Over the final month of the campaign Barack Obama and John McCain will campaign across Northeast Ohio but it is unlikely they will see, in all of their campaigning, what I saw on a side street in Slavic Village the other night and that’s a shame because for my money it is the root cause of our nation’s financial problem.
While my photographer and I were shooting some boarded up homes on the block I was approached by a woman who said “shoot this one they’re taking it in two weeks.” She was pointing to the home she’s owned for 15 years that was now in foreclosure.
She bought the place she told me for $39,000 and because of a bad loan, she still owes $39,000 (way more than the house is worth) on top of that she told me the place needs about $15,000 in work. Her solution? Walk away, let the bank foreclose and just take the place.
Home mortgages are no recourse loans. If you default the bank can take your house but they can’t come after any of your assets. So as the gap between what people owe on their homes and what the homes are actually worth continues to grow the temptation to do what the woman I met was doing will only be that much greater.
The problem is that only causes home prices to fall further causing that negative equity gap to get even bigger causing more people to walk away which causes… (you get the spiral of a point.)
Until this single problem is addressed the nation’s economic problem will continue to get worse. Our economy’s been shot and the efforts in Congress are bandaging the wound and slowing the bleeding but ignoring the fact there’s still a bullet in the body.
Harvard Economics professor Martin Feldstein estimates there are 10-million homes with negative equity and that half of those homeowners owe 20% or more over what the house is worth. Housing prices fell 17% in the last year. If nothing is done that 10-million will quickly grow to 20-million and that 20% will grow to 30 – 40% and the temptation to default will be too great to resist.
Feldstein, who was chief financial advisor to Ronald Reagan in his first term, suggests what he calls Mortgage Replacement Loans. He proposes having the federal government loan homeowners up to 20% of their present mortgage at a very low interest rate. The money would go to the holder of the mortgage and the homeowner would benefit from a substantially lower monthly house payment.
The loans though would be with full recourse. This guarantees the government getting their money back but it would also cause someone to think twice about defaulting after getting such a loan because there is no walking away from a loan, you’re still on the hook for it.
Is that the answer? I have absolutely no idea but it’s something worthy of debate and if the candidates say it isn’t then tell me something that is. Until you do more and more people will be walking away and this hole will only get deeper.