Prodded in part by some of the nation's biggest banks, the Bush administration and Congress are considering costly new proposals for the government to rescue hundreds of thousands of homeowners whose mortgages are higher than the value of their houses.
This is a bailout for the banks in disguise.
Not since the Depression has a larger share of Americans owed more on their homes than they are worth.
This is indeed the worse housing downturn since the Depression. So when someone compares to 1991 or 1980 downturns are misleading the public.
Many owners are only gradually becoming aware that their homes would sell for less than the debt against them — a phenomenon, said Richard T. Curtin, director of the Reuters/University of Michigan Surveys of Consumers, that is "beginning to weigh on people, making them uncertain and nervous about the future."
More and more owners are upside down. And more incentive to just walk away.
Mr. Breakstone, a 42-year-old lawyer, and his wife, Lori, chief of customs agents at Memphis International Airport — who together earn more than $250,000 a year — managed to extricate themselves by paying off the mortgage. But millions of others are trapped in their homes. They have jobs, make their mortgage payments on time, but cannot raise enough cash to cover the shortfall.
Remember that this is not a subprime issue (it never was). Subprime was just one symptom. The problem was affordability. Everyone - from Prime to Subprime borrowers - overextended themselves thinking prices will always go up. The banks kept lending as the foreclosures were going down. The reason they were going down was because of house prices kept going up. Thus, if you could not afford the payments, you could always sell the house.
Bank of America, which is in the process of acquiring Countrywide Financial and has potentially huge exposure, has circulated a proposal to create a new federal agency that would buy vast quantities of delinquent mortgages at a deep discount and replace them with fixed-rate federally guaranteed loans.
We have said this before. Banks are openly begging to take the loans away. We make the loans. We get the payments. If we don't, let's just pass it to the Federal Government. May be Bank of America acquired Countrywide because it was good at getting the Federal government to bail it out. May be Ken Lewis can try to learn art from the Tan Man.
A more modest plan is being developed by John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies. His plan, still in rough form, would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home.It would take the remainder of the mortgage as a "negative amortization certificate," a lien that the investor could recoup if the house were later sold for its original mortgage value or higher.
Collie Tuttle, in her early 60s, is caught in this bind. Four years ago, she purchased a newly built four-bedroom three-bathroom house in the Memphis outer suburb of Olive Branch, Miss., for $270,000. She put nothing down, relying on her six-figure income from selling furniture to pay down the mortgage, reducing it to $248,000.But then she lost her job, and in her next one — also selling furniture, but at lower pay — she is being forced to choose between her home and the rest of her life."It was a big mistake on my part to buy this house," she said. Divorced, with two grown sons, she rattles around in it alone. She had thought the house would add to her wealth.
In a way you feel sorry for her. But this seemed to be the mentality. It seemed everyone would calculate their salaries going up and no one cared to factor in losing a job or salary going down.
Now the Breakstones are saddled with $4,000 a month in house payments, and $14,000 more in fixed outlays, including child support, car leases, taxes, consumer debt and utilities, using up the bulk of their income."I used to think," Mr. Breakstone said, "that I would pay the piper later and enjoy life now. I've totally reversed that view."
Let's hope people have learned their lessons with borrowing. Remember Mr. Breakstone is a lawyer not just an average joe.
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