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Home Underwater? Walk Away from Geithner's Perverse 'Homeowner Relief' Plan

The plan to supposedly aid homeowners drowning in debt adopted by Obama and Treasury Secretary Timothy Geithner is just a money trough for the banks.

The homeowner relief plan adopted by President Obama and Treasury Secretary Timothy Geithner has not been working for a full year now. What's worse, as the program is currently structured, its chief benefits accrue directly to the nation's largest banks, leaving troubled borrowers to twist in the wind. But despite the administration's indifference, underwater borrowers can still take matters into their own hands. If you owe more than your house is worth, just walk away.

"The rational thing for these people to do is to send the keys to the bank and say, 'Good luck,'" says Dean Baker, co-director of the Center for Economic Policy and Research. "Every month that you keep that person in their home paying that mortgage, that's a gift to the bank. So if you could keep a lot of people from sending their keys to the bank, and keep sending their checks instead, that helps the banks directly."

According to the administration's latest update on the Home Affordability Modification Program, just 66,456 borrowers have received a permanent mortgage modification from their bank over the past year, out of about 900,000 trial modifications. Even judging from the trial-stage figures, the program barely making a dent in the actual problem. Data from First American CoreLogic indicate that for 10.7 million U.S. homes, borrowers owe banks more than their house is worth (they're "underwater"). That's a full 23 percent of all mortgages in the country. Another 2.3 million borrowers are down to their last slivers of equity.

But the primary problem is not that the administration's program isn't reaching enough borrowers—it's that the "relief" offered by the plan is actually worse for a lot of borrowers than outright foreclosure. And despite heavy criticism from community groups and borrower advocates, Geithner's Treasury Department—which oversees the plan—has refused to alter HAMP's core objectives, opting instead for a series of minor paperwork processing tweaks.

HAMP attempts to keep people in their homes by reducing how much they have to pay every month. Banks can make all kinds of revisions to the loan contract to bring down this payment, and on the few permanent loan modifications that have been agreed to, borrowers have seen their monthly payments go down by about $500. But buying a home is so expensive, especially at bubble-level prices, that even borrowers receiving this aid could usually rent a comparable home for less. Still more troubling, this payment assistance does nothing to address borrowers' overall debt burden. The total amount the borrower owes to the bank—the loan principal—is still exactly what it was when the mortgage contract was first signed. If you bought your house for $280,000, but the house is now worth only $210,000, paying off your mortgage in full, even with help from HAMP, will mean losing $70,000.

"You can't make a significant dent in mortgage defaults without reducing principal," says Raj Date, a former Capital One executive who now heads the Cambridge Winter Center for Financial Institutions Policy.

The average underwater borrower today owes about $70,000 more than their home is actually worth, according to CoreLogic. Since 10.7 million mortgages are currently underwater, the banking system could see losses of up to $749 billion from problem mortgages—and the number gets much bigger if home prices decline further. Banks have probably already booked some of those losses, but it's still a huge hole, one many banks will not be able to fill. The entire U.S. banking system only has about $1.25 trillion to absorb losses, according to the Federal Reserve ($11.58 trillion in assets minus $10.33 trillion in liabilities). So while most large banks booked big profits and paid out huge bonuses in 2009, the potential for serious financial trouble has always been right around the corner. We have not, in fact, fully revived the U.S. financial system. We've just helped banks book profits on the backs of troubled borrowers. With HAMP, we've even encouraged borrowers to waste their money on irrational payments.