SOURCE: Center for American Progress
CAP Action Associate Director for Housing and Economics Andrew Jakabovics testifies before the House Financial Services Committee Subcommittee on Housing and Community Opportunity. Read the testimony (CAP Action).
Listen to the podcast (mp3)
The most potentially wide-ranging new policies are those designed to address the problem of “negative equity” (homeowners owing more than their homes are worth) by bringing the amount owned on mortgages down to the current value of the properties. HAMP has been criticized by its overseers for essentially trying to address last year’s bad mortgages—subprime and other exotic loans whose terms were largely unsustainable from the start. In moving to offer underwater but otherwise creditworthy borrowers an FHA refinancing and in bringing principal writedowns into the HAMP modification process, the administration is attempting to tailor its response to address the current problem of prime loans going bad.
As of the end of last year, 30.6 percent of subprime loans were at least 90 days past due or in foreclosure. By comparison, only 7 percent of prime loans were in the same category. However, when looking at absolute numbers, it is clear that addressing the problems faced by borrowers with prime mortgages is critical: The Mortgage Bankers Association survey covers 33.5 million prime loans outstanding, compared to fewer than 4.6 million subprime mortgages. In other words, there are nearly 1 million more prime loans that are seriously delinquent or in foreclosure than subprime loans.
When borrowers face job losses, illness, death, or divorce, delinquency often results. But as long as borrowers have some equity in their home or are not too far underwater, they will often do everything in their power to keep their homes. When these common default factors are coupled with significant negative equity, however, the decision to simply walk away from the home (and its mortgage) becomes much easier.
The decision to walk away, leaving the home vacant and abandoned, harms the value of neighboring properties, hurting people who may still be struggling to keep up with their own mortgages. That’s a major problem for communities across the country when an estimated 24 percent of all houses with mortgages are worth less than the remaining balance on those mortgages. Writing down the amount of outstanding mortgages to bring them in line with the current values of the properties provides an opportunity to create the conditions for homeowners to keep paying their mortgages over the long term and minimize the walkaway risk that threatens their neighbors’ financial health.
CAP Action Associate Director for Housing and Economics Andrew Jakabovics testifies before the House Financial Services Committee Subcommittee on Housing and Community Opportunity. Read the testimony (CAP Action).
Listen to the podcast (mp3)