Is Making Your Mortgage Payment Dragging the Economy Down?

By now, everybody knows that there are millions of homeowners in the United States who are underwater on their mortgages. A good majority of these homeowners are faithfully making their payments on their underwater mortgages because that is the right thing to do. But is this bad for the economy?

A recent article in the Los Angeles Times discusses this idea. According to the article, “payments on mortgages that are underwater could absorb billions of dollars that might be used for other forms of consumer spending.” As a result of this, making those mortgage payments creates a “drag on family finances, the housing market and the overall economy.”

Here are some numbers to help make it real. There are currently about 15 million homeowners who are underwater on their mortgages. Of that 15 million, about half of them owed at least 25 percent more on their homes that what they were worth at the beginning of the year. More than four million of those mortgage owners owed at least 50 percent more than their homes are valued at. The three largest real estate markets and hardest hit states are in Illinois, California and Florida where the average negative equity was about $107,000.

Refinancing might sound like the best option for these homeowners. Unfortunately, too many of them owe too much on their home and they are not eligible for refinancing. They can’t get a home equity line of credit and even traditional refinancing loans are out of the reach for most of these homeowners. Even selling their home isn’t an option because they would have to take such a loss that it wouldn’t be worth the time and effort to do so. What’s worse is that the loan modification program offered by the Treasury Department only helps those who have had some type of hardship occur which prevents them from making their payments, such as a job loss or injury.

So the homeowners who are trying to do the right thing are essentially stuck. Many people in this situation are simply walking away from their mortgage. But moral obligations simply won’t others walk away from a financial responsibility like a mortgage. But continuing to make their payments is having an effect on the economy as people who continue to drown in their underwater mortgage. They are not pumping money into the economy because they are being more cautious with their other spending so they can continue to put money toward their mortgage. When millions of people do this, it has quite an impact on the overall economy. It just seems like paying your mortgage and trying to do the right thing is putting many people in a catch-22 situation and there is no viable solution at this time.