As the Treasury Department prepares a $40-billion program to help delinquent homeowners avoid foreclosure, it confronts a difficult challenge: not making the plan too tempting to people like Todd Lawrence.
An airline pilot who lives outside Norwich, Conn., Lawrence has a 30-year mortgage and no trouble making monthly payments. But the real estate market has plunged, and he owes more on his house than it is worth, like millions of other people.
If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Lawrence believes sober souls like himself are also due for a break.
"Why am I being punished for having bought a house I could afford?" he asked. "I am beginning to think I would have rocks in my head if I keep paying my mortgage."
The plan, still under development, is part of the economic rescue package passed by Congress earlier this month. It is designed to aid up to 3-million beleaguered homeowners by reducing their monthly payments.
Washington and Wall Street are frantically seeking to stabilize markets by curtailing the onslaught of foreclosures. There are now at least four major plans to aid homeowners. But experts say it is difficult to design these programs in ways that reduce the indebtedness of the distressed without giving everyone else a reason to mail the keys back to their lenders.
More than 10-million homeowners are underwater like Lawrence, and their ranks are swelling.
Government officials say that homeowner bailouts are not a gift. For one thing, they assert, most mortgages will simply be revamped so the monthly payments become affordable for the next few years. Reductions in loan balances, which are drawing the most attention, will generally be a last resort.
Going into default, whether as a gambit to get a loan modification or to get rid of a burdensome house payment, carries risks. Under some conditions, lenders have the right to sue a borrower for assets beyond the house itself. Then there is the inevitable blot on the borrower's credit record.
Many owe more than home is worth
Almost half of Nevada homeowners with a mortgage owe more to the bank than their homes are worth. If you add in the homeowners like them in California, Arizona, Florida, Georgia and Michigan, together they account for nearly 60 percent of all homeowners who are "underwater" on their mortgages.
Nationwide, almost one out of every five homeowners with a mortgage owes more to their lender than their properties are worth. But if you subtract those states, the rate drops to about one in 10, according to a report to be released today by First American CoreLogic.
By the time the housing market hits bottom, prices may be down 40 percent from the top, leaving 40 percent of homeowners underwater, said Nouriel Roubini, economics professor at New York University.