What a difference a few years makes. As the foreclosure crisis unfolded in 2008 and 2009, most mortgage-industry players fought tooth-and-nail against proposals to curb foreclosures by reducing the principal balance on mortgages. Industry lobbyists back then insinuated that principal "cramdowns" (as they derisively called them) would be the gateway for a flood of dissolute borrowers to forget their financial obligations and cripple the industry.
Today -- after 5 million foreclosures and with 11 million homeowners still owing more than their homes are worth -- the mortgage industry has mostly changed its mind. Servicers increasingly offer principal reductions to struggling households, either voluntarily or under the recent agreement with state Attorneys General. Even the conservator of Fannie Mae and Freddie Mac now says mortgage write-downs may make economic sense for the two housing finance giants.
All of which begs the question: What if the industry had made these moves sooner? In 2009, Mark Zandi of Moody's Economy.com told Congress that 1.7 million foreclosures might be avoided if lawmakers allowed write-downs on some loans secured by a person's primary residence -- something allowed for years on loans for investor-owned properties, vacation homes, and even boats.
Even if only a third of these foreclosures had been prevented, what would the impact have been? Of course, the 600,000 families who stayed in their homes would have benefited, but so would have their neighbors and the U.S. economy. Overall, nearby homeowners would have preserved $100 billion in home equity because foreclosures wouldn't have dragged down the value of their home too. Based on statistics from a Congressional Budget Office 2007 study on consumer spending and housing wealth, I estimate that this extra $100 billion in home equity would have spurred as much as $7 billion in additional consumer spending each year. No doubt this extra spending could have helped save a few U.S. small businesses or preserve some jobs.
Why even think now about what might have been? Maybe because, in an economy driven largely by consumer spending, we need to consider policy solutions for the greater economic good -- and the long term -- rather than just declaring financial winners and losers in the short run.
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