Debate Club

Underwater Mortgages Causing Downward Economic Spiral

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Restoring the housing market is key to the economic recovery. Housing construction creates jobs—well-paying American jobs—that feed back into our economy. Every new construction job produces two more jobs in the local economy (and, conversely, every construction job lost results in two additional jobs being eliminated). But housing demand remains tepid and, as a result, the construction industry has stagnated.

What's the problem? Underwater mortgages are depressing housing demand by creating blockages in the mortgage finance system. Interest rates are at all-time lows, but underwater homeowners can't take advantage of them because they can't make up for lost equity. Families who find themselves in trouble because of a loss of income or other financial shock can't make their monthly payments, refinance, or sell their homes. Foreclosures result, which drag down the prices of nearby homes, increasing the likelihood that other homeowners will fall underwater and perpetuate the downward spiral. Lenders become increasingly wary of making new mortgages, afraid of the risk of losses from bad loans.

[Check out the U.S. News housing blog The Home Front.]

The failure of the market to correct these problems is exactly why public policy needs to intervene. With proper help and incentives, many (but not all) underwater mortgages can be turned into performing loans. Underwater homeowners who might otherwise need to walk away from their homes would be more willing to stay in them if refinancing were available. This would mean fewer foreclosures, which benefits homeowners, lenders, neighbors, and the housing market. Plus, with lower monthly payments, homeowners would have more disposable income to prime the economic pump, such as by investing in home repairs or improvements.

The trick is identifying which homeowners can benefit from refinancing. Housing counseling can play a key role here. Urban Institute research has shown that housing counselors can help homeowners and lenders restructure loans and increase the likelihood that those loans will remain current, or identify other options for people who cannot afford to remain in their homes. By coupling effective counseling with robust solutions for troubled homeowners—such as loan modifications, refinancing, and rental housing options—we can get on the road to economic recovery much faster.

Peter Tatian

About Peter Tatian Senior Research Associate in the Urban Institute's Metropolitan Housing and Communities Policy Center

housing market

Other Arguments

115 Pts
Obama's Mortgage Plan About Politics, Not Economics

No – Obama's Mortgage Plan About Politics, Not Economics

Anthony Sanders Real Estate Finance Professor at George Mason University

11 Pts
Taxpayers Shouldn't Have to Pay for Underwater Mortgages

No – Taxpayers Shouldn't Have to Pay for Underwater Mortgages

Mark Calabria Director of Financial Regulation Studies at the Cato Institute

-48 Pts
Cost of More Foreclosures to the Economy Is Too High

Yes – Cost of More Foreclosures to the Economy Is Too High

Ethan Handelman Vice President for Policy and Advocacy at the National Housing Conference

-59 Pts
Responsible Families Deserve Mortgage Relief

Yes – Responsible Families Deserve Mortgage Relief

Raphael Bostic Assistant Secretary for Policy Development and Research at the Department of Housing and Urban Development

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