“REALTORS, & DOGS, KEEP OFF THE GRASS

We are in the 3rd inning because of the mortgages that had teaser rates then went up to huge rates and you will see much higher than the current 8% default rate.

I despise WSJ editorials without solutions. I think the judges should be the last line of defense for the homeowner (debtor). Loans first should be negotiated with the banks (including lowering the principle). It should be looked at in a “business sense” and nothing more. It should be in the interest of the bank to get the most value out of these bad loans. For example, say someone bought a house for $500,000 no money down and the house is now worth $300,000. Reduce the principle to the $300K, have the person required to have PMI for the 20% (or $60,000), have the rate be at a fair rate and have any profits be based on the principle to loan value…so if the loan is $290K (if he paid down some of the principle) and he sells for $350K, the bank would get 79% of the increase in value. ($60,000 profit / $290,000 loan). Also (if it is possible legally) have it where the bank takes the property over (with a deed-in-lieu) if the payment falls behind 90 days. This way this saves foreclosure costs AND the banks get the properties relatively quickly.

Failure to do anything will have a much more negative effect. If the bank forecloses on the property, it will likely take a year if not longer to get the property (as the courts are clogged with foreclosures) as well as if the person contests the foreclosure it could delay it another 9 months in “normal” foreclosure environment. The house value is likely to continue to decline as the WSJ editorial offers no solutions so now the house is worth $220,000, with not collecting any money for an additional year (or $2,000+ per month) or $24,000 PLUS foreclosure costs $20K uncontested to $40K if it is contested. Then the house will lay vacant while they have to maintain the property…another $2,000+ per month… At this point the bank will take ANYTHING for the property and after another year (two years total, they sell the house for $180,000)…where they could have had a good loan at $300,000 PLUS getting most of the appreciation.

And if you think this is far fetched this ACTUALLY happened (the only difference is the debtor offered a short sale at $300,000 to a person with GOOD credit and the bank refused… The bank recently sold the property for $179,000 two years and 4 months after the bank refused the short sale offer. So the bank lost $50,000 in payments over those two plus years, $40,000 plus in foreclosure costs, plus $110,000 in decreased value of the home. So in the end, the bank lost $400,000 out of $500,000…where the other solution, the bank would have lost $200,000. Multiply this by thousands and you get where we are…and where we are going with the second wave of foreclosures that are just starting to hit the banks.

So with all the rhetoric in stating just let the banks take them over, then let them…but realize it will be far far worse than renegotiating loans including lowering the principle as the value of the homes will continue to decline precipitously. Principle write-down is just a tool to get things flowing again, and so far the voluntary efforts to do principle write-down has failed. So maybe by having the judges having the ability to cramdown the loans would just be a tool for banks to make banks look at these bad loans in a different light.

What the banks are really worried about, I think, is the increased leverage that borrowers will have in modifying their loans. Right now, the banks can take a “Take it or leave it” approach to modifications. If the cramdown legislation passes, then borrowers will be able use the threat of bankruptcy to negotiate more favorable terms. While there may be losses, modifications of salvageable loans will occur with or without cramdown or stimulus of federal aid. The question is “On what terms?”

The mortgage companies will definitely pass on this cost to the consumer with added fees, pacts, etc. Not good.