One by-product of people being evicted from their homes during foreclosure proceedings is that they often end up renting a place to live. After losing a house to the bank, they are not likely to be homeowners again for years.
The Administration’s new plan to keep people in their homes by reducing what they have to pay for their mortgages each month actually has a similar effect on “ownership” although that may not be apparent at first.
As the program has been described so far, the principle of home loans will not be adjusted. A mortgage with a $300,000 balance will not become a mortgage with a $200,000 balance. The government will set up programs to make the monthly payments on the mortgage more affordable, particularly by dropping interest rates.
There are a number of clever ways that will mandate how the principal will be handled. According to Bloomberg, “Like earlier efforts from the Federal Deposit Insurance Corp. and housing industry groups, the new plan will make use of interest-rate reductions, loan extensions and so-called principal forbearance, in which part of a mortgage’s principal is deferred to the end of the loan’s term.”
In a great many cases this will mean that people will continue to live in and pay for homes that may never be worth what they initially paid for them. If a house bought for $300,000 in 2005 is now only worth $200,000, the government is not taking the owner off the hook for eventually paying the entire principle even if the house does not reclaim its higher value. That essentially will turn many homeowners into the equivalent of renters, people living in a residence which may have absolutely no ongoing value for them. The difference is that a renter does not have to fix his own toilet.
In that sense, the notion of bringing down the monthly payments for homeowners who cannot meet the obligations of their mortgage payments makes them simply placeholders in the housing market. The government is encouraging people to put their modest wages into money pits, by helping them to remain in their homes through new mortgage modification programs. They are being herded into an economic trap that will require them to spend money on something which may never have any value to them just so that they can keep their current roofs over their heads.
Douglas A. McIntyre
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