If we look at the primary components of a home mortgage; Principle, Interest Rate and Repayment Duration, we see the elements we have to work with, in an attempt to bring the “underwater” housing market back to life without drowning the mortgage holders or the destroying the credit of mortgagors. We need everyone to survive the still unresolved collapse of the housing market, for our economy to fully recover.
I think there is some middle ground on underwater mortgages that doesn’t destroy the balance sheets of mortgage holders and provides a way to handle the massive over valuation we are stuck with, in a weak jobs market.
Recent History: Calls to adjust the Principle are going nowhere, because it would bankrupt institutions holding the mortgages and loans made when interest rates were higher are reaping windfall profits today. Short of defaulting, mortgagors are paying precious money into a negative asset, going farther into a hole of debt and mortgage holders would become insolvent if they mark principles down to their current market value. So, what can be done without killing the credit of home owners or the equity of bankers?
I suggest that we leave principles alone, adjust interest rates to reflect reasonable profits on original investments and stretch the duration of loans to allow affordable payments, over a longer window of time, to reduce the specter of defaults and materially indemnify the probability that assets represent recoverable values.