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How to Help People Whose Home Values Are Underwater
WSJ ^ | Nov 18, 2008 | By MARTIN FELDSTEIN

Posted on 12/19/2008 3:57:17 PM PST by fightinJAG

[snip]

None of the existing proposals to help homeowners with negative equity would eliminate the incentive to default.

In an earlier article on this page I proposed a plan to prevent declines of house prices back to the prebubble level from pushing current positive-equity homeowners into the negative-equity group. The essential feature of that plan is to replace 20% of the homeowner's existing mortgage with a separate, full-recourse loan from the government. That "mortgage replacement loan" would have a very attractive, low interest rate. Because it would be separate from the mortgage and would have full recourse, it would establish an important firewall. Even if house prices fall another 20%, all mortgages would still have positive equity. The mortgage-replacement loan would involve no actual government spending and therefore no increase in the budget deficit.

The key to preventing further defaults and foreclosures among current negative-equity homeowners is to shift those mortgages into loans with full recourse, allowing the creditor to take other property or a fraction of wages. But the offer of a low-interest-rate loan is not enough to induce a homeowner with substantial negative equity to forego the opportunity to default and escape the existing debt. Substituting a full-recourse loan requires the inducement of a substantial write-down in the outstanding loan balance. Creditors have an incentive to accept some write-down in exchange for the much greater security of a full-recourse loan. The government can bridge the gap between the maximum write-down that the creditor would accept and the minimum write-down that the homeowner requires to give up his current right to walk away from his debt.

(Excerpt) Read more at online.wsj.com ...


TOPICS: News/Current Events
KEYWORDS: bailout; default; mortgages; underwater
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1 posted on 12/19/2008 3:57:17 PM PST by fightinJAG
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To: fightinJAG

Well, if you said pay or the gulag, that might work.


2 posted on 12/19/2008 3:58:09 PM PST by Tarpon (America's first principles, freedom, liberty, market economy and self-reliance will never fail.)
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To: fightinJAG

And the enumerated power specified in the Constitution which allows this transaction is found in what paragraph?

I didn’t think so.


3 posted on 12/19/2008 3:59:01 PM PST by RKV (He who has the guns makes the rules)
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To: fightinJAG

This is an interesting proposal for stemming the coming tide of foreclosures in non-subprime categories.

Although interest rates are falling, many homeowners who bought in the last five years cannot refinance because lenders (now) require a 80% LTV. When a home has lost 20% of its value, as many have, the owner can forgetabout refi.

Offering a separate loan, as suggested here, might work. Thoughts?


4 posted on 12/19/2008 3:59:22 PM PST by fightinJAG
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To: Tarpon

0bama did say he’d put us all to work.

That salt isn’t going to mine itself...


5 posted on 12/19/2008 4:00:12 PM PST by null and void (Hey 0bama? There will be a pop quiz every day for the next four years...miss a question, people die.)
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To: fightinJAG

You help people by making them help themselves.


6 posted on 12/19/2008 4:00:37 PM PST by TheWasteLand
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To: fightinJAG
Let's nationalize home ownership.

/s

7 posted on 12/19/2008 4:02:19 PM PST by BipolarBob (Even the earth is bipolar.)
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To: Tarpon

Agreed.


8 posted on 12/19/2008 4:02:42 PM PST by ConservativeMind (What's "Price Gouging"? Should government force us to sell to the 15th highest bidder on eBay?)
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To: fightinJAG
My bet is that cutting the loan balance in half of people who are going to default anyway is a lot cheaper than letting them default and then their empty house get gutted by looters who leave it an empty, worthless shell with no plumbing, wiring or metal hardware.
9 posted on 12/19/2008 4:04:28 PM PST by E. Pluribus Unum (Selective serotonin reuptake inhibitors are the opium of the people.)
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To: fightinJAG

A: Don’t.

They need to learn a lesson.


10 posted on 12/19/2008 4:04:36 PM PST by Uncle Miltie (Women were treated like livestock by Mohammad, so Allah must want women treated like cows forever.)
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To: fightinJAG

Don’t do anything. They knew what the payment was going to be. If the value drops, just don’t borrow more until it comes up or the balance goes down.

If you were stupid enough to get funny financing, get a couple part time jobs so you can make those payments you signed for. Or file bankruptcy and move out.


11 posted on 12/19/2008 4:04:45 PM PST by Larry Lucido
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To: fightinJAG

Heck, the way we are headed they will be paying us to borrow money pretty soon, that should help. sorry, its Friday afternoon.


