Based on the discussion going on in the comments of this post, I’d like to put a question on the floor. Is one of the things that might reduce unemployment, particularly localized high unemployment in places like Detroit (15.5%) or Las Vegas (over 13%) finding a way of inducing banks to renegotiate mortgages based on current market values?
Texas metropolitan area unemloyment rates are, by and large, significantly lower than national averages and there are lots of other areas that are economically stronger than the worst-hit cities. If people are staying put because they’re “under water”, i.e. they owe more on their houses than their houses are worth, mightn’t it be as good a use of resources to address that specifically as to extend unemployment benefits?
Yes, I understand the moral hazard involved and that it would put some banks into pretty serious straits. That’s why I’m asking about “finding a way”.
In theory, banks should have started negotiating down mortgages already. That is what they have done in the past. It appears to be more difficult with the fragmented loans. Also, loan servicers have little motivation. But, if we could overcome these obstacles and the politics, it might work. I would feel better if we had some idea of the skill levels of those unemployed and stuck with underwater houses.
That said, I think the politics would be horrible. People would be angry if only those in high unemployment areas were helped. A countrywide approach would be rejected out of hand as big government intrusion. It kind of would be. Ideally, if you want this to work, it needs to originate, or at least look like it originates, at the state level. Then it might work.
Steve
I think it depends, steve. If the homeowner has lost their job and isn’t able to get a new one, the mortgage company doesn’t have any incentive to renegotiate mortgages, it’s a waste of time and resources.
I guess one thing Michigan could do is switch to non-recourse mortgages, which would give homeowners leverage to leave their homes without risking other assets. I assume that would give people the ability to head for the door, and I can see why Michigan wouldn’t want to do it. Interest rates would go up in Michigan, stifling future development. Should the federal government step in and do that? As a non-Michiganite, I wouldn’t feel right about doing that, particularly since it’s not clear that Texas would hire the new-comers just because the unemployment rate is relatively better.