Bank of America will reportedly start working with states to use federal money to pay down the mortgage balances of struggling homeowners in AZ, NV, and CA. This is part of the “Hardest Hit Fund”, aimed at the states with the largest drops in real estate values.
Let me play devil’s advocate. While we can sympathize with the intent of the program, there are some valid arguments against its implementation, in particular the “Hardest Hit” push:
We’re specifically targeting homeowners who are in the most extreme bubble markets. Stats have shown repeatedly that helping the marginally struggling/underwater homeowners works far more often. Those who are significantly struggling/underwater repeatedly default even after modifications, refinances, etc. The effectiveness of our spending needs to be analyzed first.
There are plenty of homeowners who are underwater, but are still paying their bills on-time. These homeowners will not be helped, just as they aren’t being helped with loan modifications. Instead, we’re spending money only on those who aren’t making payments, may have lost jobs and income, and are less likely to recover even with help.
The costs are far higher to save one homeowner in a Hardest Hit market. If we spent $10k/ea to keep 100 homeowners above water in a moderately-effected market vs. $100k/ea for 10 homeowners in a Hardest Hit market, we’d be much more effective in stabilization for a greater part of the country.
Read on.
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