Treading water with “underwater” mortgages


The Obama administration recently unveiled a few new wrinkles in federal efforts to help homeowners and lenders with underwater mortgages. It will help some but not all borrowers and lenders in the Twin Cities metro area where problems are continuing to mount.

Details of the new plan can be found online at the Star Tribune and Pioneer Press. However, banking industry sources tell Minnesota 2020 that information is too sketchy to analyze in depth.

For instance, if a lender writes down the loan as intended, the forgiven principal becomes income to the homeowner and is then taxable. Without the IRS doing something about that, the program doesn’t accomplish much. Restructured loans need affordable payments like lowering the interest. That is not taxable, and the bank does not have to write off principal that would reduce their capital on their balance sheets.

Shared appreciation mortgages — as advocated by Minnesota 2020 over the past year — would give a lender back the write down of interest at some later date or recover principal it may forgive if the borrower does not have a tax problem.

That’s a view from inside banking circles. But today’s plans for helping lenders and borrowers stabilize underwater mortgages is moving a little closer to shore in these troubled waters. This is becoming even more important here in Minnesota.

MSN used Forbes, Zillow and other data earlier this week to show the Minneapolis-St. Paul metro area now ranks seventh among major metro areas for percentage of homes under water. By the fourth quarter last year, nearly 39 percent of single family metro homes had mortgages exceeding current market value.

Two ideas floating around would address underlying problems with the troubled housing market, however. One is the Home Values Guarantee program advocated by Minnesota 2020 (click here). Another would be modifying the federal Neighborhood Stabilization Program, as advocated by Tufts University professor Rachel G. Bratt, that would help stabilize housing markets with help of nonprofit organizations that are already in place. Her idea is outlined in a Feb. 28 op/ed piece in the Boston Globe, “Fixing the homeowners default trap.”

Until such time as we stabilize the housing market and begin restoring lost market values, we are doing little more than treading water in today’s housing and finance markets.