American families have too much mortgage debt weighing them down—for many it is unsustainable, particularly those with underwater mortgages, where the debt is greater than their home's value. Resolving underwater mortgages is essential to keep families in their homes, restore housing markets, and encourage economic recovery.
There are many ways to act:
If we do not act, the consequences will be severe. More foreclosures will weaken neighborhoods and disrupt struggling families. Some households will remain trapped, missing out on better jobs elsewhere, waiting for inflation and monthly payments to slowly grind away the debt. Underwater loans keep people from selling their homes, even if they would be better off moving elsewhere for a job, to be closer to family, or to make room for kids. With few homes bought and sold, it will remain harder for everyone to know what the right price of a home is, and therefore harder to restore the confidence that homes purchased today will retain their value. Until we restore that confidence, we cannot hope for a full economic recovery.
There are many homeowners who took out reasonable mortgages for homes at the going price, made their payments, but got trapped in underwater loans by the bursting housing bubble. Right-sizing mortgages can help those responsible households get above water more quickly. It can provide better returns to lenders by preventing costly defaults and foreclosures. It will also help housing markets recover. Government should lead the way, but it need not foot the entire bill.
About Ethan Handelman Vice President for Policy and Advocacy at the National Housing Conference
Anthony Sanders Real Estate Finance Professor at George Mason University
Mark Calabria Director of Financial Regulation Studies at the Cato Institute
Peter Tatian Senior Research Associate in the Urban Institute's Metropolitan Housing and Communities Policy Center