Decius wrote:
OK, lets say you bought a house for 200,000. You paid 80% LTV so your mortgage is $160,000.
Nearly 15 million homeowners owe more than their homes are worth; in this group, about half the mortgages exceed the home value by more than 30 percent.
If your mortgage now exceeds your home value by more that 30 percent, your home is worth, at most, $123,000. Its probably worth a lot less then that because you've probably been paying mortgage payments for several years and you're still 30 percent down, but lets stick with the best case scenario.
The hole is $77,000. If you can do a non-recourse foreclosure, you are out $40,000 and the bank is out $37,000.
$40,000 is the most you could ever be out on this home.
Now lets enact the Feldstein plan:
If the bank or other mortgage holder agrees, the value of the mortgage would be reduced to 110 percent of the home value, with the government absorbing half of the cost of the reduction and the bank absorbing the other half.
We're going to bring the mortgage down to $135,000. This costs $25,000.
The bank is out $12,500.
The government is out $12,500.
Now, you sell the house.
You are out $52,000.
$40,000 is the down payment you've already lost, and the other $12,000 is the difference between the mortgage value and the price of the house. (There is a lot of other principal that you also loose that I'm not accounting for here.)
Thats the best case scenario. If the value of the home drops further, you'll owe more. There is no limit to the amount you could owe.
So, lets recap:
Taxpayer looses $12,500 - a total of $350 billion.
Homeowner looses at least $12,000 - possibly more.
The Bank wins - they save $24,500 and their total losses are capped at $12,500!
In other words, as I said this morning, its a massive transfer of wealth from taxpayers and homeowners to the banks. It is extremely negative for homeowners. Feldstein argues that the whole program ought to be voluntary. I can't see any reason why a homeowner would agree to this.
Was this floated as a joke?
I agree with you and Feldstein did not detail his analysis to arrive at that conclusion. He floated it as a "shared loss" between govt, banks and taxpayers. What he failed to capture, as you pointed out, the taxpayer takes the biggest hit.
