Are All the Foreclosure Efforts Worth It?
By Rob Minton & John Mazzara
I don't know if you've read about it in the news recently, but a plan called the Hardest Hit Fund was hatched by the U.S. government in February. It calls for $2.1 in U.S. Treasury funds -- read: tax dollars -- to be distributed among 10 states, which then would provide assistance for unemployed and under-water homeowners.
The 10 states are: Arizona, California, Florida, Michigan, Nevada, North Carolina, Ohio, Oregon, Rhode Island and South Carolina.
The states have submitted, or will submit, to the feds proposals for the use of these funds. Some are sure to include using the funds to pay down principal balances or make monthly payments for those who are unemployed and/or under water.
And whether that's a good use of tax dollars is sure to be a hot debate.
On one hand, you could really help stem the tide of foreclosures. Statistics show that mortgage assistance in the form of principal pay-down has a better record of success than simply lowering the interest rate or extending the loan term to make the monthly payment more affordable. Since the Obama administration seems to be all for principal balance reduction on loan modifications, you can bet that the states' plans for the funds will include helping reduce outstanding loan balances.
Some will argue that slowing the rate of foreclosure is a benefit to all. Sure, your tax dollars could be going to your neighbor to help him pay down his debt while you scrape your own payment together every month, but his avoiding foreclosure might help the whole neighborhood. It's hard to argue that a few foreclosures can affect an entire neighborhood.
Some might also feel that using tax dollars to directly help homeowners is better than using that money to incentivize banks to work with the homeowners on modifications. That, unfortunately, has met with mixed results.
But are there bigger-picture issues when the government starts paying for people's homes? For example, aid to homeowners who are unemployed might not exactly be viewed as a good thing. If you're unemployed and either your state or your federal government -- or a combination of both -- is making your house payment, how eager are you going to be to find work? This welfare-state, government-will-bail-us-out mentality could pose a real threat to people's motivation to be self-sufficient. And in the long run, that could hurt the economy more than a few more foreclosures might.
It's a tough situation. As a real estate investor, it's sometimes hard to watch irresponsible borrowers get assistance for home loans, while those of us who have the same hardships but certainly don't get any breaks for our non-owner occupied homes.
At the same time, and I have written this before, the economy is not going to turn around completely until people are again in equity positions in their homes. That sense of financial security is what helps convince consumers to consume, and when consumers are again consuming, employers will again employ.
You have to think that principal buy-downs to underwater borrowers in the 10 hardest-hit U.S. states could improve the overall equity situation. But by how much? And at what cost, beyond the actual dollar figures?
I guess we're going to find out.
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