Monday, October 24, 2011
If, however, he hopes to actually accomplish anything substantive, then his reported plan to allow underwater mortgage holders to refinance their mortgages will fall short.
According to what I've read from the so-called mortgage experts, it is the underwater nature of the mortgage that is creating the problems... and not that these homeowners are paying more than they otherwise would if they were allowed to refinance. According to what I've read, people who have no equity in their homes (and being underwater certainly qualifies as having no equity) are more likely to walk away from their mortgages and to take worse care of their homes while they are in their homes. Lowering their mortgage payments does nothing to change the value/debt ratio... someone who is $100,000 underwater will still be underwater by that amount, it isn't as if the value of the house is going to go up because the underwater homeowner gets to pay somewhat less a month.
Perhaps there will be some small number of homeowners who would have walked away but with a smaller payment will decide to stick it out... but this group would be such a small portion of the underwater crowd that any impact on the overall housing market would be tiny.
Another claim of the plan's defenders is that homeowners will spend the savings, boosting the economy. But according to Keynesian theory, which these people sure subscribe to, it is the overall amount of spending that is relvant, and these people won't be spending any more money than they are now, they'll just be spending it on different things. So where's the benefit?
Nor, as I mentioned above, will it benefit other homeowners. It won't drive home values up. A neighborhood that is under pricing pressure because X% of the homes in that neighborhood are underwater will still have the same percentage of homes underwater. This won't make new buyers any more likely to buy into a neighborhood.
As I have said before, the best thing for the housing market would be to acclerate the foreclosure of homes whose homeowners are delinguent. Get the people out who aren't making the payments and sell the houses to people who will put up some serious equity and make the payments. Let the people who lose their houses go buy or rent something they can afford.
Once this happens, there won't be an uncertainty discount in housing prices, where buyers refuse to act because of fear that prices in a particular area will drop due to future foreclosures.
While one can have sympathy for those who would lose their homes, there are two things to remember: One, they brought this on themselves, buying more home than they could afford (and even if they had 'help' from the local mortgage lender, nobody forced them to accept that help). Two, misguided attempts to help these people has kept the housing problems going on longer than they needed to have been (it's a typical Democratic/liberal approach to problems brought out by individual misbehavior... make the law-abiding, play the rules majority suffer to absolve these people of the problems they brought on themselves).