Unsatisfied with all the foot dragging this country’s major mortgage lenders have been doing with its beleaguered home loan modification program, the Obama administration last week announced that it plans to begin “shaming” lenders who aren’t being responsive enough to the urgent, widespread need to reduce homeowner’s mortgage payments. According to Elizabeth Warren’s recent Congressional Oversight Panel report (see p. 63), while the Treasury Department originally estimated that 50-75 percent of all trial modifications would lead to longer-term fixes, from March to October less than five percent of the nearly 600,000 borrowers received a more permanent fix.
And as tempting as it would be for us all to design sundry, creative means of delivering said shame, the main problem with the administration’s approach was that it didn’t put homeowners first. It’s not enough to simply reduce payments, for example, by extending the duration of loans from 30 to 40 years as is the case in too many of the miniscule number of loans that have been modified.
Given the significant price correction we’re witnessing, and the extent of possible foreclosures—Warren’s report places low-range estimates at 8.1 million in the next four years—the mortgage burden itself must be reduced. And the way things are going, the administration may be the last group to understand this fact.
But, an increasing number of homeowners are taking the path advocated by legal scholar Brent White, who teaches at the University of Arizona, the flagship institution of higher learning in the ironically arid state with sky-high rates of “underwater” homes (meaning the owner owes more on his or her mortgage than the home in now worth).
He argues that for many drowning homeowners, it makes more financial sense to just walk away from the mortgage and home - regardless of what such a move will do to their credit score - and that they should have no qualms doing so.
Predictably, this has the banking industry and a not insignificant minority of readers posting on the articles I’ve read blasting such homeowner revolts as “immoral” and antithetical to “personal responsibility” and a business culture of “trust” and contracts.
Hmmm, given the lack of ethics in the banking industry of late, can we say “hypocrites alert”? Personally, I don’t see even the remotest “moral hazard” in walking away from a mortgage. The deal was, if we don’t pay our home loans, the bank (or whomever they sold it to in the form of mortgage-backed securities) gets to keep the once-severely-overvalued houses. Be our guest.
Unfortunately for many families of color, the decision is not so cut-and-dry, and too many are suffering anguish and/or waiting and waiting and waiting to have their loans modified. If we are going to keep people in their homes and stabilize the housing market, we need principal reductions.
And the call for this necessary step will only get louder and louder - as it did during yesterday’s House Financial Services committee hearing and in the recent Congressional Oversight Panel Report (see p. 67). Even op-eds in the Wall St. Journal are calling for it (although they continue to peddle racist garbage about how federal programs to expand homeownership were the principal cause of the housing crisis).
Truth be told, it was the administration that was apparently too ashamed, timid or afraid to demand from the get-go that banks receiving TARP bailout funds should be required to reduce the principal for homeowners. The sooner the administration realizes the overdue necessity, the better.