"the big news...the first systematic set of policies to address the problem of negative equity" [View All]

[ProSense]

TARP For Main Street (Finally!)

Our guest blogger is Andrew Jakabovics, the Associate Director for Housing and Economics at the Center for American Progress Action Fund.

Today, the Obama Administration will be announcing several new initiatives to bring relief to homeowners struggling to pay their mortgages. But the big news is that the administration has come up with the first systematic set of policies to address the problem of negative equity (homeowners owing more than their home is worth) by bringing mortgages down to the current value of the properties.

An estimated 24 percent of all houses with mortgages are worth less than the remaining balance on those mortgages. By writing down the outstanding loan to bring it in line with the current value of the property, there is an opportunity to create mortgages that are likely to keep paying over the long term and minimize the walkaway risk.

Since the housing crisis began, CAP has argued that the best solution is to restructure mortgages to reflect current property values. Drawing on the experience of history, the new FHA/TARP program announced today fits the bill.

In what is essentially a modern version of the New Deal’s Home Owners’ Loan Corporation, a borrower who is current on her loan but who owes more on her home than it is currently worth can refinance into an FHA loan for 97 percent of the property’s current value. Incentives will be paid to servicers to allow these borrowers to refinance for less than the outstanding amount. Given the much larger losses lienholders would face if borrowers defaulted, cash in hand may be sufficiently attractive to allow these short-refis to proceed.

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(emphasis added)