Underwater loans, O'Neil's housing plan

Two housing stories are worthy of note this morning - an alarming estimate of homeowners with negative equity and former Treasury Secretary Paul O'Neil's quite sensible plan to fix the housing market. First, the stunning data on underwater homeowners.
From CNN/Money comes this report indicating that almost 20 percent of all borrowers owe more on their house than it is worth. Recall that about one-third of all U.S. homes have no mortgage (a novel concept, no?), so this figure would be about a third lower if measured across all residential real estate.

At least 7.5 million Americans owe more on their mortgages than their homes are currently worth, according to a real estate research firm's report released Friday.

In other words: If they sold their homes today, they'd have to bring a check to the closing. Ouch.

Another 2.1 million people stand right on the brink, according to the report by First American CoreLogic. Their homes are worth less than 5% more than the mortgages they're paying on them.
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Home values in Nevada and some other states rose particularly high during the real estate bubble - and are now plummeting. So even those who put 20% down when they bought their home don't stand a chance.

In many bubble markets, home prices got so high that the only way that many buyers could get a loan was by using what Fleming called "affordability products." These included adjustable rate mortgages with rates that were set artificially low for a few years, until resetting much higher, as well as mortgages that required little or no down payments.

These loans left buyers with little equity to begin with, and when prices dipped, they quickly found themselves underwater.

Ahhh... Memories...

When home prices were soaring, the mortgage industry created "affordability products" so the boom wouldn't have to end - all with the blessing of economists and policy makers because we had entered a new era where "risk" was being distributed with the help of financial innovation in mortgage securitization and insurance derivatives.

Back to the present...

The views of former Treasury Secretary Paul O'Neil on how he might go about fixing the housing market mess were the subject of this report at National Realty News the other day.

The plan is simple and straightforward, albeit quite painful, with absolutely no chance of garnering any support from any elected official.

Former treasury secretary, Paul O’Neill said that congress should scrap plans for a new economic stimulus package and instead simply require mortgage lenders to only make loans for people with a 20% or higher down payment.

On Tuesday, O’Neill addressed reports and indicated that he was not surprised that neither presidential candidate supported his position.
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According to a published reports O’Neill also said, "Unfortunately we've gotten to a point where people that want to run for president don't think they can tell the truth and still get elected. I'm hopeful whichever person gets elected, they'll be better than what they've said. An awful lot of presidential campaigns now are pandering to the lowest common denominator. They promise people everything."

As you might recall, O'Neil had a difficult time during his short tenure in Washington. His penchant for speaking his mind made for numerous political gaffes and, along with Christie Todd Whitman, hastened an early exit from the Bush Administration.