New York Times Article Addressing the Housing Slump?

Posted on Oct 14, 2012 in HARP Refinance

Question by ss: New York Times Article Addressing the Housing Slump?
I read the following NYT article in regard the housing slump. One part of the article, capsule information pills I did not understand. The author writes that millions of homeowners remain at risk of defaulting on their mortgages if they experience a payment shock because they owe more than their house is worth. Can you explain how lower home value leads to a payment shock which leads to a default on a mortgage.

Assuming you have a fixed rate mortgage, drugs whether the value of your home goes up or down, you still have the same monthly mortgage payment, right? So where is the payment shock coming from? Thank you for your help.

U.S. Tackles Housing Slump
The Obama administration is ramping up talks on how to revive the housing market, which is weighing on the economic recovery—and possibly the president’s re-election in 2012.

Last year, advisers considered several housing-policy prescriptions but rejected them in favor of letting the market sort things out. Since then, weak demand and a stream of foreclosed properties have put renewed pressure on home prices, prompting concern within the White House.

Housing “hasn’t bottomed out as quickly as we expected,” President Barack Obama said at a White House town hall last week. Mr. Obama said housing remained the “most stubborn” problem facing the country and conceded that a raft of federal mortgage-aid programs were “not enough, and so we’re going back to the drawing board.”

Policy ideas include having taxpayer-owned mortgage giants Fannie Mae and Freddie Mac relax their rules for loans to investors, allowing those buyers to vacuum up excess housing inventory. In certain markets, Fannie and Freddie could hold some foreclosed homes off the market and rent them out to ease the property glut.

Officials also could sweeten incentives for banks to reduce loan balances for borrowers who are underwater, or owe more than their homes are worth.

The White House is weighing ideas to strengthen the feeble housing market. Pictured, emptying a foreclosed home in Lawrenceville, Ga., this year.

Discussions are in early stages, and there isn’t consensus around particular ideas. A spokeswoman said the president and his advisers “are always looking at new ways” to strengthen the housing market but wouldn’t disclose details. “While we continue to consider the options available to us, it would be inaccurate to say we are proposing any of these particular ideas at this time,” White House spokeswoman Amy Brundage said.

Home-buyer tax credits worth up to $ 8,000 in 2009 and 2010 gave a short-term boost to home sales, but demand plunged after they expired. Foreclosures have put pressure on prices and damped residential construction, traditionally an engine of job growth during economic expansions.

“As conditions change, some options that were below the line the way the market was 18 months ago might be above the line today,” said Peter P. Swire, who teaches law at Ohio State University and until last year was a top housing adviser to the White House.

Most of the administration’s housing efforts have focused on helping borrowers refinance or modify their loans to avoid foreclosure. But some economists say too many borrowers won’t be saved through loan workouts and that the administration must do more to soak up the flood of foreclosures by boosting housing demand.

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President Obama’s signature loan-modification program, announced during his first month in office, has lowered payments for around 600,000 borrowers. Meanwhile, around four million borrowers are in foreclosure or have missed three or more consecutive mortgage payments. While mortgage-delinquency rates have fallen, millions more remain at risk of defaulting if they experience a payment shock because they owe more than their homes are worth.

More recent housing relief has targeted unemployed borrowers. Last week, officials said unemployed borrowers with loans backed by the Federal Housing Administration could miss up to 12 months of payments while they look for new jobs. A separate $ 1 billion program is set to begin providing interest-free loans of up to $ 50,000 for temporarily jobless borrowers this month.

Unlikely to get Congress to provide additional funds, the administration is left to examine options that it can implement without congressional consent. Fannie and Freddie, the so-called government-sponsored enterprises or GSEs, could be one policy lever. “There are a number of things that we can look at on the GSE side,” said Austan Goolsbee, departing chairman of the Council of Economic Advisers.

Last year, officials considered a range of policies that included allowing borrowers with loans backed by Fannie and Freddie to refinance more easily by relaxing fees that lenders are charged for riskier borrowers.

Others outside the administration have pushed for fede

Best answer:

Answer by Peter W
A couple of things:

a) There are still millions of ARMs out there coming to maturity over the next couple of years. So a barely affordable payment on an ‘upside down’ piece of real-estate may no longer be affordable or practical when compared to walking away.

b) Equity is the means by which people often measure their wealth and calculate the value of ownership vs. renting. If paying a mortgage for a property where there is no (or negative) equity exceeds the cost of renting, the decision to walk away becomes a valid option (from a purely selfish point of view).

c) Often individuals will make sacrifices to keep their house (ownership) if they experience a bump in the road – layoff or reduced hours or medical emergency or similar. If they perceive that there is no residual or future value in such a sacrifice due to negative equity, they will again walk away rather than tough it out.

Those are the three obvious reasons, anyway.

Know better? Leave your own answer in the comments!

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One Comment

  1. The payment shock can come from one still being in an adjustable rate, if the Fed raises rates their rates go up, or if they lose their income, hence a payment shock. The author should have used a comma before he wrote, since they owe more than the house is worth. In past years after owning a house for 3 – 5 years with a appreciation rate of 3% a homeowner could sell their home and make a small profit or break even if they experienced a payment shock from increase in rates or loss of employment. Not so today, the homeowner would end up in foreclosure or bankruptcy.