Foreclosure Crisis Deepens Yet Again: The One Thing Lenders Won’t Do That Could Significantly Decrease Foreclosures Immediately
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According to the MSNBC article, No end in sight for foreclosure quagmire:
Four years after a wave of rogue mortgage lending sent the U.S. housing market into the worst collapse since the Great Depression, the devastating flood of resulting foreclosures shows no sign of abating. In some ways, the problem is getting worse.
House prices are falling again, forcing more homeowners “underwater” — owing more than their house is worth.
After some good news on this front in the last few months (see Foreclosure Activity Decreases 21 Percent in November 2010, According to RealtyTrac), the home foreclosure crisis is far from over. And, there’s plenty of blame to go around – lenders, loan officers, the federal government and yes, even homeowners. have contributed to this mess.
But, we’re in it now and blamed be damned!
How do we get out of this mess is the question; one that no one has been able to solve. But, there is a solution. Lenders hold the key to it and the vast majority of them just aren’t willing to exercise the option. And our ball-less politicians aren’t helping to nudge them along either.
So, what is the solution?
Stopping Foreclosure: The One Thing Lenders Could Do to Stem the Tide of Home Foreclosures
Reduce principal balances. What exactly does this mean?
What is a Principal Reduction?
It’s when a lender agrees to “forgive” part of the outstanding balance on your loan. That’s right — you don’t have to pay it back. For example, if you owe $150,000 and your home is only worth $120,000, your lender may give you principal loan reduction of say $20,000 (or the full amount you are under water, ie, $30,000), meaning you only have to pay back $12o,ooo or $130,000. [Source: Stopping Foreclosure: Banks Considering Giving Principal Reductions, Permanent Modifications & More to Prevent Foreclosure for Many Homeowners]
Why and how would this help? Well, in three ways.
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3 Ways Principal Reductions Can Decrease Home Foreclosures
1. It Would Stop Many Homeowners from Doing the Jingle Mail Walk: And, this option is not only being exercised by homeowners who can no longer afford to pay their mortgage.
Many homeowners who can afford their homes are doing what’s known as voluntary foreclosure (aka strategic default). They’re walking away because it doesn’t make sense for them to pour good money after bad, eg, continue to pay on a property that has lost so much value and may never recover (or it could be years away).
Proof that this is happening?
According to the article, Wealthy Leaving Las Vegas Mansions as Foreclosures Spreading:
The wave of defaults that began with subprime borrowers and the unemployed has spread to upscale homeowners who see no point of staying even if they can afford to. . . In Nevada, 23 percent of delinquent borrowers said they “strategically defaulted,” or walked away from their homes by choice rather than necessity, according to a January report by the Nevada Association of Realtors
Even though this is Nevada, a state that has been one of the hardest hit by the foreclosure crisis, it mirrors what many homeowners think, which is, “Why pour money down the drain if my home is not going to recover its value any time soon? I can just walk away and regroup in a couple of years, instead of waiting and hoping for a recovery in 5, 10 or more years.”
In many cases, homeowners who strategically default like this can rent larger, nicer homes for much less than they were paying on the one they owned because many of them purchased at the height of the market.
When looked at from this vantage point, why WOULDN’T a homeowner ditch a depreciating asset (their home), save thousands of dollars a year (by the time you add up property taxes, homeowners insurance, property upkeep, etc.) and buy something for much less (that is possibly better than what you had before) in a few years.
While there is a moral component of simply walking away from your home, when the average homeowner learns that banks walk away from some foreclosed properties as well (eg, dump an unprofitable asset), it makes the pill that much easier to swallow.
2. Get Many Homeowners from Underwater: One of the main reasons many homeowners (especially those who can afford to stay) decide to strategically default is that they’re severely underwater and can’t refinance/modify their mortgage. The aforementioned article, No end in sight for foreclosure quagmire, states that:
[There are] 14 million people [homeowners] now underwater. Half of those are underwater by more than 30 percent. That’s the fodder for (more) default.
As a reminder, being underwater means that a homeowner owes more on the property than it’s worth/could sell for in today’s market. So, for example, if you owe $100,000 on your mortgage, but it appraises at just $70,000, then you’re $30,000 underwater.
By giving principal reductions, lenders would give homeowners hope that they could somehow recoup some of the value of their homes because they wouldn’t owe so much more than the home is worth.
Homeowners 40% to 60% Underwater
Some banks are doing this – very, very quietly. One homeowner in Atlanta, GA states that his lender not only gave him a principal reduction, they reduced his mortgage payment significantly as well. In his particular neighborhood, he states, there are homeowners who are 40-50% or more underwater.
He goes on to state that an ongoing topic among many in the smallish community (50-60 homes) is “Should we stay or should we go,” meaning homeowners are assessing if it’s worth it to stay.
As many homeowners enter years where retirement is not far off and they are double caretakers (of children and aging parents), it’s the worse possible time to be saddled with what was supposed to be their largest appreciating asset; yet, it’s their biggest financial drain – their home.
3. Allow Many to Refinance: With no home equity, it remains virtually impossible to refinance a home loan – even with government programs like HAMP allowing those who qualify to do so even if they are underwater.
Many homeowners are so far underwater that they don’t qualify now, even though HARP (the Home Affordable Refinance Program) allows underwater homeowners to refinance up to 125% of a home’s value.
Remember, article No end in sight for foreclosure quagmire, states that half of the 14 million homeowners who are underwater are so by 30% or more.
If lenders really want to help stem the tide of foreclosures, they’d reduce principal balances. Of course, the American taxpayer has bailed many banks out and they’re in the black again, so maybe they’re not feeling the need to work with homeowners.
And if that’s the way they want to conduct business – fine. After all, we are a capitalist society and it’s their right.
But if they don’t start to play ball, do they really think hardworking taxpayers will just blithely bite the bullet and bail them out again once these “assets” start to drag down profits?
What Do You Think?
Should banks write down principal balances to help homeowners avoid foreclosure, or should homeowners pay the bill if (after all, they signed the mortgage papers)? Share your thoughts in the comments section below.
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Foreclosure Crisis to Drag on for Another 9 Years?
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Home Foreclosure News: 9 Million Homeowners Could Go Into Foreclosure Between 2009 & 2012
Stop Foreclosure: How to Ready Your Home for a Fast (Short) Sale
Stop Foreclosure: The Secret Your Lender Won’t Tell You That Can Help Save Your Home
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Copyright © 2011 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.
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