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Is forgiving mortgage principal right?

A plan to write off some debt for 'underwater' borrowers elicits anger but also stories from people who find themselves stuck.

By Teresa Mears Apr 5, 2010 4:00PM

Is it right to forgive mortgage principal for people who owe more than their homes are worth?


What if they refinanced and took out cash to buy new cars and kitchens with granite countertops and stainless steel appliances? What if they stretched to buy a home they could barely afford? What if they didn’t put any money down?


In the meantime, you bought a home that was well below what you could afford, put 20% down and are still staring at the old Formica countertops that came with it 20 years ago. Why doesn’t the lender forgive your balance?


A New York Times story on the federal government’s plan to write off the principal on some mortgages for underwater owners drew hundreds of comments, many of them angry at the idea of bailing out their fellow taxpayers.

Debra Garson of New York State wrote:

Why should tax dollars go to people who made foolish decisions about buying homes they could not afford? Are taxpayers who lived within their means supposed to ante up for everyone who decided to spend and spend with no end in sight? People who bought too much house should have to live with the consequences of their actions.

Added Pete from Washington:

What's not often noted is that a large proportion of those "underwater" mortgages are the result of "cash-out" home refinancings to enable the purchase of frivolous and expensive toys like giant SUVs, vacations to Cancun, plasma-screen TVs, motorcycles, ATVs, swimming pools, boats, jet-skis, snowmobiles, and so on. (In their infinite wisdom, our fearless leaders chose to make this "free" money tax-deductible as well.) Now, why on earth should our pockets be picked by people like this? Why should we have to pay for their extravagant, irresponsible lifestyles?

Interspersed through the hundreds of comments were stories from people who had ended up in trouble with their mortgages for various reasons:

  • "The Observer" from Phoenix: In 2007, the couple, who have four children, bought a six-bedroom home for $336,000. They sold their old house and put $69,000 down. They spent $12,000 on landscaping, $40,000 for a pool and $25,000 on furniture, all paid for in cash. They took out a 30-year fixed-rate mortgage with a payment of $1,869 per month. Last summer, the husband lost his job of 23 years, and the wife’s salary was reduced. They owe $259,000 on their mortgage, but the home’s value has dropped to $175,000. “We are both hardworking people,” she writes. “We bought a home that we could afford, made a significant down payment, and paid cash for everything associated with the home (including major ones like a swimming pool). This is not the profile of irresponsible homeowner wannabes.”
  • "SPW" of Bradenton, Fla: They bought a house for $175,000 in 2000 and refinanced to remodel the kitchen and two baths and pay off credit card debt, ending up with two mortgages totaling just over $300,000. At the time, they had a household income of about $130,000. At the peak of the market, they estimated their house was worth $450,000 to $500,000, so they thought they were being conservative. The wife’s company went under and after a year of no income she got a job paying about 35% of what she had made before. Attempts to get their mortgage modified failed, and the house is now worth about $175,000. “Surely I wasn't the awful irresponsible person so many posters talk about,” he wrote. “I didn't get anywhere near maxing out the value of my home at its 'peak.' … Here we sit … looking at being forced out of [what was] our home and into eventual Chapter 13 -- due, not entirely, but mostly, to factors outside our control.”
  • Katherine from Reno, Nev.: In 2007, she and her soon-to-be husband, both with stable jobs, bought an 1,800-square-foot house for less than 2.5 times their annual income. They made a cash down payment and got a conventional 30-year mortgage. Now, home values in their area have declined 40% in five years, and they owe $120,000 more than their house is worth. She has been unemployed for eight months, in a county where the unemployment rate is 13.5%. They have not missed any payments. “Some of the 'solutions' mentioned in related postings on NYT are naïve,” she wrote. “We cannot rent our house, as we would still have to put in at least $1,500 a month to cover the mortgage and we need a place to live anyway. Also this would also hurt our ability to refinance via one of the programs if not owner occupied. We cannot sell it without either owing the bank or taking the credit hit of a short sale. Since my last two jobs required a credit check, I am loath to do anything which would negatively affect my credit, such as walking away. .. So we’re stuck.”

In a follow-up column, writer Tara Siegel Bernard interviewed experts about why bailing out homeowners might be a good move for the nation. She wrote:

But let’s not forget that many distressed homeowners were the victims of bad timing, poor understanding of the loans they were signing up for and a slumping economy. Many families stretched themselves too thin so they could buy into the American dream of home ownership -- an idea supported by both Democrats and Republicans, not to mention the tax code. And some people simply had the misfortune to buy at the top of the market in precisely the wrong area.

She quoted Robert J. Shiller, the Yale economist: “It shouldn’t be something people should be punished for. It was a national mistake. President Bush, in his weekly radio addresses, was extolling the benefits of homeownership. Implicit in this, he was telling people they were doing the right thing to take these highly leveraged mortgage loans. We can’t reasonably think people should be punished for doing that when there is a crisis that is not of their doing.”


What do you think of the plan to forgive the principal for some of the 11 million Americans who owe more than their home is worth? Does it reward bad behavior or merely help some people who are victims of circumstances beyond their control? Even if it does reward some people who overspent, is it better for the economy than doing nothing? Would your neighborhood be better off if your neighbors got help to stay in their homes rather than let them go into foreclosure?


What would you do if you owed twice what your house was worth and lost your job?


Related reading:

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