I was reading up on what’s new in the mortgage markets and the economy over the weekend, and one piece of reporting caught my eye because it seemed like it couldn’t possibly be true. It was talking about how the Obama administration is considering making a move later this month where Fannie Mae and Freddie Mac would be told to forgive a portion of the mortgage debt of millions of underwater homeowners. From Reuters:
Main Street may be about to get its own gigantic bailout. 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. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.
The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie.
So a week from tomorrow we could see if the administration makes a move on this, and starts the process to forgive a portion of the mortgage debt for underwater homeowners.
Is Mortgage Forgiveness Really Going To Happen?
If you talk to insiders in Washington, it sounds like many of them believe that this could actually happen.
1) Republican leaders believe this is going to happen since GOPers and Democratic moderates in the Senate are unwilling to spend more taxpayer money on more stimulus. But such a housing plan would allow the White House to sidestep congressional objections and show voters it is doing something tangible about an economy that seems to be weakening.
2) Wall Street banks are alerting their clients privately to this possibility. Here is what some are cautiously saying publicly. This from Goldman Sachs:
GSE policies are one of a dwindling number of policy levers the administration has left to pull, so it is conceivable that changes could be made, though there is no sign that a policy change is imminent. The Treasury’s essentially unlimited ability to provide financial support to the GSEs creates an interesting situation over the next twelve months: the GSEs could potentially be used to provide additional support for the housing market and, to a lesser extent, the broader economy in 2H 2001.
And this from Mizuho Securities:
As policy makers ponder their next move the data suggests that they face not only a stalling recovery but a growing risk of deflation taking root in the economy. As a result, the Administration has turned back to industrial policies by approving the purchase of a sub-prime auto lender by GM as a means for pumping up domestic sales, especially since the latest auto sales data indicates that consumers are still responsive to incentives. This precedent increases the risk that the government will use its control of Fannie and Freddie to increase consumer cash flow and juice the economy again.
Moreover, Morgan Stanley is pushing a mortgage relief plan directly to Congress. On August 3, a top Morgan Stanley economist recommended to the Senate Budget Committee that Fannie and Freddie ease their lending standards to allow millions of Americans to refinance their mortgages.
3) Keep in mind the political and economic context. The nascent recovery is already running out of steam. Wall Street economists just downgraded the government’s second-quarter GDP estimate of 2.4 percent to around 1.7 percent. And as even Treasury Secretary Timothy Geithner is warning, the unemployment rate may well begin to rise back toward the politically toxic 10 percent level given such sluggish growth. Many in the White House thought the unemployment rate would be dropping sharply by this point in the recovery.
So could it happen? To me it sure sounds like it’s a real possibility, especially with President Obama’s flagging poll numbers, and Democrat fears that they could lose big in the fall elections. They need to do something in order to appear in control and in charge. By doing this they would gamble that there would be more people who are happy about having debt forgiven, than there are people who are upset with the administration for giving more stimulus – and saddling the rest of the taxpayers with other people’s mortgage debt.
Is Forgiving Mortgage Debt For Underwater Homeowners A Good Idea?
So if this were to happen, and the underwater portions of homeowners mortgages were forgiven – would that be a good thing? Who would end up having to pay for it? :
A massive write-down of principal in underwater mortgages would cost us additional tens of billions of dollars, if not $100 billion or more, in order to get these mortgages to market level. That money won’t come out of thin air, either. Either it will take taxpayer dollars to make up the difference, or the sudden and arbitrary writedown will make Fannie/Freddie investors a whole lot more poor than they were before. The Obama administration can’t afford to send Wall Street reeling with that kind of shock, especially this close to an election and with the economy already sinking, so it would almost certainly require massive taxpayer subsidies to accomplish, on top of what’s already been spent on TARP bailouts.
You can rest assured that it’s probably going to be taxpayer dollars that make up the difference, so that could be another $100 billion or so added to taxpayer obligations.
Barron’s talks about how they doubt it will happen because of the negative consequences it could have.
