You may have heard it being bantered about in the media. You may have also dismissed the idea the second you heard it. It remains to be seen whether or not the Federal Government , through it’s mortgage arms, Fannie Mae and Freddie Mac, will actually implement a non-judicial cramdown of millions of mortgages.
Here’s how it works:
Millions of homes in this country are currently “underwater”, meaning the value of their homes fall well below what is owed on the mortgage. People in these homes are paying mortgage payments on homes that have considerable negative equity. Take an example: A home worth $125,000, with a 30 year mortgage with an outstanding balance of $200,000 at an interest rate of 5% would yield a monthly mortgage payment (not including hazard insurance or real property taxes) of $1,073.64. In this example, there exists negative equity of $75,000! The Government would agree to reduce this homeowner’s mortgage balance and make it equal to the value of their home. The homeowner would be left with a 30 year mortgage with an outstanding balance of $125,000 at 5% interest, yielding a monthly mortgage payment of $671.03. If this idea were implemented, this homeowner would receive a benefit of over $400.00 in monthly mortgage payment savings. Millions of homes secured by federally backed mortgages underwritten by Fannie Mae & Freddie Mac could qualify for this type of write down, putting hundreds of dollars a month extra into the pocket books of millions of Americans.
Last summer, Congress almost enacted a change in the bankruptcy laws that would have allowed Judges to do the same thing that is being proposed now. That cramdown legislation, however, was defeated by the Senate, after strenuous objection by the big banks and mortgage companies. Do you think consumer spending is an issue with the economy today? Well just imagine if several million Americans all had $300 to $400 extra to spend per month! Reducing the current mortgage debt load would be a boom for the economy. It could even speed up the current stagnant recovery we are all facing and it could also save the housing market.
With approximately a million more homes estimated to be foreclosed upon this year nationwide, reducing this debt load may actually take many homes off of the chopping block. Cramming down mortgage balances in this fashion could actually also save the greater housing market. You see, the problem is that many of these foreclosures are going to flood the market with supply. Simple economics dictates that as supply increases, home prices fall. At the current inventory rate, it is typically taking 12.5 months to sell a home. In a healthy housing market, that wait is usually less than 6 months. If we want the overall economy to improve, then one way to improve it i to supply this type of relief to millions of underwater homeowners across the Country.
The Government did try to modify many of these mortgages through the HAMP Program, however, that program has now been declared an utter failure. If Congress or the President intend to fix the economy prior to election time (an impossible feat at this juncture), then more must be done to correct the supply and demand curves of the housing market. If nothing further is done to make that happen, then do not expect an improvement in the housing market for at least another 5 to 8 years.