Saving underwater home owners

Say you bought a house for $350,000 in July 2006 — those were the days of 100% financing, so you borrowed $350,000 on a 30-year fixed-rate mortgage at 6.8%. The house is now worth $280,000, but your mortgage balance is $334,000. The current rate for a 30-year fixed-rate loan, if you could get one, is 4.7%.

Under Gumbinger’s plan, you’d get a new $280,000 mortgage at 4.7%, and the government would guarantee the other $54,000, on which you’d pay 4.7% interest to the current mortgage holder. This would reduce your payments by $6,700 a year, or roughly 25%. Your mortgage holder wouldn’t have to take a write-down, because the shortfall would be guaranteed by Uncle Sam. You get lower payments, preserve your credit rating, and save your pride by not becoming a deadbeat.

We should listen to this proposal. As it stands, responsible homeowners now have to choose between:

• Not being able to sell at any point in the next decade or two without damaging their credit.
• Strategically defaulting or walking away.
• Staying put in a city that may have limited job growth and a diminished quality of life because of the housing crisis; or one that leaves those homeowners disconnected from extended family.

None of those options are particularly fair to those homeowners whose only real failing was borrowing 100% of the purchase price in a market whose prices were driven higher by investors, speculators, flippers, and bankers. And it gives those people underwater borrowers who are current on their mortgages an incentive to stay put and ride out the storm.