Wednesday, March 24, 2010

The Housing Crisis and the Resentment Zone

Copyright, The New York Times Company

Means-tested government benefits, and the “resentment zone” that goes with them, are more prevalent than ever, thanks to the housing crash. Programs like these delay the housing market’s recovery.

Home buyers take usually out mortgages that cover only part of the value of the houses they are buying. In other words, the house is worth more than the mortgage owed. This means that in the event a borrower defaults, the lender can, in most cases, be repaid in full by foreclosing on the house and selling it to someone else.

However, housing prices have fallen dramatically since 2006. By 2009, about one in four home mortgages was “underwater” — meaning that the market value of the house had fallen below the amount owed on the mortgage (a.k.a., home equity is negative). Because of the low resale values, foreclosing on any of the homes will not yield lenders their entire principal; lenders in those cases must rely on the good behavior of the borrowers.

Meanwhile, homeowners are considering whether it is worth moving, and a reduced credit rating, in order to erase their negative home equity by walking away from their home and its mortgage.

As it has with health care, student loans, nutrition and other areas, the federal government has responded to the mortgage crisis with another layer of means-tested benefits. And these may be the largest means tests yet.

The government’s idea was to “modify” underwater mortgages in order to give homeowners an additional incentive to stay in their house. But the government will not sponsor such modifications for people with negative home equity who also earn “enough” to make their mortgage payments.

The government programs aim to modify the mortgage so that the modified mortgage payments, together with taxes and insurance, are 31 percent of the borrower’s income. Those reduced payments remain in place for five years, if not longer.

Thus, a homeowner earning $60,000 per year would have his annual housing expenses reduced to $18,600 (31 percent of his income), whereas one earning $70,000 would have expenses of $21,700. In other words, the fact that one person earns an additional $10,000 for the year obligates him to $15,500 additional housing expenses (an additional $3,100 per year for five years).

For this reason, mortgage modification has dramatically larger penalties for earning than other means-tested government programs. This not only adds to an already large pool of resentment, but is also partly responsible for the slow pace of modification by mortgage lenders and servicers, and for the dearth of income tax revenues collected by state and federal treasuries.


5 comments:

Anders said...

It seems that the borrower can be current, late, in default, in bankruptcy, or in foreclosure at the time the application for modification is made. The programs available will vary accordingly.
help research paper

muzammal khan said...

Could ultimately make existing property more productive. Table 1’s first and second content display. bubblegum casting

kavin paker said...

Quite often in doing this you become a bit of a monster. It’s my option that if women are going to be animals, they should make themselves as animals. It’s one of the first activities in breaking out.bubblegum casting

Yasir Khalid said...

Perhaps readers may find no relationship between the blog and this conference, but if someday can attend, would realize that there is much to do with this blog. Going Here

Yasir Khalid said...

Also the constant traffic we channel to your website Ac Repair North Palm Beach will do a lot in lifting the ranking of your website giving it even more exposure in Google searches. this link