The increasing foreclosure rate has in part been blamed on the Bush Administration for failing to make the problem a top priority. Added to that, Treasury Secretary Henry Paulson refused to use a part of the $700 billion financial grant to help homeowners Avoid Foreclosure.
However, hope is being pinned on the coming administration of Barack Obama who said that lowering foreclosure rate is important in the country’s economic and financial recovery.
Federal Deposit Insurance Corp. Chairman Sheila C. Bair, in her testimony before the U.S. House Committee on Financial Services, said that lowering the number of homeowners who are facing the threat of losing their homes is important to the effort to stabilize the country’s economy and the global financial markets.
In line with this, the departments of Treasury and Federal Reserve have announced a rescue fund of $800 billion for the credit markets.
This includes $600 billion to purchase debt issued by the Federal Home Loan Bank and government-sponsored enterprises , Federal National Mortgage Association or Fannie Mae and Federal Home Loan Mortgage Corp. or Freddie Mac.
The announcement resulted to a 5.5 percent interest rate decline on a 30-year fixed-rate mortgage and the increase in the number of people who applied for loans in an attempt t buy homes or refinance mortgages.
Susan M. Wachter, a real estate professor at Wharton, believes that these developments are helping the housing market recover and stop the plummeting home prices.
Meanwhile, the private sector has also embarked on its own programs to help alleviate the foreclosure problem.
Both Citigroup and JP Morgan Chase have launched loan modification programs, focusing on loans that they own and not on mortgage-backed securities loans.
Other banks have announced a postponement on foreclosures on homeowners who may be behind their payments but have the capacity to continue paying if their loans will be modified.
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I think the following is the solution and many officials at HUD agree to whom I have sent this proposal:
Many people are either upside-down on their homes or know someone who is because of plummeting home values as a result of foreclosures. This letter is concerning this group of people who may hold the key to solving the housing market dilemma but have been overlooked.
Foreclosures are not only limited to people who can no longer make their payments, but they also include people who are “upside-down” but are otherwise financially solvent. The following is a proposal that can encourage this group of people to keep their loans and not “walk away” while greatly diminishing foreclosures. I can go on and on about the benefits of this plan but here it is:
Problem:
• We will not see stabilization until we can stem and reverse the acceleration of mortgage foreclosures resulting in decreasing home values. As it stands, there really isn’t any way to establish and stabilize market values. They are in a free-fall.
• Homeowners do not have equitable value for their homes so they are either “walking away” from their homes leaving them to be repossessed by lenders, or they are paying way more for their home mortgage than their home is now worth, nor may it ever be again.
• Because homeowners are either stuck or “walking away” there is little liquidity in the housing market.
• Financial institutions are realizing tremendous losses due to foreclosures.
• Government is giving financial institutions huge bailout money to continue to do business as usual, not necessarily solving the problem.
• Lack of liquidity has produced a stalemate in the housing market.
• Defaulted/bankrupt homeowners are removed from the home buying marketplace for nearly a decade.
Solution:
Develop a program for financial institutions that would allow upside-down homeowners in good standing and the ability to pay to “trade-up” to a lender-owned home with a current market value equal to their existing home loan. The original lender would then own the original home whose value is less than the REO, which would be in good condition in most situations, and that home would also become available for a “trade-up” at market value. Please see example below.
Advantages for financial institutions:
• Greatly reduce foreclosures: Ultimately, this could have a domino effect to where lenders would eventually end up mainly owning lower value homes in foreclosure thus minimizing loss, and at a more normal percentage rate of foreclosures in the market.
• REOs could be transferred in a “trade-up” at market value. They would not have to be severely discounted so would minimize loss and reduce speculative investors.
• Lower property taxes and insurance on lender “trade-downs”.
• It would discourage people who can meet their loan obligations from defaulting on their de-valued homes, thus reducing risk of foreclosures.
• It would eventually establish viable market values and stop the downward spiral of prices. We may even start seeing a more normal appreciation in home values again.
• Lenders could sell good established loans to other banks in the case of a “trade-up” that is between two financial institutions.
• Lenders could retain good and stable mortgagees, which would reduce risk.
• Lenders could charge fees and points for the transfer.
• Improves and preserves housing liquidity.
• Reduce bankruptcies as a result of loan defaults.
Advantages for Homeowners:
• Homeowners could “trade-up” to a home that was worth what they owe on their current loans (equitable value).
• Homeowners would be able to relocate without incurring tremendous financial loss.
• It would improve liquidity.
• It would improve net worth, thus stimulating the economy.
Advantages for Taxpayers:
• This program would not require a government bail-out, just a mandate.
• Reduce bankruptcies as a result of loan defaults.
• Help to resolve financial crisis as it pertains to housing.
• Government bailout money can be conditioned on adopting this type of program to help mitigate losses.
In a nutshell, as long as prices continue to come down, foreclosures will keep going up (an economic fact), which further drives house prices down, etc. It is a chicken-egg effect. The banks are going to suffer losses either way, but this program would benefit financial institutions and mitigate losses, not only because they will get market value on foreclosures (much more than through foreclosure sales) but also because a program like this could be packaged and sold as a lending product, with all the applicable fees. Participating solvent mortgagees in good standing would be less likely to walk away from a loan with diminished value if they could “trade” it for a house that has collateral value, thus reducing that faction of homeowners who cannot justify throwing good money after bad. These loans could be saved. It would largely arrest foreclosures, thus stabilize housing prices, and it wouldn’t be just handing money over to homeowners (or banks for that matter), as has been suggested.
I believe that a program like this could help turn around the housing crisis rather quickly. The energy from this kind of positive movement could re-stimulate the housing market, thus the economy.
Example:
House A
If sold through foreclosure: $110,000
Original Loan $250,000
Today’s value: $175,000
House B
If sold through foreclosure: $200,000
Original Loan $350,000
Today’s value: $250,000
House C: Bank Owned
If sold through foreclosure: $275,000
Original Loan $475,000
Today’s value: $350,000
Homeowner A and Homeowner B are financially solvent, have great credit and jobs, and are easily making their house payments, however, they are questioning if it is worth it to continue making payments on a home that has decreased in value to a degree they may never recover during the life of the loan. House C is currently bank owned and listed for approximately 42% less ($275,000) than the Original Loan Value ($475,000). The net loss to the lender is $200,000. If Homeowners A and B also decide to default on their loans, the potential net loss to the lender would be $490,000, including the losses from House C through a foreclosure sale.
Under this program, the potential net losses would be reduced from $490,000 to $300,000, not including reduced property taxes and insurance for the lien holders until the houses are filled; the more that houses are traded-up in the chain of trades, the more potential savings for the lender.
Homeowner B trades up Original Loan $350,000 for House C at Today’s Value of $350,000. Homeowner A can then trade up Original Loan $250,000 for House B at Today’s Value of $250,000. The bank then ultimately owns a house valued at $175,000 (House A) rather than a house that is valued at $350,000 (House C), and it is not as a result of a defaulted loan on House A.
The losses to the lenders are yet again reduced as the “trade-ups” can generate revenue through fees and selling loans to other lenders who provide “trade-ups.” Ultimately, lenders will end up owning mainly lower value homes that don’t have to be sold as foreclosures, thus again mitigating losses and establishing liquidity, which will stimulate the housing market.
This is so amazing I think Im going to cry. And great write up! Thanks
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