AgentIndustry News

Negative equity: a housing time bomb

Part 1: Will Obama's mortgage plan work?
Published on Apr 6, 2009

Editor's note: This is Part 1 of a three-part series. Read Part 2. Most of the small print about the Obama administration's plan to help beleaguered mortgage borrowers is now available. In my view, it is coherent and well thought out, but disappointing in its limited scope. The program is designed to provide benefits to owners who deserve to be helped, rather than to reduce foreclosures and stabilize home prices. The limited scope of the program is why its cost is estimated at only $75 billion, or less than the amount required to bail out AIG. The systemic impact will be correspondingly small. The major limitation of the program is that it does not attack the problem of negative equity -- mortgage balances larger than the value of the homes securing the mortgages. Large and growing negative equity underlies the sharply reduced values of mortgages and mortgage-related assets on the books of the financial institutions holding them. These reductions in asset values have eroded...

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