Keep those keys
- Share via
Recent glimmers of hope about the economy may be lifting the stock market, but there’s no sign yet of a let-up in the foreclosures that lie at the root of the problems. The coming weeks could provide more encouraging news about housing too, depending on the success of two new federal programs to avert defaults. Yet one of those initiatives, which helps borrowers refinance their federally owned or guaranteed loans, offers less help than it could -- and should -- to homeowners in California and other states with steep drops in property values.
There are numerous factors behind the stunning increase in foreclosures, including reckless borrowing, predatory lending and increasing unemployment. And in some cases, homeowners simply walked away from homes that were no longer worth the amount borrowed (so-called underwater mortgages). Those who made small down payments are particularly susceptible to this temptation, preferring a few years of bad credit to a long-term investment in a house that’s fallen far off its purchase price.
Persuading them not to abandon their homes would slow the pace of foreclosures, easing the downward pressure on housing and the complex mortgage-backed assets that are gumming up the credit markets. One of the administration’s new programs attempts to do that, but only for borrowers who have defaulted or may do so soon. It’s a costly effort that offers to pay lenders and mortgage-servicing companies to reduce borrowers’ monthly payments while rewarding them with up to $5,000 in free home equity if they stay current. In essence, the Treasury would give troubled borrowers a bigger stake in their homes.
The other new program eases Fannie Mae and Freddie Mac rules so that borrowers who aren’t behind on their payments can get government-backed refinancing. This help, which involves no special federal subsidies, is available to borrowers whose mortgages are owned or backed by Freddie or Fannie. Those whose property has depreciated significantly, however, may not qualify -- the firms won’t provide refinancing for more than 105% of the current value. That’s because the two firms finance many of their loan purchases through mortgage-backed securities that don’t permit higher loan-to-value ratios.
Yet borrowers whose homes are the furthest underwater are the ones most likely to mail in their keys and walk away, with Fannie and Freddie -- and the taxpayers who bailed out the firms -- stuck with the loss. Enabling them to refinance into less costly mortgages gives them more incentive to stick with their investments until the housing market rebounds. And it doesn’t pose the moral hazard that the other administration initiative does because it’s not using tax dollars to ease part of the pain of the bad bets borrowers and lenders made during the housing bubble. The administration should find ways to make refinancings available soon to borrowers who are more deeply underwater, while low mortgage rates could serve as a powerful incentive not to give up on those homes.
More to Read
Inside the business of entertainment
The Wide Shot brings you news, analysis and insights on everything from streaming wars to production — and what it all means for the future.
You may occasionally receive promotional content from the Los Angeles Times.