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Homeownership Without Equity: What's It Worth?

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Dean Baker
Truthout, December 15, 2008


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It costs roughly $3,000 a year to insure a kid through the State Children's Health Insurance Program (SCHIP). Head Start costs around $7,500 per student. The Women, Infants and Children (WIC) nutrition program checks in at about $750 a head.

These numbers are worth keeping in mind in the context of plans for helping homeowners facing foreclosure. All three programs are arguably great success stories, improving the health care of lower-income children, increasing educational opportunities, and providing good nutrition at the start of life. All three programs could also be expanded to serve more people if the funding were available.

These programs will likely be expanded as priorities of the new administration and also as part of a stimulus package in which almost any type of spending will help to boost the economy. Nonetheless, it will almost certainly be the case that the programs will still not be large enough to fully meet the demand for their services.

In this context, it is worth asking how much taxpayers should be willing to spend to keep a homeowner in a home in which they have zero equity. Unless we discuss this question in a serious way, then we are speaking nonsense when we talk about plans to deal with the foreclosure crisis.

The reality is that almost all of the millions of families facing foreclosure have zero equity left in their homes. That is why they face foreclosure. If they still had equity in their house, they would borrow against it and meet their mortgage payments.

The families facing foreclosure have already borrowed down any equity they had, or saw it disappear with the housing crash. Either way, they now owe as much, or more, than the current value of their home.

This means that when we propose plans to pay banks money to have partial write-downs of mortgages, we are paying them to allow homeowners to remain in homes in which they have zero equity.

If prices continues to fall, as they will in markets that are still deflating, the homeowners that we rescue today will end up back in the hole in another year or two, once again owing more than the value of their houses.

If they have to move for work or family reasons in the next few years, as many will, they will be facing short sales. They will have to come up with tens of thousands of dollars at closing to make up the difference between the sale price and the amount of the mortgage still outstanding. Since most of these people will not have the money to make up this shortfall, this will be recorded on their credit record in the same way as a foreclosure.

In these cases, the outcome of these homeowner rescues will be that families will struggle for a few years to pay a mortgage, then end up leaving the house with zero equity and a strike on their credit record. Of course, many will give up sooner, realizing that there is no point in making a mortgage payment that far exceeds the rent on a comparable unit when they are underwater on the mortgage.

This is the reality facing the homeowners whom we are trying to help with most of the government-subsidized refinancing schemes. In many cases, the homeowners will end up with nothing at the end of the day. The winners in these stories are the banks. In underwater mortgages where banks stood to lose $100,000 or even $200,000, these proposals would have the government generously step in to pick up a large share of the loss.

This is why we should be asking about SCHIP, Head Start, and WIC. There are programs that we know can help low- and moderate-income families. With more funding, more families would be helped.

Alternatively, we can take hundreds of billions of dollars and pay it to banks so that one to two million homeowners can stay in homes in which they have no equity. That choice seems like an easy one if helping the banks is not the main goal of the policy.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.