Suddenly changing to make it easy to refinance, either through principal forgiveness or lowering lending standards for Fannie and Freddie, would cause chaos in the mortgage-backed securities market. The Fed, with a massive MBS position, would be a big loser. So would be Fannie and Freddie. And that ultimately means the American taxpayer.
Moreover, a plunge in the MBS market would mean huge losses for other investors, including those with stakes in mutual funds with big MBS exposure. And a plunge in mortgage securities prices could wind up pushing up mortgage rates in the end, conceivably pricing out some prospective buyers trying to get their proverbial foot in the door of their first house.
And politically, it could backfire. There could be many more folks resentful that they couldn’t get a special deal to reduce their mortgage because they did the right thing—put down an ample downpayment on a house they could afford with a margin of safety.
Personally I don’t think it’s a good idea either, and because of the potential backlash such a move would have with it – i doubt the Democrats would want to chance it. But we shall see!
What do you think? Should the government move towards forgiving principal debt for underwater homeowners? Would the consequences of such a move be too much for them to consider it? Tell us your thoughts on this potential move by the White House in the comments.
Starting with the notion that we should be willing to help others out even if it is helping them out of their own mistakes – I think there is still a big stumbling block. The problem is that we want to not just to help through a temporary fix but we want a real long term fix. To do this means we need to set up rules – such as mortgages can’t be granted unless its a lower amount of their monthly income (people get mortgages that eat up 40% of their gross) and even requires a larger down payment. Unfortunately, those kinds of rules don’t get the end result that the politicians want – a short term boost in the housing market by letting people get out of their old homes and into bigger better ones.
So, while I earnestly want to help these people I am torn because our system is not prepared to stop people from making the same mistake again and again. How do we educate the masses to make better decisions? How do we slow the next house crazed generation who believe they need a better house than that which they grew up in at 30 years old? Is it possible without laws to stop bad behavior?
For Christians, we need to decide if locking ourselves into a 30 year (or even 15 year) mortgage is honoring God and being a good steward of our resources.
I usually try to remain unemotional about financial matters, but this one really gets me riled up. I will be furious is such a bailout is passed, and I hope that most of the American public will be, too. As you stated, this would be huge punishment to all the people who purchased homes that they could actually afford.
Oh, dear…
Kate,
I can understand both sides of the arguement, and certainly can understand your side. I am a 34 year old married man that works full time, has a part time job, and goes to school for nursing full time. When my wife and I bought a home we found one that allowed us to afford the payments after a good down payment. We made some do-it-yourself improvements and refinanced for a larger amount to pay off some credit cards we had accumulated. We at one time had a house worth over $290,000, that is now valued at under 195,000. We have been financially responsible, did the right thing, made our payments and are now going to be stuck in a house forever. I would be willing to take the bailout if it happens, and even consider a clause in the bill that would prevent me from profitting if I sold my house for anything above the amount that the bailout given. There are certainly plenty of people that have made poor financial descions, but I think there are many more you never hear about like my wife and I. God bless you all.
Stephen
Stephen,
We are in the exact same position. Always pay our bills, and mortgage. Our house was appraised at 231,000 a few years ago, we took the equity out to make home improvements and now owe 211,000 but we had a realtor come in and said we can’t sell for more then 150,000, that puts us out of the money by 61,000!! I have a better job oppurtunity in another state and would be stupid not to move, but I can’t sell my house for what we owe. Should I be a slave to this house and have my house rule where I live now and not better myself financially because of this?? I don’t know.
I don’t understand the policy move. The federal government ALREADY forgives billions with underwater homes. If you settle a note for less than what is due and owing you receive a 1099-c:
http://www.myjourneytomillions.com/articles/cancellation-of-debt-may-be-taxable-income/
The exception? A mortgage! (see: The Mortgage Forgiveness Debt Relief Act). So what are they actually forgiving? For someone that doesn’t sell?
That doesn’t make any sense….are they going to be taxed double when they do sell and the house is worth more than the note?
