The national "experts" and mass media usually quote a statistic such as 25% or in some instances 30% of the homes in the US as being underwater. That is, the owners owe more on their mortgage than the house is worth. I look at a simpler and far more troubling circumstance: possibly 40% (or more) of homeowners in southern CA can not sell their primary residence because whether they are technically underwater or not, they simply don't have the requisite equity when transactions costs (commissions for folks like me, escrow, repairs, etc.) are factored in. And, if they could sell with no net proceeds, they surely wouldn't have any cash on hand to put towards a replacement purchase, rental down payment, or even moving costs. So, many hoomeowners hang on in a cycle of despair until such time as they throw in the towel, stop making the payments that they can ill afford for an asset with negative equity and wait until they get foreclosed on and evicted. The money they save in the process becomes in effect their "net proceeds" assuming they save it, and they move on. Pessimistically, this is referred to as "strategic default" and many homeowners feel justified in pursuing this course of action. I'm not sitting in judgement. Everyone does what they think is best for their circumstances.
The flip side of this coin are the banks, servicers, investors, etc. charged with collecting and processing mortgage payments, negotiating loan modifications or short sales, and if all else fails, foreclosing and evicting the homeowner. This group is collectively engaged in what is best described as "extend and pretend". That is, extend the process and deal with the foreclosures on a "retail", not instiutuional basis and hope that the economy turns around and housing prices increase. I wonder how that's working for them? From what I gather, not that well.
The collateral damage in all this are the those who are paying their mortgage on time, are not upside down (yet), but who are seeing their equity decline as there are more and more short sales and foreclosures going on in their neighborhood decreasing their equity. It's a bad cycle.
I think we can all agree that the Obama administrations supposed solutions such as HAMP, HAFA, and the rest of the programs have been at best absolute dismal failures. And, I think I'm being generous in that evaluation. A system that is set up whereby it makes more sense for the investors to foreclose rather than modify a loan makes no sense at all. As an active Realtor and short sale and foreclosure specialist, I have seen too many instances where the "investor" refuses to modify someone's loan so that the homeowner can save $500 per month, and then goes ahead and forecloses on the house and loses $100,000 or more. By my math, it would make a lot more sense to lose $6000 a year than take a $100K hit. But that's just me. There are many reasons as to why the system is working as such, but that discussion is beyond the scope of what I want o deal with here. This blog post is about a simple solution to the housing crisis. Well probably simpler in concept than in implementation so maybe I'm better served by characterizing this as an easy to understand solution.
The basic concept is get everyone who wants to opt in, into a mortgage and payment they can afford, reward the investors and servicers for implementing the program, and have swift and non adversial resolution when mortgagors default. Here's how it would work:
A national hotline, let's call it 1-800-LOAN MOD, is implemented for intake. Homeowners, whether they are current or delinquent on their loans call in to modify their loan or loans if they have first and second mortgages.
There are 3 options:
- Reduce Interest Rate
- Reduce Principle
- Reduce Interest Rate and Principal
The homeowner is eligible for a new first mortgage (no seconds) either based on the current lowest available interest rate or their principle is adjusted to the current home value (with no adjustment to the rate).
For anyone current, this is all done with no income or FICO documentation and when possible no appraisal. Lest you think I've totally gone bonkers, here's why.
If someone is currently paying $2500 per month and modifying theor mortgage takes them to $2000 per month and they are current, why go through all the paperwork? I would find it hard to believe that all things being equal, that lower payment would not continue to be made.
For those who are delinquent, they would have to be currently employed in order to qualify for the program and their income has to support the new lower payment.
As for lowering the principle, there are powerful automated valuation tools such as Zillow and others. LA County for example, is automatically adjusting property taxes for homeowners as the prices have dropped. Except for a few instances this should be doable on a national basis and if necessary appraisals can always be ordered at the homeowner's expense.
Here's what the homeowner agrees to in return.
- Deed in Lieu of Foreclosure
- Split any pro-rated "profits" realized by sale within 10-15 years
In the first instance, the homeowner who is modified agrees that if they miss 3 consecutive payments they will agree to either bring the loan current or execute a deed in lieu at day 120. They can even sign the deed at the time the receive the loan mod. This will save time and money in the eviction process.
Secondly, the total amount of forgiven interest and/or principle is forgiven over a 10-15 year time frame. If the homeowner sells in that time frame and there is any profit, the homeowner is only eligible for their pro-rated share.
On the investor side, they would therefore only have to recognize the amount forgiven on an annula basis and not take the full hit up front. In theory as the market stabilizes and in the out years prices increase, the losses are minimized.
Additionally, the government can provide tax breaks to the investors based on what they forgive every year. At a time when many politicians want to cut the corporate tax rates, that should be a popular idea. In theory, some of the savings that are being realized by the lower mortgage payments work their way back into the economy in the form of consumer spending.
Lastly, and most importantly, implementation of this program would give homeowners a strong incentive to stay in their home at prices they can afford and have a chance to regain and restore their equity.
So, that's my solution. What do you think?
