May 21, 2018
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Going ‘halfsies’ on underwater mortgages

John Clarke Russ | BDN
John Clarke Russ | BDN
A home for sale sits on the corner of Graham Avenue and Boutelle Road in Bangor in June 2011.


As most homeowners know, the value of their most important asset has plummeted with the recession and is still dropping. That means less consumer spending, less business activity and fewer jobs — in short, a primary factor in the present economic sluggishness, which some call a continuing recession or even a depression.

In Maine, 9.73 percent of home mortgages are delinquent two months or more or already in foreclosure.

Nationally, house values have fallen by about $9 trillion or 40 percent since the housing bubble burst in 2006. The drop in the 12 months that ended in June of this year was more than $1 trillion, or 8 percent. About 15 million American homes are “underwater,” meaning that the owner owes more than the home value.

Those figures come from Martin S. Feldstein, who was chairman of the Council of Economic Advisers in the Reagan administration and now is a professor of economics at Harvard. He wrote in the Oct. 13 New York Times that the only real solution is “permanently reducing the mortgage debt hanging over America.”

He proposed that the federal government reduce mortgage principal when it exceeds 110 percent of the home value. Since about 11 million homes are that deeply underwater, he figures the one-time cost would be under $350 billion if all those eligible participated.

Under this voluntary plan, if the bank or other mortgage holder agreed, the value of the mortgage would be reduced to 110 percent of the home value. The bank and the government would share equally the cost of the reduction. In exchange, the borrower would have to accept that the reduced mortgage had “full recourse,” meaning that the government could go after the borrower’s other assets if he or she defaulted on the home loan.

Professor Feldstein acknowledges that both the Obama administration and Republican congressional leaders are resisting any such solution as politically unacceptable.

Most bankers, as well as Fannie Mae and Freddie Mac, which hold millions of underwater mortgages, object to any reduction in mortgage principal, since it would amount to abrogation of a contract. Many citizens, too, who have been making their own mortgage payments would resent any relief for anyone who defaults.

Of Maine’s 180,000 first-lien mortgages, 62,000 are underwater, according to William Lund, superintendent of the Bureau of Consumer Credit Protection. Despite mediation efforts, the high default rate continues steadily. He says a chief complaint by Maine homeowners who seek modification of mortgage terms is that they can’t find someone in charge to talk to. Maine now presses for a “single point of contact” with the lender, so the borrower can talk to a person who can agree to a modification.

The admittedly drastic Feldstein model seems justified by the impact of the housing slump on the economy. If it is too tough for political acceptance, it at least may help pressure lenders to give more ground in negotiations with troubled homeowners.

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