Hillary Clinton Cannot Bail Us Out of the Mortgage Mess

We are a middle-class family and own a condo in Montgomery county, in Maryland, a suburb of Washington DC. We bought it in 2005 with a 20% down-payment which was practically all of our savings. We have a 5/1 ARM currently with 5% APR; it will reset in 2010. We make monthly payments of about $1400 towards the mortgage and about $400 monthly towards the property tax, condo fee and insurance.

The property prices have tanked in our area since early 2007. Condos in our development are not selling for even 20% off their peak prices in 2005. Many are investor-owned condos. Currently about 20% of the units within our community are for sale. Condos have been on the market for over 6 months without getting a single offer or a qualified buyer. About 1% of the units in our community have been foreclosed. With this kind of back-log in unsold inventory, even when recovery sets in, it will be slow.

Today, the equity in our home has been wiped out completely. And we are making regular payments towards an ailing asset. We really do not have an incentive to stay. But for the facts that we have an emotional attachment to our first home and we feel it is unethical to walk away from what we signed up to pay, we would walk away. We cannot afford these payments going into a black hole!

The foreclosure rate reported by a recent edition of Wall Street Journal for the DC and surrounding areas is 0.9%. That means nearly 1 in a hundred houses has been foreclosed. It is not just the subprime mortgages that are defaulting in our area - owners with excellent credit history and white collar jobs are foreclosing - either they cannot afford the mortgage rate resets or they see their payment as worthless investments and walking away.

This cycle - foreclosures fueling decreased value of homes and the decreased home-values prompting more foreclosures - is the fundamental problem in our area. A good mortgage plan should address this problem to preserve the wealth of our homes. The plan should stimulate a healthy demand and supply for housing. The plan should extend help to prime-loan holders as well. Bailing out subprime loans alone is insufficient to restore the real estate value in a neighborhood. Even though speculative investors do not deserve to be bailed out, the plan cannot ignore them as investment properties are a large percentage of currently held properties. Unoccupied and defaulting investment properties also affect neighborhoods. The plan should make interest rates affordable while stamping out predatory lending. Of course, a good plan will take a lot of money - something that is scarce in today's economy.

Let us examine how Clinton's plan compares with a good plan. She has proposed the following:

1. A 90-day moratorium on foreclosures and freeze on subprime ARMs: This will not be a welcome move for lenders. They will charge higher mortgage rates for new buyers. In a market where even credit-worthy buyers are struggling to get a loan, increased rates can be more discouraging. It will further skew the supply-demand ratio. Besides this proposal addresses only subprime bailouts.

2. The FHA would be empowered to guarantee underwater mortgages: FHA would be able to purchase, restructure and sell mortgages to help distressed tostay in their homes. This will be a good idea if the FHA is flush with funds. But this is not the case. It is taxpayer money that has to fund the FHA. This can be hard to implement.

3. A team of eminent economists would draft a plan for efficient restructuring of mortgages: There is nothing concrete here except that this is a good way to expedite a resolution without depending on the Congress to pass a legislation.

4. Legal protection for mortgage servicers helping struggling homeowners from the investment banks: Writing down loans will give big relief to homeowners if it can be realized. But this means less profits for investment banks, private equity firms, etc. These entities who lobby hard and have a say in the Government legislation will fight hard against this plan. How will Clinton get them to agree?

5. $30 Billion for states and localities to Fight Concentrated Foreclosures: The funds will be used in improving the net worth of neighborhoods by acquiring distressed properties, improving security in deserted neighborhoods, educating homeowners, etc. This may be good step but we must keep in mind that the $30 Billion dollars are taxpayer money. Though well meaning, it will probably meet with widespread opposition and not pass.

Although wishful, Clinton's plan may not materialize. If it does, it will come with a huge increase in our taxes.