12 posted on 12/19/2008 4:05:00 PM PST by SFR
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To: Uncle Miltie

Yours was more succinct than mine.


13 posted on 12/19/2008 4:05:45 PM PST by Larry Lucido
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To: fightinJAG

Shall we protect everyone from the consequences of their actions everywhere and always?

What is this, Kindergarten?


14 posted on 12/19/2008 4:05:50 PM PST by Uncle Miltie (Women were treated like livestock by Mohammad, so Allah must want women treated like cows forever.)
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To: Uncle Miltie

An I’ve got cash and want to pick up a few homes cheap. And no there is not a damn thing wrong with that. My wife and i worked and saved and did without while others were living the high life and going into do. Now I want to set my kids up for life, and get the hell out of my way.


15 posted on 12/19/2008 4:06:51 PM PST by RKV (He who has the guns makes the rules)
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To: null and void
You just reminded me of what our “KGB” tour director said in Moscow: “Everyone works in Soviet Union.”

Throughout Moscow, a huge city, there are thousands of traffic intersections. Instead of a traffic light at each intersection, there was a kiosk with four uniformed men discussing just “when” they should change the light.

Yes, yes........everyone works in Soviet Union............

16 posted on 12/19/2008 4:07:03 PM PST by EggsAckley
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To: RKV

do = debt. My bad.


17 posted on 12/19/2008 4:07:26 PM PST by RKV (He who has the guns makes the rules)
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To: fightinJAG

I am in this situation. It’s really fuggin ugly. No Mortgage company or broker will touch you, and the bank REALLY does not want to talk to you.

From my perspective, I am screwed. I pay my Mortgage, I get screwed because I can’t sell. I don’t pay my mortgage and I get my credit screwed, and I have spent the last 6 years trying to recover my husband’s crappy, flat out crappy, Credit score to now face this.

I am telling you....... It really f’ing sucks. And we bought with EQUITY already in place. JOY.


18 posted on 12/19/2008 4:07:30 PM PST by Danae (Amerikan Unity My Ass)
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To: fightinJAG

Just why is it Mr. Feldstein’s perogative to debase the savings of those Americans who live within their means to the advantage of those who don’t?


19 posted on 12/19/2008 4:07:33 PM PST by Mr. Lucky
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To: RKV
"And the enumerated power specified in the Constitution which allows this transaction is found in what paragraph?"

That's the only problem with the Constitution...it's unenforceable.

20 posted on 12/19/2008 4:07:45 PM PST by gorush (History repeats itself because human nature is static)
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To: fightinJAG

Why stop at mortgages? Are the Feds gonna’ guarantee the “negative equity” on car loans and credit cards as well?


21 posted on 12/19/2008 4:08:01 PM PST by angkor (Conservatism is not a religious movement.)
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To: SFR

Didn’t the last Fed move just give you the warm fuzzy — A range between 0 and 0.5%. Who ever heard of such a thing. T-Bills you have to pay negative interest to get them.

Don’t people realize, bankrupting the USA and everybody is worth ZERO — You think that is what the donks what? I am beginning to think so.


22 posted on 12/19/2008 4:08:14 PM PST by Tarpon (America's first principles, freedom, liberty, market economy and self-reliance will never fail.)
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To: fightinJAG

People underwater with non-recourse loans have every right to do just what the banks have done:

—Banks do what is good for their balance sheet,

—What business does: What is good for their balance sheet (including laying off employees if necessary)

—Why shouldn’t people who have been responsible not be able to do what is good for their balance sheet and walk away.

I would never refinance and take a recourse loan when I have a non-recourse loan. IMO, the housing market has not hit bottom yet and these people will only lose more money.

There is nothing being offered to help the responsible people, beware of the small print.


23 posted on 12/19/2008 4:09:00 PM PST by Snoopers-868th
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To: BipolarBob

>>>>Let’s nationalize home ownership.<<<<

And car ownership.

/sarc


24 posted on 12/19/2008 4:10:22 PM PST by angkor (Conservatism is not a religious movement.)
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To: Larry Lucido

Heres another idea, cut in half the money owed by people who actually were smart enough to lock in fix rates, bought houses they could afford, and have made all their payments on time. Once people see only those that actually pay their bills and live within their means get help, more might try doing it.


25 posted on 12/19/2008 4:10:43 PM PST by icwhatudo
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To: gorush
"And the enumerated power specified in the Constitution which allows this transaction is found in what paragraph?" That's the only problem with the Constitution...it's unenforceable.

