According to the latest data, 21.9 percent of American homeowners are underwater, “a significant jump from the 17.6% of all homeowners who sat underwater in the prior quarter.” Despite this, a measure that would have allowed bankruptcy judges to cram-down mortgage payments for underwater homeowners — who owe more for their mortgage then their home is currently worth — failed to pass in the Senate two weeks ago.
According to Professor Elizabeth Warren — a bankruptcy expert and Chair of the TARP’s Congressional Oversight Panel — that leaves the Obama administration’s housing plan without an answer for underwater homeowners. In an interview today with The Wonk Room, Warren explained that without cram-down, it’s critical that the administration find something else to “get a floor in the housing market”:
I’m very concerned because that was the last place that — in the overall structure of how to deal with failing mortgages and foreclosures — that was the last place that we had to try to deal with the underwater mortgages…There’s nothing in the current Treasury plan to deal with that problem other than “let’s count on the bankruptcy bill.” And without the bankruptcy amendment, this undercuts a big part of the thrust of trying to get a floor in the housing market…This is a problem. We can’t just help people who are facing mortgage problems in areas where there haven’t been sharp price declines. We have to find something that works across the country.
A housing bill that passed the Senate last week also doesn’t provide “significant help” for underwater homeowners. And while the declines in housing prices aren’t falling quite as rapidly as they once were, they are still going down at a healthy clip.
Dean Baker wrote that home prices “have been falling at a 24 percent annual rate in recent months” and “given the massive inventory of unsold homes, it is reasonable to expect that this rate of price decline could continue at least through 2009.” If that is the case — and since the banking lobby has successfully taken cram-down out of the equation — a new avenue for helping underwater homeowners will have to be found. The housing problem is not going to simply disappear, and until it’s solved the economic recovery will be that much slower.