A Smart Solution to the Underwater Mortgage Crisis

The federal government has spent the last two years bailing out banking giants, Wall Street power-brokers, and the creditors of the now government controlled mortgage giants Fannie Mae and Freddie Mac. Now the feds have instituted several programs to bail out the small guy. But there are thousands of hardworking Americans who made the unfortunate mistake of buying a home when the real estate industry was at its peak a few years ago. The majority of those homeowners, unless they have been making extra payments, now owe more on their mortgage than their home is worth. Because of their negative equity, they cannot qualify for refinancing to take advantage of the near-record low interest rates created by the government’s bailout programs. After making payments on time, and continuing to make payments on an underwater mortgage, these people are getting screwed by the system.

One leading mortgage industry insider, Keith Gumbinger, has a plan which he says will allow the government to help Americans who find themselves underwater, help the overall housing market, and even help the lenders deal with a backlog of troubled loans. Gumbinger, who serves as vice president for HSH Associates, is proposing that the government issue what he calls “value gap coverage”. The plan would allow underwater homeowners to reduce interest payments, thus reducing the urge to walk away from a sinking mortgage and rewarding hardworking people who’ve stayed current on payments in a bad situation.

More than likely, in one way or another, the government is already at risk for the discrepancy in value and principle on most underwater mortgages. The risk to the Fed would fall gradually as home prices rise, and your payments would slowly reduce the principle left on the loan. Of course, homeowners would not build equity until their home’s value exceed the guarantee plus the remaining balance, but it would happen quicker than it would take without the assistance. Gumbinger admits that his plan is similar to the latest proposed initiative from the government, but says that the key difference is that lenders wouldn’t have to take a loss under his plan like they would under the government’s.

Gumbinger’s proposal is not perfect, however. There would have to be a way to prevent homeowners from qualifying for the program and immediately selling their home, sticking Uncle Sam with the guaranteed amount then buying another home with a low mortgage rate. This would be great for the homeowners because they would have the same low payments but would actually begin building equity immediately, but the cost to taxpayers could be astronomical if done on a large scale. But if we found a way to block that scenario, the plan far exceeds the benefit to the overall economy than that of the government’s latest plan.

It is not completely clear how much this plan would cost American taxpayers, but it would definitely cost less than leaving millions of homeowners in jeopardy of losing their homes to foreclosure on forcing them to continue the losing battle of making payments on an underwater mortgage