Two Types of Housing Distress
The key to understanding [the administration’s housing] plan will be remembering that there are two different groups of homeowners who are at risk of foreclosure. The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments . . . The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are underwater.
–David Leonhardt, “Bailout Likely to Focus on Most Afflicted Homeowners“; The New York Times (2/18/09)
Want to know which group of homeowners receives the higher priority in President Obama’s housing bailout, due to be announced today in Phoenix? Look at the price tag.
Conventional wisdom seems to be that helping the first, most distressed group will require around $50 billion; the second, closer to $500 billion.
However, if there’s one thing that has become apparent the last two years or so, it’s that bright lines dividing one group of troubled homeowners from another are illusory.
Illusory “Bright Lines”
Initially, of course, it was thought that the financial fall-out from the housing downturn was limited to so-called “subprime borrowers” — all the marginal homeowners who put nothing down using toxic loans with low, initial teaser rates.
With housing nationally now down 20%-25% from the 2006 peak, clearly the pain has spread to the entire market.
Now, the focus is all the homeowners who can afford their mortgages, at least for the time being, but economically would seem to have an incentive to default because their homes have lost so much value.
As the Times’ Leonhardt points out, it is the behavior of this second group that holds the key to the housing market — and perhaps the economy. If they honor their mortgages, things get better; if not . .
P.S.: My post, “What’s So Bad About Bad Credit?,” addresses this subject as well.