Today President Barack Obama signed a $787 billion bill to boost the sagging economy, but some housing watchers are more interested to hear what he has to say Wednesday, when he is expected to provide details of a $50 billion proposal to help homeowners avoid foreclosure.
Some experts say the only way to dramatically reduce foreclosures is for government to use taxpayer funds to reduce the amount struggling homeowners owe to the bank.
Jack Kyser, chief economist of the Los Angeles County Economic Development Corp., which also tracks O.C., said borrowers who owe more than their home is worth face a “psychological barrier” to keeping up their payments.
Up to now, loan modification programs have temporarily reduced monthly payments for borrowers while keeping the total debt intact. Kyser said those modifications have a high rate of failure. Indeed, govenment data shows many loans modified in the first quarter of 2008 went back into default within five to six months.
However, the idea of giving people a break on their debt strikes some as a “moral hazard” — people are being rewarded for bad behavior (buying more home than they could afford) and will do so again unless they are punished.
But Kyser said homeowners who miss payments suffer a loss in their credit scores and so will pay more in interest the next time they borrower money to buy a home or car, if they can get credit at all.
“They will be punished sooner or later,” Kyser said.
What do you think?
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