Calls for the government to take "bold action” to resolve the mortgage crisis are mounting, as the percentage of homeowners whose properties are turning effectively worthless is increasing dramatically.
"A surprising number of homeowners are falling into negative equity positions,” wrote Mark Zandi, chief economist of Moody’s Economy.com, in a research note this week.
"The U.S. economy is likely in recession and problems are spreading from the housing and mortgage markets to the global financial system,” Zandi wrote.
Moody’s estimates that 10.3 percent of all American homeowners -- nearly 8.8 million people -- are underwater on their property, that is, they owe more than the home is worth.
And the big wave of mortgage resets, which will dramatically increase monthly payments for many Americans, has barely begun.
It is time for the U.S. government to consider "bolder action on mortgages,” Zandi wrote.
This could include federal mortgage guarantees for troubled borrowers, or using government funds to refinance billions of dollars in mortgages close to default.
Other economists agree with the idea that something must be done, and soon, to stop the economic hemorrhaging.
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Bank of America, for example, is proposing that a new federal government agency be created to buy delinquent mortgages, and to replace the high adjustable interest rates with low, fixed interest rates.
Exactly the strategy, by the way, that the government has proposed private lenders under take, to little effect so far.
But others note that tightening up lending standards may be a more effective, and faster acting, option.
"This is no time for half measures,” Kurt Eggert, a law professor at Chapman University, and former member of the Federal Reserve Board’s Consumer Advisory Council, tells MoneyNews.com.
"By tightening lending standards, the Fed would help borrowers, investors, and even lenders. That can re-establish faith in the subprime market,” says Eggert.
That might help right away: Demand for existing homes is decreasing. Sales slowed in January with some potential buyers trying to time the market "and others waiting for higher loan limits on conventional financing,” according to the National Association of Realtors (NAR).
Existing-home sales dropped 0.4 percent to a seasonally adjusted annual rate of 4.89 million units in January from December. That’s 23.4 percent below the sales pace of January 2007.
Many potential buyers are stuck on the sidelines.
"Subprime loans and other risky mortgage products have virtually disappeared from the marketplace and over the past five months this has been reflected in soft but fairly stable home sales," he said.
"As the increased limits for FHA and conventional loans are implemented, more buyers will have access to safer FHA loans and lower interest rate loans in high-cost areas, which could lead to steadily higher home sales later in the year,” says Lawrence Yun, NAR’s chief economist.
According to some experts, however, all of this discussion about resetting loan limits, and bailing out debtors, misses the big picture.
"The problem is that they are fighting the wrong disease,” J. Michael Martin, a lawyer, and the chief investment officer of Financial Advantage, Columbia, Md., tells MoneyNews.com.
"High interest rates were not the problem, so low interest rates are not the cure. Under-spending by citizens was not the problem. Overspending was. Don’t borrow more money to prime the pump!” he warns.
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