Rebuilding the Foundation

Homeowners are drowning. A report by First American CoreLogic, a firm that analyzes sales and mortgage data, found that one in five American homeowners in December were carrying “mortgage debt greater than what the homes were worth,” according to a story in the Wall Street Journal.

A total of 8.3 million mortgages nationally were “upside down” or “underwater,” according to the story, up from 7.6 million in September.

The trend, according to the story, is likely to continue as home prices continue to fall and more and more people face unemployment or underemployment.

From the Journal:

“An additional 2.2 million mortgaged properties throughout the country are approaching negative equity, the report found. These properties are within 5 percent of being underwater. And home prices are still dropping in many areas.”

The equity report came just one week after the National Association of Realtors issued a report showing that existing-home sales fell to their slowest rate in more than a decade. According to the New York Times, the 4.49 million annual rate represented a fall off of 8.6% from a year ago, with median prices dropping to an almost six-year low of $170,300, their lowest point since March 2003. The median price in January, according to the Times, was down 26% from its peak of $230,100 in July 2006.

The realty group also reports that foreclosures or distressed sales, which are among the cheapest homes on the market, accounted for an estimated 45% of sales last month—which has been one of the primary factors driving prices downward.

Basically, each house that goes into foreclosure creates ripples in the larger housing market, its diminished value echoing into the surrounding neighborhood, driving down other home prices and creating momentum for a foreclosure epidemic. As property values fall, there is the growing likelihood that many houses will be worth less than the mortgage paper their owners are carrying, which in turn might encourage some to walk away and leave their properties for the bank to deal with.

The loss of home value — along with the financial shell game played by the too many in the banking and investment industries — has left banks skittish, freezing credit and shrinking the supply of money in the economy.

The impact, as President Barack Obama said in his February address to Congress, is devastating for the economy:

“You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education, how stores stock their shelves, farms buy equipment, and businesses make payroll.

“But credit has stopped flowing the way it should. Too many bad loans from the housing crisis have made their way onto the books of too many banks. And with so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or even to each other.

“When there’s no lending, families can’t afford to buy homes or cars, so businesses are forced to make layoffs. Our economy suffers even more, and credit dries up even further.”

That’s why it is imperative that the foreclosure crisis be addressed. The president has outlined a plan—at a cost of between $75 billion and $275 billion—that will offer assistance to up to 9 million homeowners to stabilize the housing market. It calls for providing incentives to lenders, mortgage holders and borrowers to help modify mortgage loans and having Fannie Mae and Freddie Mac, which would receive $200 billion in additional financing, refinance between 4 million and 5 million mortgages.

Critics say it rewards bad behavior by bailing out people who bought more house than they could afford. The president, however, disagrees.

“It’s a plan that won’t help speculators or that neighbor down the street who bought a house he could never hope to afford, but it will help millions of Americans who are struggling with declining home values—Americans who will now be able to take advantage of the lower interest rates that this plan has already helped bring about. In fact, the average family who re-finances today can save nearly $2,000 per year on their mortgage.”

The plan, the details of which were released in early March, has the backing of the National Association of Realtors and numerous homeowner advocates.

The cash, however, is not likely to be enough, which is why the president is seeking modifications in federal bankruptcy law that would allow judges to modify mortgages. The plan, according to the Times, was rewritten as part of a Congressional compromise.

“Under the terms of the agreement,” the paper said, “judges would have to consider whether a homeowner had been offered a reasonable deal by the bank to rework his or her home loan before seeking help in bankruptcy court. Borrowers also would have a responsibility to prove that they tried to modify their mortgages.”

None of this is perfect. But compromises like this are preferable to doing nothing. The reality is that we will not be able to get the economy moving forward until we stabilize the housing market, end the foreclosure crisis and keep people in their homes.

Hank Kalet is a poet and online editor for The Princeton Packet newspaper group ( E-mail; see the Channel Surfing blog at;

From The Progressive Populist, April 1, 2009

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