I Agree Secretary Geithner!

[US Treasury Secretary Timothy] Geithner said Wednesday the number of families that would benefit from principal forgiveness is significant. "Not overwhelming, but significant," he added. (American Banker, April 18, 2012)

I will admit I got an A in Economics.  I saw the principle of supply and demand in everything.  Now working in homeownership I still have the lens of supply and demand.  So Secretary Geithner’s comment that principal forgiveness would be significant is an immediate, ‘hell yes!’

In the mid to late 2000’s there were a lot of folks buying homes.  That means they bought at the height of the housing market and now likely live in a home with a value less than their mortgage amount.  It is called ‘underwater’.  I have a relative who bought in 2006 and his mortgage is almost 40 percent higher than the tax value of the property.  He is current on his payments, but after 6 years of payments, he has no equity to borrow against to do house repairs or improvements.  When his daughter is ready for college in 15 years, he will have some equity but not enough to pay for her tuition for the first year of college.

I decided to look at Portland Housing Center customers who bought during that same time period 2005 to 2009.  I started with Bank of America borrowers because I wanted to send them a flyer of an upcoming event in May hosted by Bank of America to assist homeowners.  For 188 Bank of America homeowners, I compared the property tax value against the original mortgage amount.  I found that 60 percent were ‘underwater’.  As near as I could tell 5 percent had a foreclosure; another 4 percent I grouped as unknown.  The remaining 31 percent had a home value that was greater than the mortgage amount.  They were the ‘overwater’ homeowners.

Imagine if my relative and the other 60 percent had principal forgiveness.  I assume that means more construction jobs since every home needs repairs.  I also think it means more houses for sale on the market.  Most people do not choose to do a short sale – which is another means to get principal forgiveness.  They wait for the market to improve.  When I hear that affordable homes in the $100,000 to $175,000 range have multiple offers and a house in Gresham had 36 offers, I know there are not enough affordable homes for sale.  If we had principal forgiveness, I bet there would be a lot more homes for sale as people traded up or across town or for another bedroom.  That means supply and demand and it is significant.