Blog #2 - Resolving the Foreclosure Crisis

By Jim Michaelsen

Real Estate Broker

707Realty.com team

6/10/09

Starting with the Bush Administration, treasury secretary Paulson worked on a voluntary program where lenders would work with borrowers to modify loans. Guess what…nothing happened. The few loans that were modified went back into default. The lenders pointed out this fact and used it as a reason to continue foreclosures. The problem was the principal of the loan was not reduced, the missed payments were simply added on to the back of the loan and the loan was restarted. Any wonder why a lot of these loan modifications went south?

The Cost to Banks and Investors

Most lenders are taking homes back in foreclosure after borrows have stopped making payments for anywhere from 3 to 6 months. The taxes and insurance are usually in the rears and become an additional cost the lender has to pick-up, in addition to maintenance and repairs. The cost to foreclose on a home isn’t cheap. When a home is placed back on the market as a bank repo it sells for between 45-60% of the outstanding loan balance. The lender then pays a real estate commission and may pay for part of the buyers closing costs In order to complete the sale. Once in escrow the sales process may take another 30-90 days to complete. So when all is said and done the lender has lost in excess of 50% of the face value of the loan.

A Better Way for Everyone

Would it not have made more sense for the lender to modify the original borrower’s loan and keep the homeowner in the house making reduced payment? The lenders answer is that they would have to contact the actual holder of the note to do that and it is too difficult, due to the repackaging and subsequent sale of the loans. Instead, if they foreclose, it is relatively simple. The note holder gets whatever the after sale proceeds are, and that’s it. If I were an investor I think I would rather get cash flow, even at a lower interest rate and reduction of principle then the scraps left after the foreclosure process.

The new administration has tried to help with billions of dollars and incentives to get lenders and service companies to rework the loans rather than foreclosure. The bottom line here is that the lenders won’t talk to borrowers about loan modification unless they are behind in their payments. In many cases the borrowers don’t qualify for the new loan after they get behind in their payments.

What is actually being done? Not much! The U.S. Senate is the major stumbling block here.

Why you ask?

Because many senators, especially republicans (with the help of some democrats) think that if we leave the market alone it will take care of itself. Well guess how we got into this mess? By leaving the free market to work on its own. Do we really need to throw another million plus homeowners out in the street just to let the market run its course? I don’t think so.

Senators are asking for advice from bankers as to how to fix the problem, which is exactly the problem! Remember who created this mess. If an idea is floated and the banking industry does not like it, the industry tells the Senators it is a bad idea. If these Senators were actually thinking about solving the foreclosure problem they would realize that if the bankers say it’s a bad idea, it is probably a very good idea for the consumers/borrows.

The Obama administration offered a proposal to revamp of the bankruptcy law to allow Judges to re-cast mortgages. It was shot-down. Guess by whom? The republicans and a few weak-kneed democrats.

Why? Because the banking industry didn’t like it.

And get this…the dissenting senators said it would clog-up the courts. What are the courts there for anyway? I would hope they exist for the people and should hear the people’s cases. If we need more judges, then they should be hired. It is a better investment than just handing money over to the banks to solve the foreclosure problem.

Bankruptcy is the key to solving the problem. Why? Because it will put pressure on banks/lenders to re-work problem loans and keep citizens in their homes. Here is how it should and can work:

The borrowers contact the lender to rework their loan. The bank has 120 days to try to work out a resolution, though a combination of interest rate reduction, principle reduction and loan-term change. If nothing can be resolved during that period, the buyer has the option of filing chapter 13 bankruptcy. Upon doing so, the court takes jurisdiction over the loan. The judge could then order an appraisal of the borrower’s home, compare the appraised value to the existing loan amount, and if the loan amount is higher than the appraisal, the amount of the loan that exceeds the appraisal would be wiped out. The remaining balance of the loan would be re-amortized over the remaining live of the loan; at a rate established by the Fed.

The lenders would actually save money under this plan, since there is no foreclosure, no resale fees or holding costs and the borrower stays in the home making payments.

So what do lenders think?

They hate the idea!

Why?

Because it would force them to do something other than give lip-service to the public about their efforts to modify loans. The bottom line is that it is easier to foreclose, and that is why they do it. The banks do not give a damn about the borrowers. They take TARP money and hold it, instead of loaning it out.

The reasons the banks give for fighting the bankruptcy plan is that they say it will hinder them from making loans in the future. The bankruptcy plan would only affect loans made prior to Jan 1^st, 2009. Not loans made in the future. Besides if the banks don’t want to lend, then maybe the Federal Government should start making loans directly thru FHA and cut out the banks. There are plenty of out-of-work mortgage lenders who I am sure would be able to help the FHA make loans directly.

That is true for small business as well; we have a small business administration, let them make direct loans if the banks are too nervous about their financial positions to make loans.

As for home loans, the FHA programs are about the only game in town right now. Jumbo loans (loans over a certain amount depending on the area you live) are too expensive. If you self-employed forget it, unless you have outstanding income documentation and tax returns, (which by the way most self employed people don’t have).

The banking industry created the mess we are in, and now they are the obstacle to getting it corrected. The Senate is not helping. Banks lobby, Senators listen to the money, and then Senators follow what the banking industry thinks is best…but best for them. At this point it seems to be what is best for the banks, not the citizens of this country. Make your voice heard, call your Senator and say let’s get this foreclosure problem fixed. The first place to start is by adopting bankruptcy law changes.

With unemployment on the rise, new waves of foreclosures are predicted; borrowers are upside down on their loans and starting to throw in the towel. And now, it is prime borrowers who are falling behind on their mortgage payments. Its time this mess comes to a stop.