Over the last few years, you may have noticed that loan modification programs are just a joke. They don’t really help people save money or prevent people from losing their homes and have to move out with nowhere to go. Most of these programs simply delay what homeowners owe with enough time to get back on their feet financially with the assumption that the housing market will improve shortly.
Like we said, home loan modification programs are generally a joke. It doesn’t look like the housing market is going to make a quick comeback with home prices still plummeting in most cities and unemployment rates so high. So, what is the real answer? What can help homeowners stay in their homes and get our economy back on the right foot?
Some experts have an idea that the banks won’t like one bit – simply “erase” some of the amount people have borrowed through the act of principal reduction. Doing this would definitely allow banks to share the burden of that busted bubble with those lenders that helped create it in the first place. Principal reduction would also stop people from having to relocate simply because they can no longer afford their homes.
But do you think the banks would actually go for that? Probably not – just look at all the loan modifications done in the first quarter of this year. Less than 3% involved any kind of principal reduction. And that’s a whole percentage point higher than the same time in 2010. Financial experts are leaning toward the idea that without principal reduction, our housing recovery is a mere dream.
Still wondering exactly how principal reduction on mortgages across the nation will lead to economic recovery? Look at it this way: if lenders would just reduce drowning mortgages to their actual market value, banks across the country would be able to throw around $70 billion into the economy. That translates to job creation, business growth, and consumer savings on mortgages of almost $7,000 a year. Experts estimate the number of jobs created from this plan to be about 1 million.
It’s a fact that many homeowners are struggling to pay their housing boom-era mortgages. Default rates are high, people are moving out on their loans (and homes), and the economy continues to suffer. Principal reduction might serve as an additional stimulus to our economy.
Just think: that $7,000 or so that homeowners are saving each year on the mortgage might turn into spending on groceries, household necessities, and other things. It is a natural stimulus to our economy if you look at it that way. As demand for these products increased, more jobs would be created, and business would start to grow again.
Of course, since no one has actually tried moving this plan into motion, we don’t know what the real outcome might be. But, what do you think? Do you think principal reduction on these underwater mortgages could give our economy a boost?
Jon Huser.
