There's a lot to study here, but Senator Jeff Merkley has put together a plan for fixing the housing market and restoring healthy home ownership for millions of families - particularly the one-fifth of home owners that can't refinance into lower mortgage rates because they're underwater (including 85,000 Oregonians). Watch his short video for a brief explanation of how it would work.
According to Merkley, the plan wouldn't actually cost taxpayers anything, and the program would be self-financing. It's got support across the spectrum - from the liberal economist and Nobel Prize winner Joe Stiglitz and from the National Association of Realtors, among others.
From his statement:
Over one-fifth of American homeowners are currently underwater. They are therefore unable to take advantage of historically low mortgage rates and are at much greater risk of default and foreclosure. Merkley's plan would create a new, temporary government-backed trust to purchase mortgages issued by private lenders that meet the program's criteria. After refinancing, average underwater homeowners would, depending on the option they chose, see their monthly payment drop sharply or dramatically cut the amount of time before they begin building positive equity in their home.
One of the best analyses at this early stage comes from respected finance blogger Felix Salmon at Reuters:
In many ways, if you don’t sell your house, this is functionally equivalent to a principal reduction. That $240,000 15-year mortgage at 4%, for instance, has exactly the same cashflow characteristics as a $198,000 15-year mortgage at 7%. And the $240,000 30-year mortgage at 5%, similarly, asks homeowners to pay exactly the same as they would if they had a $193,00 30-year mortgage at 7%.
Salmon notes that while banks might be cranky about the topline numbers - when people pay on these underwater mortgages, they're making good money - they also see a huge reduction in risk (especially on entirely underwater second mortgages) when the loans get bought out by the trust.