New bail-out for homeowners?

That’s what BusinessInsider is saying, based on an op-ed column in the NYT. The idea is for the Feds to buy up all high-interest bonds covering homes whose owners are underwater and replacing them with 4% loans. The principal would not be reduced, so the homeowner would still be underwater but with a lower rate, he could keep paying rather than walk away.

Hmm – a homeowner who accepted this deal with be stuck in his house for life or until the market rose high enough to pop his head back out of the water, whichever comes first, because he could never afford to sell. If he owes $250,000 in principle and his house is currently worth $165,000, he’d have to come up with $85,000 cash at the closing table. How’s that gonna happen? Being stuck in one’s hose means, for instance, that you sell out and move from Detroit, with no jobs, to a more promising area. So more federal spending, decreased population mobility, and the feds running roughshod over lenders. Sounds like it should be popular in D.C.

5 Comments

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5 responses to “New bail-out for homeowners?

  1. Retired IB'er

    As you point out, CF, this would only hurt the re-sale problem all the more as no one would leave their houses because of sweetheart loans. No trade-up buyers for example…

    The only way to solve the housing problem is to let it correct. All the one time government interventions are/will do is postpone correction UNLESS the government is willing to offer the “incentives” for the next buyer, and the buyer after them, and the buyer after them… I say this because the new buyers won’t be able to afford housing without the same government aid (which if they don’t get, prices drop and we’re back where we started).

    The only real solution for housing is either prices drop or the FED succeeds in creating wage inflation (to allow future buyers to “afford” inflated house prices). From what I can tell neither are going to happen quickly and so we are likely to muddle along just like Japan.

  2. out looking in

    the brilliance is overwhelming! What i find so sad is that Detroit (and other cities) don’t even have the money to bulldoze condemned houses!! Talk about a real shit show. Anyone see the 20/20 or 48hrs mystery the other night when they were searching abandoned homes near 7 Mile road in Detroit- now this is America!

  3. Patrick

    I agree with you CF and IB that houses need to fall to their natural price. That said, I’m willing to bet that a lot of people would be willing to stay in their home if they could afford it – even if they are under water. This probably would have been helpful 3 years ago when the subprime rates were 9 – 11% and 4% meant affordability…but I’m sure those people have already defaulted. An 8% mortgage on 250k would be about $1,800…a 4% interest only would be $833.

    I’m sure there are a lot of people who would stay in their homes if they could…particularly if they don’t have other options

  4. realestatenovelist51

    Chris:

    I read the proposal slightly differently. The borrower does not have to come up with the difference between the current mortgage amount and the current price of the property. The bank just rolls over the mortgage at its current principal amount and applies the new, presumably lower mortgage rate. Otherwise, as you point out, people would have to come up with significant cash, and most don’t have it.