New Hope for Underwater Homeowners

May 3, 2013 by TIME Business & Money

Given the consistently good news we’ve seen from the housing market, it can be easy to forget just how much damage the bursting of the real estate bubble has wrought on the economy and the lives of average people across the country. According to analytics firm CoreLogic, 10.8 million homeowners remain underwater (meaning they owe more on their mortgages than their homes are worth), representing 22% of all mortgages in the country.

On top of the obvious human suffering caused by crushing debt, the fact that more than a fifth of the mortgages in this country are underwater is a huge drag on the economy. Underwater homeowners are much more likely to default on their mortgages, which puts downward pressure on home prices. They’re also generally unable to refinance at today’s low rates and thereby reduce their monthly costs, further increasing the odds of default and limiting their ability to spend. In addition, some economists have argued that the widespread phenomena of underwater homes has exacerbated the unemployment problem because it prevents the unemployed from moving to find jobs.

To counter these effects, the Obama Administration has rolled out programs incentivizing banks to reduce the amount owed on the mortgages of underwater homes. In theory, at least, this can be a win-win-win solution to the problem of underwater homes: Homeowners instantly reduce their monthly payments and begin building positive equity in their homes; mortgage lenders benefit because above-water homeowners are far less likely to default and the foreclosure process is very expensive for banks; and the process helps speed recovery for the entire economy.

(MORE: Is This Man Single-Handedly Stifling the U.S. Housing Recovery?)

But for years now Fannie Mae and Freddie Mac — which have been owned by the federal government since 2008, and which owns or guarantees more than half of outstanding residential mortgages — have not been writing down the value of mortgages at all. The reason? Ed DeMarco, acting head of the the government entity that overseas Fannie and Freddie, has refused to sign on to such a program, arguing that it would encourage so many folks to intentionally default on their mortgages that it would end up costing taxpayers more than it saves.