I have been a Realtor for ten years, and an Investor for 25 years. I have been following the mortgage meltdown since it began, and have attended many banking seminars on this subject. I know this may seem presumptuous, but I believe that the bailout has been completely mishandled. Congress has bailed out everyone but the homeowner giving massive amounts of money to Fannie Mae and Freddie Mac. Already it appears that they have mishandled it and if some modifications could be put into place, I believe that the Government’s (our) money would not continue its slide down the black hole of the foreclosure market.
The old rules cannot be applied to this situation. Just as the Great Depression brought unique solutions to the Real Estate Market, so the our Government and the Banking Industry must stop taking the easy way out, and realize the true situation that we are facing. The average person today, who is losing their home, is paying the equivalent and more for their mortgages that were present in the Carter years when rates were at 17%. Even though homes were inexpensive comparatively, rates were not. In the current market, because of predatory loans, easy money and consumers looking for a fast buck, those who are caught in the whirlpool of declining markets are paying $2000 to $3000 per month on average for homes that are now selling for $150,000 or under. It is turning people into paupers who were considered to be middle class only three short years ago. These figures I’m using are examples I have personally seen, are presented only as an example, however, I know of several people who are in this exact situation.
A one $150,000 home at 17% on a thirty year mortgage would result in a payment of $2,108 per month. If that home were sold at $150,000 today for an interest rate of 6.5% the payment would be $943.00. That is affordable for most middle class home owners, even those in arears. If Homes are so affordable why are they not selling like hotcakes? The simple reason is that most renters became homeowners within the last five years, and are now wandering the streets with ruined credit. The pool of qualified Buyers has shrunk considerably.
I personally know several people who, when the market was high bought 2 bedroom 2 bath attached homes, mind you, at $250,000 on sub-primes variable interest rate loans and are now paying over $2000 per month. These are now selling for $150,000. Yet, when they go to their mortgage company, and ask for a modification based on current market value they are turned away. Countrywide has been the biggest offender in my estimation. In addition, and to his credit, the Federal Reserve Chairmen had suggested that Lenders lower the mortgage balances as a solution, at the beginning of this market, but they have stubbornly refused.
The people being turned into the streets are not bad risks, as might have been the case in other economic downturns. These people simply cannot afford 17% equivalents mortgages. The price bubble in the Real Estate Market was caused by easy money, but the fix will not be accomplished by tightening it in the old way.
I believe that if the Fed and the Government truly want to solve this, there is a solution. Instead of giving the banks the money, give the money directly to the homeowner in the form of a “Short Refinance” where no “third party” investor must to be consulted for approval. Banks, over the last four years have allowed “Short Sales”, and have taken back properties rather than work with the homeowners to keep them in the homes. Can you imagine what the situation would look like if they had given homeowners Short Refinances instead of “Short Sales”
First, no cash would have changed hands and second, there would be far less inventory on the market today. Yet Congress and the Federal Reserve have thrown good taxpayer dollars after bad, printing more money, and keep giving it to theses offending Lenders to prop them up when they should have taken their medicine with the rest of us, and gone belly up. Hoping to stem the tide, Big Government has caused more foreclosures through job loss, because as a result of their ignorance of the subject, the economy has been dumped.
In this new suggested plan, a homeowner who is found to be behind would be offered a “Short Refinance” by Fannie Mae and Freddie Mac. This would be offered on an individual case by case basis to consumers who’s predatory loan has reset or to one that has “option” payments with principle accruing on the back of the loan. Since banks are refusing for the most part to do these and instead prefer to “wait” for new buyers, the Government must step in and stop them from flooding the market with more unwanted properties.
The cure will never happen if we do stay on this path, so we might want to return from “fantasy land’ and apply a little reality to the subject. When a bank approves a Short Sale, they give a loan to a “new” Buyer, based on current market value. Does it make sense to you that the bank pays a Realtor, loses months of income waiting for his gigantic bureaucracy to get around to approving said “Sale”, and the “new” Buyer? Of course not! They end up receiving same amount of income as they would have had if they had just offered it to the person who owned the home? Yet, because of the tangle of Investors, banks simply “can’t” or won’t act in a logical manner. The result is more far more unnecessary inventory floods the market, their clients (passive Investors) lose income, displacing families who not only can’t buy again because their credit is ruined, but may have trouble renting as well. take an average working family with income and then do not allow him to be a consumer any longer. No amount of stimulus money will help that situation. Think of how many loans could have been given with that money that the Government doled out to “each” taxpayer.
Many economists and Investors say that only the public should be punished for their stupidity, but the public did not the lend the money in the hope of foreclosure in a rising market, the Investors and Banks did. The public was for the most part e-mailed, faxed and coeerced into these loans by unscrupulous lenders…the same people that the Government is giving bail-out money to.
Fannie Mae and Freddie Mac should be allowed to offer “Short Refinances” to current owners; individuals who are able to maintain the payment… The difference of what is owed and what is refinanced should be borne equally by the past mortgagor and the mortgagee. This would result in a new loan (without Realtor fees for the sale of the property or the property choking the market place) and the homeowner can keep his home. Fifty percent of the balance owed would be placed on the back of his new mortgage with Fannie Mae or Freddie Mac.interest free for ten years. Amnesty should also be granted for the diffence absorbed by the former Lender to the Homeowners credit.
This would be a more desirable solution, on all levels. The original lender would lose far less revenue and fees on the property, than he does on “Short Sales and Foreclosures, while the new lender, would have the advantage of gaining the extra principle at the future sale of the home, receiving solid revenue from a person who’s already been paying and has proven that he can keep the new loan current. Since the property would never enter the market, inventories would drop sharply and prices could recover naturally.
The only way to change the status quo is for new refinances to be offered, at hundred percent of current market, if necessary. Banks lose anywhere from %50,000 on a Short Sale to well over $100,000 on a foreclosure. In the new plan, the average loss on each home would drop to less than $30,000 depending on circumstances. American Government must stop bailing out Lenders, especially when they don’t bail out Stockholders when prices drop. It’s time to invest in the average American, so he can become a consumer once more.