I’m not sure if it would be worth it. It seems like the government should offer tax incentives to help investors buy foreclosed / short sale homes to repair and rent out to others.
I don’t think there should be a bailout, although I expect there will be some handout that doesn’t hurt the bankers’ derivative positions. First of all, it’s not fair to those of us who did the responsible thing.
Secondly, most people who have their mortgage adjusted go right back into default again.
Thirdly, is it really helping people to keep them in a mortgage they can’t afford? I think they would be much better off getting rid of the millstone around their neck that is a 40 year mortgage payment. This doesn’t allow them to save anything for retirement.
I don’t believe it. If anything it’s merely balloon of hope they are floating to those who are underwater with the desire to get their vote.
The problem is it would so enrage those who at the most outnumber those underwater or in the least equal their number who are paying on their mortgages. That would be political suicide.
Likelihood is that it’s a smokescreen.
This isn’t about helping homeowners, it’s about helping the banks that hold the soggy paper. It avoids foreclosures and writedowns, keeps the homedebtors in their homes paying their (now reduced) mortgages, and taps everyone in the country who pays taxes to make up the difference. Viola!
Scary to think this type of program is even being floated — It shows how lost this country has become.
I don’t think that it’s a good idea at all. It seems that Obama has this trend of helping people who have made bad decisions by robbing from those who have made good decisions – under the guise of helping those who did nothing wrong, and desperately need the help.
My husband and I have desperately wanted to buy a house for years. Before the big crash, we were getting offers right and left for 0 down ARM’s, and we declined every time, We had a lot of debt, and promised each other that we wouldn’t even think about buying a house until the debt was paid off, and we had saved a significant down payment.
We’ve been working very hard, and have paid off more than $35,000 in the last 3.5 years. We could have used that money to buy a house and put ourselves in a very precarious situation, but we didn’t. We postponed what we wanted to do things the right way.
The idea of OUR tax dollars going to bail out the people who were not patient, and who did not conduct themselves responsibly really gets under my skin. Especially when the current administration has spent the last several months spending like drunken sailors.
When will the U.S. have enough debt for the government to say “Enough is enough?” Why can’t they lead by example and be responsible with money?
I owe about $96K on my house and its probably worth about $60K, so if there’s anyone that could benefit from this, its me.
I think its one of the stupidest things Obama could do. If he does, guess whose going to eventually pay for it?? Yep, you and me.
It sucks for these people who are upside down, but if they stem the tide and keep paying, the market will even itself out and get back on track.
Plus, if you think Obama is doing this for the benefit of the American people, you’re dreaming. It is for politcal gain only.
To play devil’s advocate…
@Kate and @Bekki Some people under water purchased homes with 20% down but the 30-40% drop in home values in their area has still put them under water. I was recently counseling a couple through church who had saved for 8 years to put 20% down on a $150k house which was now worth just over $100k, She and her husband are around $15k under water and they wish they could find a new home because muscular distrophy has gotten worse and they need a house without steps.
@David Who is to say the market will turn up at a rate of more than 3-6%/year? The expectation of a large multi-percent increase is baseless. Meanwhile, we have learned that so much of the economy is fueled by the buying and selling of new homes.
To be clear, I don’t support another bailout but I think we should have a bit more compassion for people in the scenarios.
@Erik – I completely agree with you. I recognize that there are many people who are upside-down as a result of the market crash, and plummeting home values. I just think that the underwater mortgage issue as a whole is much worse because of the sheer number of people who bought way beyond their means.
My parents bought their home with a 20% downpayment 10 years ago, and they’re in the very same boat. Now that most of the kids are grown, they would love to sell the house and get something smaller, but they’re stuck right now.
It’s the masses who were given mortgages with no down payment, that stretched themselves to the max in order to purchase the house that are making the problem much, much bigger than it would be otherwise.
I would MUCH rather see bailout money given to homeowners so they can stay in their homes. This is a better alternative then money for the banks!! In this way these families may be able to be consumer spenders again which is what we need. Also, what would the banks do with all the homes they may foreclose on?? who would by them? Isn’t it better to have a family stay in their home and continue to pay towards some of their debt instead of just walking away??
