The Mortgage Fix That Can Save the Economy

foreclosure crisisThe loan modification programs have been a joke. You have a house that has tanked in value and the best the banks can come up with is a plan where they sort of delay what you owe long enough for you to get back on your financial feet -- if that -- based on the flawed logic that the housing market is certain to improve in just a matter of months.

The real answer for what ails us is a Third Rail solution that banks don't want to touch: Erase some of the amount we borrowed, a process known as a principal reduction. To do so would share the burden of the housing crash with the lenders who helped create it. It would also allow us to get on with our lives, and, according to The New Bottom Line, save the economy in the process. Got your attention now, didn't we?


Banks would rather poke out their proverbial eyes with sharp sticks than offer principal reductions. Only 2.8 percent of all loan modifications in the first quarter of 2011 involved any actual sort of principal reduction, according to the ratings agency DBRS. And that number is actually up a full percentage point from the same time last year.

But some analysts believe that the industry-wide reluctance to perform principal reductions on a wide scale is actually what is holding back the housing recovery.

Search Homes for Sale Browse through photos of millions of home listings or search for rentals If lenders would reduce all underwater mortgages to their current market value, the nation's banks could pump $71 billion per year into the economy, create more than 1 million jobs annually and save families up to $6,500 per year on mortgage payments, according to The New Bottom Line, a collaborative of 1,000 faith-based and community organizations who want Wall Street held accountable for the mess it created.

Grassroots organizations associated with The New Bottom Line have called on state attorneys general to investigate banks for foreclosure fraud and to work for a settlement that includes large-scale principal reduction for borrowers.

According to the report, "The Win/Win Solution: How Fixing the Housing Crisis Will Create One Million Jobs," homeowners are struggling to pay their "boom-era mortgages with their recession-era salaries" and the economy is suffering for it. The report adds: "Writing down the principals and interest rates on all underwater mortgages to market value would serve as the second stimulus that America so desperately needs, only without added costs to taxpayers." Amen to that part.

The plan says that the money that homeowners would save on their mortgage payments each month would be spent instead on groceries, clothing, and household necessities.
As consumer demand increased, businesses would start hiring again.

The plan projects an annual stimulus of $20.5 billion in California alone, leading to 300,000 new jobs a year created there. A $12 billion stimulus to the economy of Florida would result in almost 180,000 new jobs.

The report says that in 2010, the nation's top six banks paid out more than twice the cost of the plan ($71 billion per year) in bonuses and compensation alone ($146 billion in 2010). And that currently, the country's banks have cash reserves of $1.64 trillion -- a historic high.

Tell us what you think. Could principal reduction revive the economy? Add your comment in the box below. Click here to see a new post that looks at some of the reader comments so far.

Also see:
Realtors' Latest Challenge: A Surge of Squatters
Low Refi Rates Are Great, But Not for Everyone

How to Buy Foreclosures

VIDEO: All About Short Sales

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