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Finally, A Commonsense Proposal in the Mortgage Foreclosure Crisis
by Amy Hovey and Dan Kildee
For years before the housing bubble burst, the argument was that you could never lose by investing in – or betting on – real estate. That was the "logic" used not only by a segment of shady mortgage lenders but by the mainstream industry, and by every president in modern times – all backed by publicly-guaranteed lenders like Fannie Mae and Freddie Mac.
For the past four years, we've faced the consequences of what turned out to be a false premise: millions of homeowners with homes under water; thousands who've already lost their homes; neighborhoods and whole communities scarred and sinking under the weight of abandonment and the lowering of property values that abandonment brings.
And for four years, community leaders, mayors and just plain folks have been calling for a commonsense solution that holds promise for individual homeowners, ravaged communities, and cities and towns alike: the write-down of the principle for underwater homes.
With this simple and somewhat elegant solution, principle and interest payments would be lowered, making payments not only reflective of real values but more importantly bringing them into line with what homeowners can afford. The benefits: homeowners could save their homes (into which most have already poured their life savings); neighbors' property values would end their free fall; communities would be safer; cities and towns would be spared the unnecessary (and ever more unaffordable) cost of extra policing, fire and demolition; and – perhaps most important to the overall economy – the housing market would stabilize.
Finally, Freddie, Fannie, Treasury and some lawmakers agree. Leaders in all these agencies say that the Federal Housing Finance Agency has the power to embrace this commonsense proposal to keep people in their homes and stabilize neighborhoods ravaged by foreclosure and abandonment.
While opponents argue that this approach – write-downs on the principle of mortgages with face values that exceed the market value of the homes they underwrite – is tantamount to giving underwater homeowners "free money," the opposite is true. Data consistently shows that underwater homeowners are much more likely to default on their mortgages – and that reductions in loan principles will actually save money for Fannie and Freddie, the two biggest underwriters in the mortgage market, over the long term.
The FHFA has the power to support the wise and fiscally prudent proposal to allow Fannie Mae and Freddie Mac to write down the principle owed on underwater mortgages. This responsible shift in policy would offer the best prospect we've seen in years to finally turn around the housing market – and even more importantly, the longer term economic and civic viability of our communities.
We've tried and seen the consequences of a laissez faire approach. The fact is that the market cannot correct itself. It's time for the guiding hand of government to provide the push that can send homeowners, communities and the economy on the road to recovery.