A Way to Save Mortgages that are Underwater

http://online.wsj.com/article/SB10001424052970204908604574330883957532854.html

In the above article Martin Feldman argues for lowering the principal balances of mortgages that are in default or on their way to default if the value of the debt exceeds the value of the home by more that 120%. Mr. Feldstein proposes that the government (that would be us, the deep pockets) compensate the banks for 50% of the forgiven principle and the banks eat the other 50%.
In exchange, the homeowner agrees to make the mortgage a non-recourse mortgage (details like changing appropriate state laws and bankruptcy laws to be worked out later). So, if the home goes into foreclosure, the homeowner is on the hook for the difference between what the bank nets on the sale and the balance of the mortgage plus all costs associated with the sale. Normally the cost of selling is about 10% of selling price, but the bank would have additional legal, administrative and loss of interest income costs. In this case costs could go as high as 25% of the selling price. This would be sure to happen if the banks continue to process short sale and foreclosure as their current glacial pace, which is 4-6 months in King County, where we don’t have an excessive number of homes under water.
As a real estate agent this sounds terrific - it would be good for business by slowing prices by slowing the number of foreclosures coming on market and thus slowing the fall in prices of other competing homes. Banks should love welcome it as another back-door subsidy, especially if they are reigning in their current lending in anticipation of further depreciation in real estate prices.
How about from the homeowners point of view? If home prices go up, they may be eventually up out of the deep water. However, I haven’t seen any market forecasters predicting a rise of 20% in home prices any time soon. Even though they have been wearing their rosy-red glasses lately, most look for a gradual leveling off. If you have 20 to 30 years left on your mortgage and you stay in your home, you’ll at least break even
What if prices go down more and that mortgage goes from 120% back to 140% of the price of your home? After all some astute analysts ( at S&P, Robert Shiller, Moody’s economy.com) are looking for further price drops. Imagine the pain then of having to dig into your own pocket to the tune of 20 to 40 % of the price of your home, plus 10 -25% of that price (all the costs associated with selling it). Not to mention the higher taxes you’d pay to fund the program in the first place.
Those are the risks.
Read the whole article for some more of the benefits