Au contraire. It is enforceable, but via a most distasteful and personal mechanism. The 2nd.


26 posted on 12/19/2008 4:11:26 PM PST by TonyStark
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To: fightinJAG
“Although interest rates are falling, many homeowners who bought in the last five years cannot refinance because lenders (now) require a 80% LTV. When a home has lost 20% of its value, as many have, the owner can forgetabout refi.’

I do mortgage lending for the largest lender in the country. We can go up to 95% with fairly decent terms with a single loan.
The rate will be higher for being over 80%, but that means instead of getting 4.625% with 20 equity, someone will be paying over 5.000% but on the positive side no PMI.
We have pretty much quit doing second mortgages however.

But being over 100% due to property value declines really doesn't leave a lot of options.

27 posted on 12/19/2008 4:11:35 PM PST by HereInTheHeartland (I can't wait for January 20, 2013")
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To: fightinJAG

short sale


28 posted on 12/19/2008 4:12:06 PM PST by RDTF (BO smells and eventually people do what's necessary to avoid it)
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To: fightinJAG

The bubble prices were unrealistic and any attempt to recreate the bubble is silly.


29 posted on 12/19/2008 4:12:38 PM PST by Mark was here (The earth is bipolar.)
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To: fightinJAG

This is a dumb idea. You can’t cure excessive debt with more debt. Furthermore, nobody in their right mind would sign on to a “full recourse” loan. Now, if people walk away from a bad mortgage, the bank gets the house back and that’s it. Of course, your credit’s ruined for 7 years but so what? Banks won’t be lending money for at least that long anyway. Right now, a good credit rating is worth approximately 1/2 a bucket of spit. With a recourse loan, not even bankruptcy can eliminate it. The borrower will be stuck paying with wage garnishments till the cows come home. So where’s the incentive to do this?


30 posted on 12/19/2008 4:13:16 PM PST by Grim
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To: fightinJAG

Collectively we are all underwater. The total of all Government debt has now eclipsed the total household net worth of the entire county.


31 posted on 12/19/2008 4:14:00 PM PST by WackySam (Is the world is being run by smart people who are putting us on- or by imbeciles who really mean it?)
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To: fightinJAG

Most states already are recourse. Some of the more notable, former bubble markets are non-recourse, particularly California. This proposal might fix things on a macro scale if everyone complied, but back down on the individual level, why on earth would a homeowner voluntarily be put on the hook, if their current mortgage allows them to walk away with no other consequences other than bad credit? If they’re in bad enough shape to participate in such a program, their credit is wrecked anyway.

This has echoes of the bankruptcy reform from a few years ago, that benefitted the credit card industry so mightily, and is raking strapped card holders over the coals with universal default. That’s all coming apart now, and is about to be reversed to some extent.

If they’re so all-fired determined to fix the problem, offer one time subsidized loans for “troubled” refi’s and purchases of troubled properties, with an extremely attractive rate, that is fully assumable, and make up the difference on forced short sales, within limitations to minimize abuse, on a primary residence only, with very strict guidelines that are enforced. No noncitizens, no sketchy ID, no straw buyers.


32 posted on 12/19/2008 4:14:27 PM PST by RegulatorCountry
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To: Larry Lucido
Applause!! BUMP for common sense!

Housing prices have gone up and down from the time mortgages came into being. Countless times, I have known people who bought a house only to have it's value drop a year or two later. This is NOTHING NEW! Housing prices/values rise and fall all the time. I, myself, saw this when I was shopping for houses years ago, as well as when I sold a house. What all this is about is keeping minorities in houses, with mortgages the socialists in Congress made the banks grant, when they can't afford them and couldn't in the first place.

Towns and cities are up in arms because when house values go down, people can have them reassessed and OMG!! That lessens the tax base!!

33 posted on 12/19/2008 4:14:48 PM PST by gidget7 (Duncan Hunter-Valley Forge Republican!)
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To: Snoopers-868th
There is nothing being offered to help the responsible people, beware of the small print.

Indeed, the responsible people will be robbed to help the irresponsible - as usual. Sad thing is, a lot of responsible people in some areas will be dragged down by the irresponsible around them.

34 posted on 12/19/2008 4:16:36 PM PST by meyer (We are all John Galt)
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To: Grim

New, this fall on ABC, “Extreme Makeover, Home Equity Edition”!


