Bank of America will reportedly start working with states to use federal money to pay down the mortgage balances of struggling homeowners in AZ, NV, and CA. This is part of the "Hardest Hit Fund", aimed at the states with the largest drops in real estate values.
Let me play devil's advocate. While we can sympathize with the intent of the program, there are some valid arguments against its implementation, in particular the "Hardest Hit" push:
- We're specifically targeting homeowners who are in the most extreme bubble markets. Stats have shown repeatedly that helping the marginally struggling/underwater homeowners works far more often. Those who are significantly struggling/underwater repeatedly default even after modifications, refinances, etc. The effectiveness of our spending needs to be analyzed first.
- There are plenty of homeowners who are underwater, but are still paying their bills on-time. These homeowners will not be helped, just as they aren't being helped with loan modifications. Instead, we're spending money only on those who aren't making payments, may have lost jobs and income, and are less likely to recover even with help.
- The costs are far higher to save one homeowner in a Hardest Hit market. If we spent $10k/ea to keep 100 homeowners above water in a moderately-effected market vs. $100k/ea for 10 homeowners in a Hardest Hit market, we'd be much more effective in stabilization for a greater part of the country.
- Penalizing homeowners who took smaller risks and rewarding those that took larger risks is backwards. The risk involved in these Hardest Hit markets led to huge short-term profits and homeowners pulling out excessive equity for personal spending. Much of the equity spent in the run-up was for discretionary spending such as vehicles. Now that the tables have turned, those who pulled out the most money will also be given the first bailouts.
Seattle is one of those high-priced markets and has taken very significant hits in value. We could very likely be up soon on the short list for funds. This isn't a NIMBY argument. We shared in the large gains and are reaping the losses as well.
We all want to get the country back on track economically, but sound analysis of our spending needs to come first. "Throwing money at the problem" is not in vogue these days.
Text of article:
Arizona, Nevada, and California are among the states that have proposed using federal aid money to have Bank of America lower the amount struggling borrowers owe on their mortgages.
Bank of America Corp. will begin the mortgage principal reduction program for customers in Arizona, as part of a pilot program in using the federal aid dollars from the Hardest Hit Fund. The Hardest Hit Fund is an Obama administration program designed to provide extra aid to states that face high unemployment and sour real estate markets. Individual states can determine how to use the federal money. Arizona received $125.1 million in aid.
Bank of America customers in Arizona who are struggling to make their mortgage may be eligible to have the amount owed on their mortgage reduced via matching contributions from the state and from participating mortgage investors.
The bank sent letters to home owners in Arizona who may qualify.
Source: "Bank of America Begins Mortgage Principal Reduction Program in Arizona," Dow Jones Business News (March 2, 2011)