Feds should do more to help underwater borrowers: Moody's
The federal government should enact more loss-mitigation tools to thwart another housing downturn that could erupt from falling home prices and risks tied to 14 million underwater mortgages, analyst Mark Zandi with Moody's Analytics said Monday. Zandi said another housing downturn is possible. He envisions a dangerous scenario where plummeting home values would push more borrowers underwater, causing them to choose a strategic default over paying their mortgage. Those factors could then lead to further price declines and a downward spiral that would keep the housing market sputtering for months to come, Zandi's report concluded. Of the 14 million borrowers underwater now, about half owe 30% or more than their homes are actually worth, Moody's said. "It does not take much to induce many in that situation to turn their keys over to their lenders; a leaky roof or broken air conditioner might be sufficient, particularly if rental housing is available nearby for less than the cost of the mortgage," Zandi warned. With housing prospects abysmal in many areas, Zandi said the government may want to prop up housing once more to ensure the sector's training wheels are secure enough to pedal to a real recovery. The market is at historic lows in some cases with single-family and multifamily housing starts averaging 550,000 units annually, the weakest pace of construction since World War II and well under the average production of 1.75 million units per year, according to Moody's. Until an actual recovery is reached, Zandi wants lawmakers to employ more home refinancing options, while also delaying a reduction in the GSEs conforming loan limits and encouraging loan modifications that aggressively employ principal reductions. "Although none of these steps are particularly satisfying or likely to be popular, the outcome will be worse if policymakers stand by while a weakening housing market undermines the economic expansion," Zandi said. Despite the substantial risks remaining in housing, Zandi sees some light at the end of the tunnel. The analyst believes investor demand is strong, which is allowing the market to chew through some of its excess inventory. In addition, prices have fallen to where it's now beneficial for investors to rent out their properties until a period of recovery returns. Write to Kerri Panchuk.