About one in every five families with a mortgage in this country is “underwater” ― owing more on the loan than the home is worth. That’s part of a slow rot that is spreading through our economy. (None of which is helped, by the way, by the failure members of the congressional supercommittee to do anything but blame each other for doing nothing.)

In the four years since the housing bubble burst, the banks, the Wall Street “packagers,” Fannie Mae and Freddie Mac, and the federal government have done very little to help those drowning families. At the same time, they’ve missed a chance to rejuvenate the housing market by taking the hit on the bad debt and clearing the decks for everybody to move forward.

It’s not a pretty story. We rushed to bail out the banks that made loans which were stupid or fraudulent or both, but we didn’t provide a rescue mechanism for the families caught in this tragedy without heroes.

In the banking world, when you have a lot of these bad mortgages still on the books at inflated figures and no process under way to write them down, it’s called “extend and pretend.”

That captures what’s going on, but it hides the enormous price we’re all paying because a large part of our economy is immobilized in a kind of slow-motion Kabuki dance: The banks don’t take the hit on the write-downs that must come some day, and the families affected are reduced to choosing between staying trapped or walking away from their homes. What we need is a third alternative: to restructure the underwater mortgages at a lower level and let families start paying the new mortgage off and investing in their future again.

You might have thought our national government would’ve put in place a program to make sure everyone involved worked through this problem. But officials have just nibbled around the edges. Rather than forcing the bailed-out banks to take the write-downs once they had the additional cushion of the new capital they received from the taxpayers, the federal government proposed some modest fixes, but in effect they joined the banks in “extend and pretend.” That’s puts us in store for a slow, drawn-out reckoning.

But when you’re dealing with people who are underwater, telling them to hold their breath isn’t a very wise ― or fair ― course of action. Many of these households will gradually slip into foreclosure. That means more homes for sale with fewer buyers, which means prices will remain depressed. And the more home prices stay low, the larger the number of families that wind up underwater. This is not the kind of cycle we want to promote as we try to emerge from the recession.

What does the right kind of cycle look like? Something like this: The banks agree ― or the federal government forces them ― to write down these underwater mortgages to levels where the value of the home exceeds the mortgage and the family in the house has a real shot at making the payments. Yes, the banks would have to take the hit on the write-downs; but better now than later, so that they start lending again rather than protecting their extend-and-pretend loans. The new mortgages could provide that the bank and the homeowner split any profit that materialized whenever the house is resold.

A family with positive equity in their home has a big incentive to make its payments, and to invest in and maintain the home. A family that’s underwater has little incentive to keep paying a bank that’s likely to take the home at some point down the road.

Since when did we Americans get so slow and scared of cleaning up a mess we made? Moving on the underwater mortgage mess is well overdue. And the national candidates aren’t even talking about it.

By Peter Goldmark

Peter Goldmark, a former publisher of the International Herald Tribune, headed the climate program at the Environmental Defense Fund. ― Ed.

(Newsday)
(MCT Information Services)