Loan mods encourage bad behavior
Letters to the Editor
By Inman News, Tuesday, November 18, 2008.Bookmarking Sites
Re: 'Loan mods could restore confidence' (Nov. 17)
Dear Editor:
I wish I had been shrewd enough to take an obviously bad loan instead of a fixed-rate 30-year mortgage. I could then have been paying an extremely low payment until my loan reset. Then the government would step in and subsidize the loan, further enhancing my savings. Finally, after five to seven more years, when I want to move and the market has not remotely begun to recapture my equity losses, I could just walk away knowing the government (actually stupid taxpayers who didn't see this bonanza) will pick up the losses.
This is bad policy, only encouraging future poor consumer decisions. Even more serious, this only creates greater market uncertainty. (When will these additional bad loans foreclose and at what percentage rate?) Market uncertainty is costly and delays ultimate healing. Look at Japan's failure to accept its losses and the horrible stunting of its economy that has resulted for more than two decades for clear confirmation of this fact.
Michael Mathis AAI Services Redlands, Calif.
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Submitted by Tim Daunch on November 18, 2008 - 2:36pm.
I agree with Mr. Mathis' premise, as far as it goes. However, each side of the debate wants to paint all the players with the same brush, which I believe is innaccurate and fruitless.
I would suggest that there are several types of buyer situations to discuss, including:
- some really ignorant buyers who were duped by greedy mortgage brokers. Did they engage in "bad behavior", i.e. did they knowingly take on a debt they couldn't afford? Should they lose their homes because they were gullible and/or uneducated? How about we get them into a 30-yr mortgage, like the rest of us? Is that a bail-out or just re-leveling the playing field? This assumes, of course, that they can afford it, otherwise, like Mr. Mathis says, we are just throwing good money after bad.
- some greedy, irresponsible buyers who knowingly gamed the system, not really caring what happened in the future. Someone told them they could get that big house now with 0% down, no doc, etc. and they jumped at it. I think these are the folks that Mr. Mathis refers to and I agree with him. They deserve what they get.
The problem is how to determine which buyer was truly a victim (of his own ignorance or of a dishonest broker) and which buyer simply gambled and lost.
Unfortunately, government is notorious for applying a one-size-fits-all solution to such problems. The various debates reflect this mentality as well ("they're greedy!", "No, they're victims!"). So how to weed out the deserving from the undeserving? That is where we should focus our debate, I think.
With regard to "encouraging future poor consumer decisions", I'd say this is not likely. Yes, there will be a group of buyers who jump with glee if they get bailed out, because they got away with it. So the logic is "they'll just do it again". Well, they can certainly try but it won't work again because no lender will make such loans any time soon. Just look at today's lending criteria viz. FICO and down payment.
Tim Daunch
The Cinnabar Group, Cleveland, OH
Submitted by Lenn Harley on November 19, 2008 - 3:41am.
The winners and losers in the loan modification craze are nonsensical.
Unqualified buyers who are defaulting can get loan modification subsidized by the taxpayer.
Home owners who are losing or have lost their life savings through depreciation of their property can do nothing but lose.
It makes no sense.
Lenn Harley
Broker
Homefinders.com
http://www.homefinders.com
Submitted by Darrell Blomberg on November 19, 2008 - 6:19am.
Michael,
Thank you for your observations. You allege that it took twenty years because Japan was in denial about their situation? Well, back in the US, the numbers for pending troubled loans is more known than you realize. What is unknown is when the loan servicers, mortgage insurance companies, loan investors, REALTORS® and the federal government are going to figure out the answer. Bite hard, you won’t like my answer.
I’ll make the case that the government should step in. Currently, we have too many foreclosures, bloated MLS inventories, declining prices, scared sellers, apprehensive buyers, parallelized loan servicers, angry loan investors, frustrated REALTORS®, an impotent government, a stagnant economy and job losses; which leads, again, to more foreclosures. Where should we break this economic death spiral?
We need to break it before someone gets in the spiral. Our most diligent focus needs to be keeping good people in their home and giving them a good reason to stay there. That would break the cycle before a home goes to the auction block. That would yield one less foreclosure, one less short sale listed in the mls, one less…, etc. A well structured loan modification that probably involves some degree of principle reduction is just the ticket to get us out of this mess.
There are probably worthy homeowners living in 30% of properties which are in some stage of foreclosure. These are good Americans who experienced a temporary hardship. They may be so upside down in their home, when you consider; loan balance, loan associated arrearages, loan amortization, current market value and future appreciation, that they cant possibly reach the break even point for 7 to 15 years. That means, we’ll have homeowners doing short sales for more than ten years. Is that the program you’re espousing?
If this is true for the homeowner, doesn’t it make financial sense to walk from the home if their credit has already tanked? They may be better off to go find a rental for a few years while working on their credit repair. The solution is finding a way to stem the tide of foreclosures where good solid citizens have experienced a temporary hardship and don’t have the economic heft to get back on track without assistance.
According to James B. Lockhart III (Director (CEO) and Chairman of the Oversight Board of the Federal Housing Finance Agency) the government looses 50% of the loan balance when they tally the all costs to process a foreclosure. A loan modification involving a principal reduction may only need a 5 or 10% infusion of cash. As a taxpayer which investment gets you closer to the solution quicker and for less money?
Your desire for Laise Faire will only serve to prolong the process. The government needs to step in and do what it is supposed to. Their purview is to do for the people of America can’t do for themselves; and that is to hustle this mess to a close.
Everybody is worried about someone else getting a benefit they aren’t getting themselves. Look closer at who really is getting the benefit of a modified loan for a homeowner. Would you benefit if your house’s value wasn’t weighed down by one more abandoned, rundown foreclosure in your neighborhood? Would your real estate prices stop plummeting? Would there be less unsalable inventory in the MLS? Wouldn’t it be better for your business and the country in the long run? Would we get back to a healthy market quicker?
America needs the government’s intervention.
Darrell Blomberg, AzTech Realty, Phoenix, AZ