In a recent study released by First American Corelogic (courtesy HousingWire), 18.3% of all borrowers are facing negative equity on their real estate. The raw number of under-water borrowers is estimated at 7.6 million. The study also contained a category of homes that are considered “near negative equity“. This category of borrowers defines situations in which the home value is within 5% of the mortgage amount. The number of borrowers in this situation is estimated at 2.1 million. Overall, nearly 10 million people are facing negative equity in their homes. As a result, many are finding themselves unable, or unwilling to pay their mortgages. The question remains, how to solve this problem?
In the past few weeks, there has been a considerable political push to “encourage” the government to either force lending institutions to participate in loan modifications or for the government to physically buy loans that are in distress in attempt to modify them into “affordable” payments for borrowers. On of the biggest proponents has been Congressman Barney Frank. According to a letter written by Mr. Frank:
It is time for action adequate to the dimensions of the problem. You undoubtedly are aware of the October 6 announcement that Bank of America will engage in mass modifications of troubled mortgages to settle predatory lending claims brought by state Attorneys General against its recently-acquired Countrywide Financial Corp. subsidiary. BofA/Countrywide has now committed nearly $8.7 billion to provide direct relief to homeowners through serious modifications on a large scale, including substantial interest rate reductions, reductions in principal, and waivers of late fees and prepayment penalties.
According to Natalie Bauer, a representative for the Illinois Attorney General:
“The basis of the lawsuit was that Countrywide was engaging in deceptive practices, basically putting people into homes they couldn’t afford,” said Natalie Bauer, spokeswoman for Illinois Attorney General Lisa Madigan. “This enables homeowners to modify their loan terms to be able to stay in their homes.”
Whether Ms. Bauer realizes it or not, her quote perfectly sums up why programs like this do not, and will not work. In a nutshell, Countrywide got sued for deceptive lending practices. As a result, CW settled and agreed to pay upwards of $8B to modify loans. So, clearly Countrywide screwed up. I think we can all agree on that. But now we are expected to believe that Countrywide has magically corrected the error of their ways and will now modify loans to make them “affordable”.
Ms. Bauer goes on to tell how the Countrywide “mandatory” program is superior to the Bush administration “voluntary” program:
It’s the first time any lender has agreed to make mandatory loan modifications since the mortgage crisis began, Bauer said.
That is a critical distinction, because the voluntary foreclosure prevention programs, such as HOPE NOW, that the Bush administration negotiated with lenders have been a big disappointment.
And she is right. The current “voluntary” program does not sit well with lending institutions. And for good reason. It doesn’t sit well with them because it doesn’t make them any money! It actually costs them money, so there is no incentive for them to do it. The only ones that “agree” to the programs are the ones facing class action law-suits, and settle the law-suit in order to end it. Do you really believe that these banks are now reformed and will modify loans in any significant number?
If you are a troubled home owner and are attempting a loan modification with your bank, you can rest assured that it probably is not going to work out. Your bank is not likely to change your interest rate or your principal amount owed. Having said that, your bank is probably VERY LIKELY to arrange some sort of repayment option that involves forebearance are the altering of the amortization schedule. The difference between a loan modification and a work-out is significant. The work out only marginally chages the value of the instrument, while the modification creates a whole new value for the instrument.
The bottom line for the home-owner is simple. Either you can afford the house or not. I meet with distressed home owners every single day. They always fall into one of two categories. They can afford the hosue, or they cannot afford the house. Varitations of these categories include:
- Can afford it but don’t want to
- Used to be able afford it but now can’t
- Could afford it if they (Fill in the blank with: quit smoking, got rid of $700 car payment, etc…)
- Used to be able to afford it but now would rather not
- Will be able to afford it in ______ months
- Don’t want to pay because they are upside down
source: shortsaleblogger.com
Fort Lauderdale Real Estate Blog and Homes for Sale
Rory Vanucchi
RoryVanucchi@gmail.com
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