Under Water

The front page of today's Times delves into Obama's plan to rescue homeowners, and is critical of his approach. The Times divides troubled mortgage-holders into two categories- people who are having trouble actually making their monthly mortgage payments, and people who can make their payments, but currently have houses valued below their mortgage, who are labeled "under water."

The first group is comprised of about three million people, and the administration plans to spend about $50 billion to work with banks to keep these people in their homes, essentially splitting the cost of writing down the mortgages to a manageable level for the homeowners.

The second group, which is estimated at 10 million (and said to grow over the next couple years to 15 million) have an estimated $500 billion in mortgage debt in excess of the value of their homes. The fear is that, if the economy worsens, these people will walk out on their mortgages and opt to to rent instead- thus adding to the glut of houses on the market (and wrecking their credit in the process) and further dampening home prices. Obama's plan does nothing for these people, because studies indicate that in the past, only 1-2 percent of people "under water" on their mortgages actually walk out.

The Times, calling Obama's decision to only bail out the first group "a bit of rose-colored incrementalism," spins a fearful future (based on the statements of one Fed governor) that perhaps 10 percent, or 1-1.5 million people will talk out on their mortgages, and talks of spending $500 billion to bail out all the mortgage debt currently under water.

This is a ridiculous piece of analysis, because even if 10 percent did walk out, it makes no sense whatsoever to spend public money bailing out the 0ther 90% who had no intention of doing so (leaving aside the issue of why these folks get bailed out of a bad investment but I'm not getting a check to compensate me for my 401k's 40% loss last year). Even if we reached crisis proportions of people walking away from their mortgages, the government could much more sensibly take over the payments (or perhaps a portion of the payments, to split the loss with banks) of those who left and use the acquired properties for low-income rental housing- thus keeping it off the markets and avoiding the subsequent hit to housing prices.