August 6th, 2010

Helping Underwater Borrowers: More than a Rumor



Angry mobs with their pitch forks and torches were already beginning to gather yesterday when the White House refuted rumors that they were planning on expanding their refinance efforts, most notably with a measure that included paying down the balances of underwater borrowers who presently can’t refinance.

Speculation about a possible expansion of the federal refi program began to grow after an article titled “An August Surprise from Obama?” was published in the political section of Reuters.com.

The article began like this:

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.

Blogs and media outlets across the web were buzzing after hearing reports of the rumor. Financial blog Calculated Risk did their best to quell the “angry mobs” with a post they titled “Nonsense Rumor on Fannie and Freddie.” Our friend Nick Timiraos at the Wall Street Journal was quick to mention that “Obama administration officials knocked down rumors on Thursday about any plan for new programs–dubbed an “August Surprise…”

Timiraos goes on to give several “reasons to be skeptical that the government would adopt such a program now,” including how hard it would be to make such a program work, the lack of “economic punch such a program could pack,” and the all-important fact that “Helping some homeowners could breed resentment that another favored political class is getting a bailout.” All of Timiraos’ points and considerations are valid, we’re not disputing that.

However, perhaps the two most pressing matters facing this country’s lack-luster economy right now — underwater borrowers and unemployment — have largely remained unaddressed by Washington:

Low mortgage rates produce benefit only to those who can access them — namely people with incomes, good credit, equity and more. While some can, many more cannot, because they have no job to produce the income needed to participate in today’s markets. Untold additional numbers have little or no equity in their homes and cannot recast their balance sheets through conventional refinancing means.

These two issues — jobs and underwater homeowners — are the problems which most need addressing if we are to produce a faster economic recovery. Grandiose health care and financial market overhaul mean very little relative to the problems so many face today, and the regulatory and tax uncertainty inherent in such plans are more than likely serving as additional deterrents to to the kind of hiring which would produce a better economic climate.

Today’s unemployment report underscores that the country is still losing jobs and our unemployment rate remains too high. More effort needs to be turned to job creation, which will allow more solvent homeowners a chance to benefit from today’s record-low mortgage rates.

Additional consideration and thought needs to be given to helping underwater borrowers, but selecting some people to get a principal reduction and not others will do little more than anger those who don’t qualify — and there’s already plenty of “mortgage-class warfare” going on.

While the idea of paying down mortgage balances to increase refinance capabilities angered a lot of people this week, we think the White House floated the idea out there to gauge reactions. Hindsight shows that this particular strategy to address the underwater issue wasn’t a great one in the minds of many, but the fact remains that something is going to have to be done to address the issue of underwater borrowers that is fair to taxpayer and homeowners alike.

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2 Responses to “Helping Underwater Borrowers: More than a Rumor”

  1. phil wise Says: November 6th, 2010 at 10:21 am

    Unfortunately, the damage was done in creating unrealistic expectations from underwater borrowers who thought they were going to qualify for mortgage reductions.

  2. Tim Manni Says: November 8th, 2010 at 1:58 pm

    Hey Phil,

    Thanks for commenting. Have you read our plan to help underwater borrowers refinance? Here’s the link: http://library.hsh.com/articles/refinancing/ValueGapRefi.html

    Thanks again,

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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