Local governments across the country are considering seizing mortgages to keep underwater homeowners from abandoning their properties. The strategy has its supporters and detractors, but is it an idea past its need? The proposal involves governments buying nondelinquent mortgages for less than owed so that the homeowners may refinance at a lower principal. The justification is that stabilizing home prices and home ownership is good for communities. Yet the rate of defaults has declined considerably this year. In 2009, the rate of defaults was 25 percent of all mortgages; it is now down to 7.5 percent. The number of underwater homeowners is also down from 12.1 million in the first quarter of 2011 to 11.4 million in the first quarter of 2012. In part this is due to lenders reducing the principal amount of loans through modification, something that has been rare in the past. In 2010 and 2011, debt forgiveness was allowed in less than 30 percent of loan modifications by Bank of America. In July, 2012, it was allowed about 55 percent of the time. Wells Fargo forgave principal in 67 percent of its modifications and Chase applied it 71 percent. Government programs also resulted in additional principal adjustments.
Nevertheless, the longer homeowners are underwater, the more likely they will eventually default. Housing prices simply cannot recover fast enough to make up for the losses in values. Property prices almost doubled from 2000 to 2006. They have since declined 35 percent. This year we have seen an increase in prices of 3.6 percent.