Is debt forgiveness for homeowners plan a cure for walkaways?

A debt-forgiveness plan being floated by the Milken Institute in Santa Monica is the subject of Tom Petruno's column today. Here's how it would work:

Say an owner's mortgage is worth $400,000 but his house is valued at $300,000. The government would refinance the $400,000 loan with two new loans. Fannie Mae, the mortgage financier now under government control, would provide a first loan for the market value of the house, in this case $300,000. The Treasury would issue the second loan, in this case for $100,000.

The Treasury loan would be interest-only and would provide the vesting part of the program. For each year that the homeowner keeps up payments on both loans, one-fifth of the Treasury loan would be forgiven.

The Milken folks say the cost to taxpayers to save 1.5 million homes from foreclosure -- or people walking away -- would be in the $75-billion to $100-billion range. And, if I'm reading it correctly, this could spare lenders from having to take "haircuts on their loans." Anybody have a problem with that?

-- Lauren Beale

Thoughts? Comments?

 

Comments

[pugtv]

Alternative plan to prevent walkaways ...

Change the law such that the loan can never be forgiven for the balance of borrowe's lives. The note holder can garnish their wages until the balance is paid off. That will definitely stop strategic walkaways.

On a separate note, I'm not not in favor of stopping the walkaways. I'm in favor of letting the market run its course wherreever that leads.

[formerlahomeoner]

Why don't we give free drugs to addicts while we're at it. How about welfare for life?

[Smi2le]

I have a big problem with this! Why should taxpayers "spare the banks" which caused this mess from having to "take a haircut."

[Jon S]

Who qualifies? Everyone who bought a house since 2002? If not, isn't that a bit unfair?

As someone who has been WAITING for houses to return to a normal price for 5 years now, yes, I mind. Don't make me buy houses for my neighbors, people who knew they couldn't afford a $800k house but were willing to gamble that they could refinance before their payments would jump.

My fiscal prudence turns out to have been a mistake I guess - now I've been renting for 5 years with no house. My lesson from all of this would be: jump into the next bubble, if it pops we'll just socialize the loss. The potential gains are huge!

At least house prices won't fall though, PHEW! Now I still won't be able to afford a house, but at least I'll help my neighbors keep theirs. That's a nice warm fuzzy for me.

[J.W.]

Is this man crazy? I'm already convinced that the U.S. Government has lost their mind by squandering all of the money that they've already thrown at the housing problem. Now, this fool wants the government to throw more money down the toilet? Too many people in the USA are already "professional victims" and this type of thinking just adds more fuel to the fire. What about all of the people in America who have acted responsibly and didn't bite off more than they can chew? What about people who worked hard, saved their money and paid off their mortgages early? Do we get rebates from the government for acting responsibly? Hell, NO! We'll probably receive and extra tax on our property since we don't owe anyone. All this government interference really raises my hackles. Government owned and managed car companies.......government managed health care................more federal taxes on every gallon of gas, your electric and gas bill, etc etc etc. When does it stop?

[fezco]

Hows about this....
I buy a house for $400K.
I finance, $300K from a bank and the taxpayers give me a $100K- 0% interest loan for the rest of it.
Oh wait.... I'm not yet a so called homeowner so I can't utilize the taxpayer's scholarship..... and yet I pay more taxes than a 'homeowner.' Where's my lube? This is going to be painful.

[Move 2 CA]

Does it matter what we think? On its face, this seems pretty much like a non-starter. There are lots of people who are underwater but who are current on their payments who would like this. Are we going to help them too? Probably too expensive. Even if we could afford it, there'd be lots of complaints about the injustice of bailing out the surgeon who has a good-paying steady job and can easily make the payments while the poor renters aren't helped. It we try to limit it to those in imminent danger of foreclosure, it will only encourage the surgeon to stop making his payments, even though he can afford them. Renters not helped would all cry about privatizing gain and externalizing risk to the taxpayers. And not just renters would be saying this. I would expect the citizens of the rational states where virtually no one is underwater to ask why it's their responsibility to bailout California and Florida, especially after the press, politicians, and bloggers in the runaway appreciation states (some on this blog even) were previously especially harsh in the criticisms of the states without runaway appreciation. There is not a scintilla of hope for this proposal. Transaction costs for consensus are too high. Time to come back to reality.

[PaulO]

"Anybody have a problem with that?"

Oy vey

[dog-walker]

Yes. It's moral hazard. The banks must take haircuts. They must suffer the losses entailed in their reckless decisions to extend credit to borrowers who could never repay, and their reckless disregard for the long term value of the assets securing those loans. The only safety against such reckless and wildly -- and widely -- destructive behavior is the possibility of loss. If we protect against or mitigate loss, it will be rational for bankers to do the same thing as many times as they possibly can. And this could be disastrous for our civilization. Each time it happens, the banking class becomes increasingly enriched while the rest become increasingly impoverished. Eventually, some sort of horrifying mayhem will be the result that will make our concerns about financial losses and foreclosures seem like trifles.

I'm not so concerned about individual home-buyers. If the banks did their job of underwriting properly, home-buyers wouldn't get into these kinds of problems. Of course I think they should shut up, move out, take a nice little rental, and let someone with good credit buy the place at whatever price such a market would bear. But if taxpayers at large want to spare them the humiliation of foreclosure and the indignity of renting, I don't see the same risk of long term catastrophe.

[TK Bruin]

Let me see if I got this right. You want to move the bad debt from the lender to the govt (read you and me), and then forgive the debt.

Sounds like a great deal for the lenders, and a raw deal for the taxpayer.

Sounds like another plan the Tax and spend congress would love. After all, what's another $ trillion.

[Maggie Knowles]

If there's going to be debt forgiveness, why make it so complicated.

