Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion.
Rob Hahn offered his thoughts on the rumor and raised many good questions.
If after a homeowner receives this “mortgage reset”, house prices rise, and he ends up selling for a profit… would he have to pay that back to the Fed, or is that his to keep? Would only primary houses be eligible, or investment property as well? Would the loan have to be delinquent to be considered, or would there be relief for homeowners who have kept current, despite being underwater? Would second or third mortgages or even refis be eligible, or only the primary mortgage?
That last one was the first question that came to my mind. The majority of underwater homeowners we talk to have not only a first loan to contend with but a second, and in many cases the second came after the fact in the form of a cash-out event. If the Fed did in fact implement such a bold debt-relief edict, I can’t see this applying to those who made that ATM withdrawal.
But, this is likely much ado about nothing – except politics – according to Calculated Risk. And most recently, the Treasury Department itself, according to National Mortgage Professional Magazine, put the kibosh to the rumor.
“The administration is not considering a change in policy in this area,” said Treasury spokesman Andrew Williams.
In other words, move along. There is nothing to see here. But, it did make for some fun blog fodder this week.