35 posted on 12/19/2008 4:16:57 PM PST by TC Rider (The United States Constitution - 1791. All Rights Reserved.)
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To: Grim

Why don’t we just have government housing for everybody?


36 posted on 12/19/2008 4:17:04 PM PST by umgud (I'm really happy I wasn't aborted)
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To: fightinJAG

i bought a house that i could afford and paid for it...what could be simpler than that. had to qualify, had to put 20% and never ever got a second morgage on it to play or pay for other things...i guess the value of it goes up and down...still live in it for rent free...the only thing that continues to go up annually are the taxes which i am sure are being pissed away as my ss taxes were for over 30 years...CRA had it easy for people who should be saving for a down payment or renting to get loans they can’t afford and now CRA has robbed my 401k and IRAs...it took me 30 years of saving and maxing out monthly savings....the same amount has been lost in 5 months....that took me 30 years to attain...now that i believe is something to be ENRAGED about...and i am!!!!!!!!!!!


37 posted on 12/19/2008 4:32:38 PM PST by ldish (God save the USA)
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To: fightinJAG
Give everyone a one time tax credit for appraised home equity devaluations. The money must be used to pay the lender. The loan terms remain in force for the balance. NO MORE MORTGAGE INTEREST DEDUCTION! EVER!!! People can never again be allowed to roll consumer debt into mortgage debt. The tax treatment of the two deductions is what encouraged the refi madness.
38 posted on 12/19/2008 4:34:45 PM PST by outofsalt ("If History teaches us anything it's that history rarely teaches us anything")
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To: RKV
Right here, and smile when you write that check!
39 posted on 12/19/2008 4:35:44 PM PST by Leisler
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To: fightinJAG

I can’t believe this ****. I mean I had a house which I had totally rehabbed and had to sell at a loss in 94 with the mortgage insurance taking up most of the slack and me having to pay a 4k deductable and nobody was talking about helping anybody upside down in mortgages at that time, people were simply walking away from them. How do I get to be one of the people that anybody in government actually cares about??


40 posted on 12/19/2008 4:36:48 PM PST by wendy1946
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To: WackySam

Corporate, private, government debt and obligations like SS, Medicare are 350% (+/-) GDP.


41 posted on 12/19/2008 4:39:26 PM PST by Leisler
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To: fightinJAG
What about "arson for hire?"

If people are upside down in their houses, can you just torch the place for the originally higher value and collect it?

We may see a plethora of house fires.

42 posted on 12/19/2008 4:41:23 PM PST by NoControllingLegalAuthority
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To: NoControllingLegalAuthority

And you will be helping reduce oversupply!


43 posted on 12/19/2008 4:47:42 PM PST by Leisler
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To: Uncle Miltie
What is this, Kindergarten?

No.

It's not that grown-up.

44 posted on 12/19/2008 4:47:52 PM PST by NoControllingLegalAuthority
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To: fightinJAG

They are following the Katrina model to the letter. Help the politician’s friends, family and fellow criminals. Honest taxpayers need not apply.


45 posted on 12/19/2008 4:51:27 PM PST by A Strict Constructionist (The "Road to Surfdom", can it be reversed?)
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To: E. Pluribus Unum

Throw anyone that defaults out in the street.

It’s up to the lending party to protect the property and/or dispose of it but the defaulting party has no right to keep a roof over their heads.


46 posted on 12/19/2008 4:54:26 PM PST by dalereed
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To: A Strict Constructionist
They are following the Katrina model to the letter.

Indeed, they are. And Katrina was the real beginning of the end - the turning point. It is the point when the President should have stood in favor of the taxpayers but instead threw taxpayer money out to a bunch of deadbeats. I don't know what happened that caused Bush to turn so far left at that point, but he did, and the damage to the country is permanent.

47 posted on 12/19/2008 5:02:32 PM PST by meyer (We are all John Galt)
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To: E. Pluribus Unum

And as soon as THAT is official, every smart person will stop paying their mortgage and let it default.

Then the previously paid-on-time mortgage is halved. . .and smart people profit.


48 posted on 12/19/2008 5:02:36 PM PST by Salgak (Acme Lasers presents: The Energizer Border: I dare you to try and cross it. . .)
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To: wendy1946

Make bad choices.


49 posted on 12/19/2008 5:03:33 PM PST by fightinJAG
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To: outofsalt

That’s an idea.

Whatever they do, it has to help the people who did the right thing and are presently paying for the crimes and stupidity of others.


50 posted on 12/19/2008 5:04:33 PM PST by fightinJAG
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