Merkley's plan to fix home ownership

Kari Chisholm FacebookTwitterWebsite

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.

Read the statement here or dig in to the full 31-page explanation (pdf).

There's more from the Portland Business Journal, The Hill, the Oregonian, the Wall Street Journal, Slate and Firedoglake.

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    Full disclosure: My firm built Jeff Merkley's campaign website. I speak only for myself.

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    I can support Merkley’s proposal. It would both help the home-buyers involved and help clear the financial uncertainty of the loans they hold (and the effect that uncertainty has on our economy). But it does have negative aspect, especially compared with the underwater homeowners just walking away from their loans (and homes). It rewards the underwater mortgage holding lenders with full payment on the bad loans they made (and, perhaps, encouraging them to make such loans again). And it would keep housing prices higher than if the mortgage holders walked away (and the mortgage lenders had to resell them). While this may be good for all current home owners, it would not be good for first time home buyers.

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      David, I'd rather people be able to stay in their houses ... those who want to walk away still could, presumably, but most probably would rather not. It has lots of bad consequences apart from basic life disruption, stress and sorrow.

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        I think Dave's got a point. Why should these loans be bought out at full face value, without regard to any markdowns taken by the bank? Am I missing something?

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          Yes, BJ, you're missing the fact that the banks are getting a reduction in value, the program only covers up to 140% of value (the rest of the underwater mortgage would be a bank write-off), and the banks would pay a substantial fee.

          From Felix Salmon:

          And bigger problems might well arise with banks and investors, who are not going to be happy to see the loans they’re carrying on their books at 106 cents on the dollar suddenly reduced to par. On top of that, the banks are going to be asked to pay a “risk transfer fee”: 15% of the first 20% that the loan is underwater, and 30% of the second 20% that the loan is underwater. Beyond a loan-to-value ratio of more than 140%, banks are going to be asked to write off everything.

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    If this requires legislation, forget it! Nothing gets through the GOP in Congress, especially if it is going to help anyone or improve the economy. If we have a different Congress next year, perhaps.


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