Indeed, the new program is essentially a modern version of the New Deal’s Home Owners’ Loan Corporation, which helped homeowners in the 1930s weather the Great Depression. Drawing on the experience of history, the new initiative announced by the Obama administration involving the Federal Housing Authority and the $700 billion Troubled Asset Relief Program fits the bill. Since the housing crisis began, CAP has argued that the best solution is to restructure mortgages to reflect current property values. Writing down the amount of outstanding mortgages to bring them in line with the current values of the properties provides an opportunity to create the conditions for homeowners to keep paying their mortgages over the long term and minimize the walkaway risk that threatens their neighbors’ financial health. That’s a major problem for communities across the country when an estimated 24 percent of all houses with mortgages are worth less than the remaining balance on those mortgages. The decision to walk away, leaving the home vacant and abandoned, harms the value of neighboring properties, hurting people who may still be struggling to keep up with their own mortgages. When these common default factors are coupled with significant negative equity, however, the decision to simply walk away from the home (and its mortgage) becomes much easier. But as long as borrowers have some equity in their home or are not too far under water, they will often do everything in their power to keep their homes. When borrowers face job losses, illness, death, or divorce, delinquency often results.
But the big news behind the headlines is that the administration now boasts the first systematic set of policies to address the problem of “negative equity” (homeowners owing more than their homes are worth) by bringing the amount owned on mortgages down to the current value of the properties.
The Obama administration last week announced several new initiatives to bring relief to homeowners struggling to pay their mortgages.
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