote:

    Did you even think once about what this would do to the housing market. Especially what it would do to us that want to sell our homes? Can you say bottom would fall out? That is exactly what would happen to the regular Joe - homeowner's equity.

  • Report this Comment On August 13, 2010, at 2:17 PM, asmoley wrote:

    Just have the banks refinance any creidt worthy homeowner who wishes to refinance regardless of the loan to value. Many want to refinance to the attractive rates available but cannot because there LTV is to low or underwater. These people are paying on time at a higher rate but are stuck with uncompetitive payments. The FEDis keeping the rates low to stimulate, well put more money into the homeowners pocket and maybe more money will start flowing through the rest of the economy. If the banks do not want to do this (after all they are being paid, for now, a good rate of return ) perhaps there could be some tax benefit to the banks for doing streamline refis to the credit worthy.,

  • Report this Comment On August 15, 2010, at 5:27 PM, BigIsBAD5466 wrote:

    I came up with this "crazy" idea over a year ago. How about the Mortgage Bank and the Mortgage Homeowner reappraise and calculate the value of the home now. Return to the "old fashoin way of calculating a mortgage payment (28%/38%). Make the owner QUALIFY and VERIFY income/assets. Then the Owner and Bank set a new mortgage. The "hpyer-valuation" amount is split at 50 % each. When the Owner sells down the road, the Owner and Bank share the loss/profit.

    Keeps people in their homes and maintians some shared responsibility is there for previous errors.

    It is a start. Better than what has been tried before.

  • Report this Comment On August 15, 2010, at 10:51 PM, doncoyoteok wrote:

    I'm not a socialist. I'm just ruled by socialists.

  • Report this Comment On August 16, 2010, at 5:40 PM, goodald wrote:

    I understand that people who who bought houses near the top (or even before that) have lost some value and may be underwater.. That's the risk with a highly leveraged investment.

    I Rent.. I've rented for 14 years because I was trying to figure out "where" I wanted to live and didn't want to jump into a house/condo like many of my friends were.

    How about throwing us renters a bit of a bone?

    How about some kind of tax credit (even a small one that doesn't expire, like an HSA) that we can apply towards a down payment. Give people an incentive to rent instead of buying into the "American Dream" that the responsible renters (and sensible housing buyers) get to bail out.

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