What Doesn’t Make Sense?
If a home loses value and is in fact owned by the bank (as are all homes with an outstanding mortgage loan so let’s just call the borrowers “home-occupiers”) shouldn’t the bank also share in the loss? It certainly seems so to me. Otherwise, what you have is a sharing between bank and home-occupier when the going is good and the home-occupier is left alone when the going gets tough. What I mean is since the banks were gauging their profits from mortgage loans on a “bubble” shouldn’t they now adjust to the reality? In other words, adjust the value of the homes to what today’s market dictates is their value. The plans of loan modifications that you’ll be hearing a lot about simply won’t work in many cases for many reasons. One reason is that some homes have plummeted 50% or more in value. They are likely to never again see the value they paid. Why would the home-occupier throw good money after bad? Example – a person buys a home for $400,000 in some area that has no intrinsic value (Las Vegas, outside Phoenix, etc) and it is now worth $190,000. The chances are great that the home will never see a value of $400,000 again. Why would a person pay for a $400,000 home when the most it might ever be worth is $300,000? It makes no sense at all. Not only do we have to find ways to keep people in their homes but we need to find ways that make people WANT to remain. It’s obvious that any attempts to stem the tide of foreclosures are not working. Now the idea of reducing the loan amount may sound extreme but it is, in fact, happening right now. Follow this: a borrower lives in a $500,000 house and owes $450,000. The person defaults and the bank forecloses on the property. The bank spends $10 -$20,000 or more on the foreclosure process and in making repairs necessary to put the house on the market. The property is worth $400,000 in today’s market and the bank prices it that way. The home sells for $390,000, netting the bank approximately $350,000 after a lot of work and grief. (Sales price $390,000 less 5% commission of $19,500 less the $20,000 cost of foreclosure.) What sense is this making? Wouldn’t it make sense to cut to the chase and reduce the value to $390,000 for the current borrower and let them stay in the property?
The magnitude of the crisis continues to grow and the scattershot approach by the government, truly in a crisis mode, needs to be reigned in because it seems only to exacerbate the problems. Banks need to get a clue, stop hurting themselves and all those they foreclose on and deal with the problem in a new, creative, constructive way. Let’s hope at some point in the near future they see the light.
Dear Marin Realty – You have hit the nail on the head. Many of the people that come to us for a short refinace have already gone through a loan modification or they don’t qualify for a loan modification. Especially in our neck of the woods (Las Vegas) where most loans were done OVER stated and the homeowner never qualified in the first place for the over priced home. Or they are in a pay option arm and they only had to qualify off the minimum mortgage payment.
We are having success with the Short Refinances and I would recommend that way of principle reduction over a loan modification because it’s permanent. It gets the home off the current banks books and brings them liquidity.