In the Saturday edition of The Wall Street Journal, there is an op-ed from Martin Feldstein titled “How to Save an ‘Underwater’ Mortgage.”
The editorial provides a good summary of the numbers behind “Underwater” mortgages. Also, I think the article is beneficial in that it highlights the problem of mortgage defaults and foreclosures, and how “Underwater” mortgages can exacerbate the default/foreclosure crisis.
As the editorial progresses, Martin Feldstein lays out a plan for curtailing the potential problem presented by these ‘underwater’ mortgates.
It is concerning this plan that I would like to comment. I’ll keep the comments to a minimum, as this “underwater” mortgage situation and what to do about it is one that I could write very extensively about…
First, this proposal would entail (yet) another intervention, and as such is subject to the potential risks and unintended consequences of interventions, of which I have previously written.
With regard to this specific proposal ~
One of the problems I see with Martin Feldstein’s plan, and one which recurs frequently with all the bailouts, is that it helps those that, at least by the stated loan-to-value metric, have acted most in error. Some may use the term “have acted most irresponsibly.” In the case of these underwater mortgages, Feldstein proposes to have a certain amount of each mortgage reduced for those who have loan-to-value ratios of over 120%. This is a major issue in that it calls into question the aspect of fairness, a factor I have previously written about.
Another problem I see with the proposal is that it it appears to inherently assume that the current population of 120%+ loan-to-value ratio homeowners is static. If residential real estate were to decline further, this population would likely increase, perhaps substantially. In fact, in such a falling residential real estate scenario, a homeowner could have his mortgage rate reduced to 120% loan-to-value and then return above this level quite easily.
As I wrote in a June 4 post:
“Solving” our residential real estate problems is going to be most difficult, in my opinion….”
SPX at 1010.48 as this post is written