Reduce the principle to market value. Let the banks and investors take the loss for writing the bad loan in the first place (banks) and not doing your due diligence (investors).

Doesn't cost taxpayers a dime and those who made the mistakes and should have known better will learn a lesson from their losses and will hopefully write better loans and make better investments next time.

[AC]

Next time I'm in Costco I'm going to rack up the max on my CC and straight up tell the checker that I don't plan on paying for any of it. In fact, I'll tell them that they are going to give 20, no 30%, of my purchase money back because I made a bad decision on how much I was buying at one time. I know this will work because if I don't pay my bills then he'll be out of job. Anyone have a problem with that?

[DF]

Agree with all the above. And consider this: let's say that homeowner stays in the house, continues to make payments, and then ten years later sells the house for $500,000. Does the homeowner owe the money back to the government/taxpayers? Or does it become a magic windfall that the homebuyer received as a prize for making a bad investment?

I can't believe the presentist bias of all this. Home prices are cyclical. They will always fluctuate. Government price supports now are at best a temporary solution. Might as well let the ones who made the bad bets feel the pain. Why should those of us who refused to be bilked by banks and blinkered by greed bear the costs?

[Noel]

Fellow readers, please do NOT listen to the garbage that comes from the Milken Institute.

This guy (Milken) and the people from that institute just do not understand: do not suggest or float the idea discussed above because there is nothing good about it.

[cb]

Here in Oz we CAN'T walk away from a loan. If a buyer doesn't have a 15% deposit they have to pay for mortgage insurance which covers the bank in the event of foreclosure... and then the negative equity still follows the defaulter (the mortgage insurer sues for the difference). I am not saying we aren't in for hardship here, but I believe policies like this will help the scale from being as large (I hope).

[Hippie]

"And, if I'm reading it correctly, this could spare lenders from having to take "haircuts on their loans." Anybody have a problem with that?"

I don't want to give the banks just a haircut, I want them to get a Brazilian wax.

[Laker]

In many countries in Europe, that is exactly what happens:
"the loan can never be forgiven for the balance of borrower's lives. The note holder can garnish their wages until the balance is paid off."

Basically if there is a foreclosure, the borrower will need to pay the difference between the loan amount and the sale of the house to a new owner. That way, people don't walk away from their houses, and there are very low foreclosures. When waling away after 80/20 100% financing is so easy and smart, why not. And how about those that pulled 100's of thousand in HELOC and bought toys with it....they keep the money....NICE!

And if the 2nd is IO loan and 20% are forgiven, so, after 5 years, the 2nd is fully paid off?

[Raffi]

Seriously, when did it become such a casual topic for the government to refund gamblers (er, homebuyers) losses? When did it become such a problem for housing to be affordable? What happened to pretending this is a free market economy? What is going on?

Is this America?????????

[srla]

Ignoring the severe moral hazard on multiple levels inherent in such a policy, I would say this plan would be a massive failure anyhow.

Given that appraisers are already being manipulated and incentivized to overvalue properties and given that the government and banks are in massive denial about the true market value of homes and the likelihood of further declines, all this would accomplish is to postpone inevitable foreclosures that are already being postponed by reluctant lien holders and an overwhelmed foreclosure infrastructure.

And, yes, most cognizant taxpayers would have a problem with huge gifts being allocated to the most irresponsible of home owners. This plan would benefit the worst offenders, most of whom lied on loan apps in order to get negative amortization loans with teaser rates, etc.

And by "sparing" lenders from taking "haircuts" on loans, we would actually just be transferring billions more from bank balance sheets to the taxpayers' debt. We already have the $trillion-plus PPIP about to come online. Do we really need to assume even more debt from these criminal institutions?

At least if the homes are foreclosed, a new generation of buyers can benefit.

God I miss Peter Viles. Uggh.

[bruce]

yeah, i have a problem with that. why should my taxes go up for this? i didn't make the foolish loan, the bank did, so why should i get the haircut instead of the bank? michael milken is a convicted felon just trying to help out his old wall street buddies. are you trying to drive me into the arms of the underground, tax-free economy? what do you think's gonna happen to california's balance sheet when the responsible homeowners/taxpayers take you up on your offer?

[steve abo]

"Dampening" the fall of house prices will only prolong the inevitable. Affordability is being dampened by unemployment. Unemployment is rising from fallen consumer demand. Past consumer demand was focused on needless products. Many banks and investors will miss out on future rewards... sorry.

Solution: Do not spend good money after bad. Reward or spend that government money to proliferate consumption in the ethical political agenda (health, education, energy and environment) instead of useless products. e.g. Get a diploma rather than an Escalade.

[Mari]

How about NOT forgiving the 100K? How about the Government (us!) holding a 2 nd trust deed on the house that is repayable at the time it is sold of re-financed -- in the future? Housing prices will recover and then money can be recouped. If a home is sold before the 100k (in this example( is repaid) -- no loan forgiveness -- they still owe the interest and the amount attaches to a future home as a new 2nd trust deed. This would provide some security for the taxpayer and prevent people from using their homes in the future as an atm machine.......

[SMRR]

Idiocy. Let's keep housing inflated & socialize the losses of underwater retards.

[Donna]

If I'm going to get screwed, shouldn't somebody buy me dinner first?

[Mary C.]

It sounds like a welfare program for the banks. Why not just encourage banks more forcefully to reduce the balance of the loans to current market value? If it will keep a house occupied, not in foreclosure or otherwise on the market at an even more reduced price, with the risk of vandalism and other costs for an unoccupied house, don't the banks still come out ahead, albeit with a loss? We're already paying banks direct bailout money and buying their toxic assets to shore up their losses. This sounds like a plan for the banks to triple-dip. And all they do with money they get now is continue to pay high bonuses and salaries to certain employees. They don't make many loans or do other things to get the economy moving.