Homeownership has been a hallmark of the American dream since the days of westward expansion, but today that dream has never been more fragile. Every day, families struggle to make payments on underwater mortgages in a depressed housing market, threatening not just middle class prosperity, but our entire economic recovery.
Left alone, it could take years for families to regain their financial footing. The housing market crash took with it over $10 trillion in household wealth, and the precipitous drop in home values left many families holding mortgages greater than the value of their home. Last year, more than 16,000 homeowners were foreclosed on in Washington state alone.
The issue has caught Congress’ attention, and they may soon be taking action. Senator Jeff Merkley of Oregon recently introduced legislation that would help homeowners refinance to more favorable terms by creating an entity reminiscent of the New Deal’s Home Owner’s Loan Corporation (HOLC). In essence, Merkley’s proposal would allow the federal government to buy up underwater mortgages and reduce homeowners’ rates.
The system would offer various options for refinancing, providing relief both for families struggling to stay in their homes and homeowners who suffered huge losses in the recession.
Even a small adjustment could have a huge effect:
If you get a homeowner with a $240,000 mortgage at 7 percent into a loan at 5 percent, they suddenly have over $400 extra dollars every month. Multiply that kind of outcome a few million times — there are 13.5 million homes underwater — and you get a sense of the possible stimulus effects.
Even better, the program would pay for itself. The rates on underwater mortgages are so high that the federal government can borrow money at ultra-low cost, and lend the money to homeowners at the lower rates while still bringing in a profit. After three years, the trust would stop buying mortgages and slowly phase out as families paid off their loans.
Economists Joseph Stiglitz and Mark Zandi recently came out in support of Merkley’s plan, noting that although the proposal includes some risk, the benefits are too great to ignore:
Homeowners would see lower mortgage payments and rebuild equity more quickly. Taxpayers would get their money back, with interest, and would gain further as a stronger economy lifted tax revenues. Banks and other mortgage investors would get potentially troubled loans off their books. Some banks won’t like losing the large amounts of interest income they are earning on their current mortgages, but if the refinancing market were working properly these loans would have been refinanced long ago.
In their words, “the greater risk is to do nothing and let the housing market continue to hold back the economy.” The plan is a bold step in the right direction. Homeownership isn’t just a hallmark of the middle class; it may be the key to finding our way back to economic prosperity.
By EOI Intern Ashwin Warrior