When Credit Card debt is forgiven the person receives a 1099-C for Cancelation of Debt and the amount forgiven is added to the persons tax return as income. I would assume that the forgiveness of debt would also be taxable some way or another. I wonder if the homeowners affected would be able to pay the taxes on the additional amount reported as income?
You bring up a big issue – I wonder if this would be taxable as income then. If so, it could bring up a whole new set of problems as people who were already having a hard time making payments are then forced to pay the tax on the forgiven debt.
It’s also interesting to me how so many people say that having an underwater home has made the home unaffordable, when having an underwater home will not give you larger payments than you had when you bought the house. You would think it wouldn’t create problems for anyone except those that over-extended themselves, and those that want to move a few years after moving in..
Peter,
It is not taxable income check out the link/bill I left above…Which is why I don’t even understand what is going on here…
Evan is correct check out http://www.irs.gov/individuals/article/0,,id=179414,00.html
Thanks Evan!
Oops, i missed that. Thanks for the update.
I paid my mortgages . Why should my taxes go to pay for any principal forgiveness??? Give us that did it the right way back our money.
well if he is forgiving debt, then he has to forgive mine. I am not late but my mortgage is more than my house is worth. so if he forgives those underwater, then he better be forgiving my debt of a loan that is worth more than my home. how about that obama, and this probably goes for every homeowner in the united states of america. So if you are willing to help those who have not paid, you better be helping those who have, because i struggle just to pay, so can they.
As for myself I have always paid my mortgage. My home is over 40K underwater…I still pay my mortgage. It is projected that housing values will drop another 10 to 25% more. I have an adjustable rate and next year my mortgage will begin to adjust every 6 mos. Nobody will consider a re-fi on a home so backwards. So even though I have been a “good citizen” I find myself in a almost hopeless situation. I truly believe for folks like me who are current on payments a program should exsist. We bailed out the banks…just think about that- also helping “good risks” shouldnt be a second thought.
I continue to pray, as well I as ask others for thier prayers as well-
There is a Biblical parable comparing Heaven and Hell…In Hell there is along table with people on each side…There is enough food for everyone to eat, but each person has a really long spoon and therefore cannot feed themselves..
Because no is willing to help another, all at the table in hell are starving…
In Heaven there is a similar table and similar long spoons, however in Heaven all at the table are well fed..
You see at the table in Heaven every person is of a cooperative spirit and each person helps her neighbor and therefor helps herself in the process…
Each person in Heaven helps each other person and so everyone is well taken care of…
Everyone on this site should take heed, we are ALL in this together…
Stop! thinking only of yourself for as greater teacher once said…
That which yea do unto the least of my brethren, yea also do unto me…
if they forgive the debt you have in a home in which you are current ,not only will the value of your home go down, the vaue of all the homes in the area will decrease. It will take many more years for your home value to recover because when you agreed to have your loan forgiven, you agreed that your home was worth whatever amount the government told you it was worth. I don’t think any of us want that type of control over our assets. you can receive 1099 c . Many people who are current like I am are up in arms because the value if their homes decreased with all of the foreclosures – just wait if this happens. If the government sets this precendent good luck finding future homeowners who see in value in buying a home and then your value will realy fall…..a home is one of the few assets we have that you don’t haev to pay capital gains when you sell… we shouldn’t give the government the power to control that.
I am in the “upside down” boat right along with everyone else (owing 45,000 more than my current home value). It is such a scary place to be.
It seems likely that a mortgage forgiveness program would simply be a political move. I can’t actually see it solving the long term problem of our current national economic crisis. If I am truly honest, however, I wouldn’t mind if my mortgage lender sent me a letter tomorrow telling me that my debt was forgiven.
@David/moneycrashers….how long should I stem the tide and hang in there? I am thinking of selling and taking the 40k loss just to be in a better position.