Tita G
Realtor Keller Williams Realty | Loss Mitigation Certifed | ABR | GRI | Certified Short Sale Professional
Is Mortgage Forgiveness the Answer?
This question is based on the latest article published online by Daily Real Estate News.....I'd like your opinion - as this greatly affects our real estate industry and financial market
.
Courtesy of Daily Real Estate News.
Some housing experts say the next logical step for helping home owners with negative equity is loan forgiveness.
Home owners with no equity stake and no likelihood of having one anytime soon are increasingly likely to walk away. Some theorize that curbing that trend is the only thing that will stabilize the market.
The nonprofit Milken Institute has devised a plan that would use Fannie Mae to refinance underwater loans with government money. Under the plan, a private lender would provide the money for the value of the home and the U.S. Treasury would issue a second, interest-only loan for the portion of the current mortgage that is underwater. Every year the home owner keeps current with payments, the Treasury would forgive a portion of the loan.
The institute estimates that this would save 1.5 million homes from foreclosure or abandonment and cost taxpayers between $75 billion and $100 billion.
Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, approves that plan, but urges returning some of the appreciation to the original lender as a reward for patience.
"The idea that these loans are worth face value is a fiction," says Richard Green, director of the USC Lusk Center for Real Estate. "If we don't deal with [reducing] the balances, we're not really dealing with the problem."
Source: Los Angeles Times, Tom Petruno (06/27/2009)
Good Answers (28)
John W
Co-Founder Compass Comprehensive Financial
Best Answers in: Futures Markets (1), Personal Real Estate (1)
Tita,
Every action taken by our government also has an unintended consequence. This problem exists today, because our government tried, (rather foolishly,) to make houses affordable to people who, without government intervention would not be able to purchase a house. The problem was made worse by creating exotic and unregulated securities to sell to yield starved investors. Since there was no regulation for the newly invented securities, and since lenders could sell them to investors who were told that they were risk free, underwriting standards went out the window. More intervention will only serve to make the problem worse. What is actually going to be changed by lending larger sums of taxpayer money to non-credit worthy individuals. The problem is the ability of this group of home-owners to repay. By propping them up with other people's money, we would be artificially inflating the prices of houses, and the cost of credit in the future. It was our deviation from free markets to create a social equality that created the mess. I believe that all people should have equal opportunity, but that does not garuntee equal results. By making something that most of us have had to earn through hard work and saving, and making it an entitlement, is garunteeing results, regardless of effort. This creates a terrible social inequality, in that hard working Americans are punished by being forced to subsidize others deemed worthy of handouts.
As for how to proceed, the answer which best returns us to the free market system which was the founding principle of our nation is the way to go. I realize that cold turkey would be painful, as it is to break any addiction. Free markets have the wonderful ability to cushion themselves. Allow them to work, the alternative will be even more painful. As a taxpayer, I don't want to put another penny into this nonsense.
Alec M
Regional Account Executive at Event Management Systems by Dean Evans & Associates, Inc. [LiON]
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Absolutely NOT! Stop using my tax money to bail out people who CHOSE to enter a LEGALLY BINDING CONTRACT of their OWN FREE WILL!
We have contracts for a reason. There are consequences to breaking them for a reason. Why should people be forgiven for making bad decisions?
Can I get forgiveness on my student loans? At least that money was well spent . . . reward me for making a good decision, don't reward stupidity.
James C B
JCBCapital.com, JCB Capital Performance - Personal Wealth Management, Asset Manager, Financial Planner, Wealth Adviser
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Hi Tita,
Yes. Sub-prime mortgage lenders got Americans in over their heads.
Actually, it is cheaper to modify the loan than to let it go into foreclosure - lenders simply need to recognize this fact.
JC Brandon
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Clarification added 4 months ago:
e.g. ATLANTA (AP) -- Federal prosecutors in North Carolina filed criminal fraud conspiracy charges against Beazer Homes USA on Wednesday, but they agreed to dismiss the case if the company complies with an agreement accepting responsibility for certain wrongdoing and pays millions to victims. In the deferred prosecution agreement, the company accepted responsibility for fraudulent mortgage originations and accounting practices and agreed to pay $10 million immediately toward restitution to victims. Beazer also agreed to pay up to $50 million as the company, which has been battered by the housing downturn, recovers financially, according to prosecutors and court records.
JCB
Elizabeth R
Editorial Intern at San Francisco Business Times
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I would tend to agree with John, who I think has got it quite right. While it is terribly sad that some people have lost or will lose their homes, and while the lenders certainly played a significant role in creating an untenable situation, people have to take responsibility for their financial decisions. Buying a house you cannot afford is clearly not a great plan, and I do not think that bailing people out necessarily provides incentive to try harder in the future. A large part of the recession is a universal trend, among both individuals and companies, to spend money they did not have - surely the best way in the long run to stabilize and revitalize the economy is to discourage such irresponsible spending and perhaps rely less on credit?
Lynn M
Biomedical Research, Public Safety Analysis, Crisis Intervention
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IMHO, all people holding a mortgage should be given the opportunity to refinance to a payment that is within good financial principles. Even if that means some of the principle is waived. Not all people that are over their heads now went into the mortgage contract unwisely. Many people have lost their jobs since signing the mortgage and are unable to find another position with the same compensation.
Should those who has fallen victim to the declining economy be labeled as unworthy and punished because the company they once worked for can't stay afloat?
If we're talking about our tax dollars being spent to bail out the ones that put us into this mess, I'm disgusted that so much money went to the very banks that approved the loans in the first place without verifying the creditworthiness of the borrowers. Some people made a lot of profit and bonuses on the backs of the people that now cannot pay their mortgage. Those banks were the first ones in line for government funds because they were deemed "too big to fail". As if size alone determines true value or moral rightness.
FRANK F
—►CEO NorthStar —►Strategic Futurist ex-Banker = "A Future You Can Bank On!" —►Keynote Speaker
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No. Never.
First laws of bank lending:
1. Do not throw good money after bad;
2. Your best loss is your first loss.
In other words:
1. Do not refinance or extend it.
2. Call the loan now, and take your losses.
Why should people with mortgages be subsidized?
Heck even the interest payments are tax deductible.
(Not tax deductible in Canada, by the way, which
some conservative Americans say is socialist, lol.)
The only way to stabilize the housing market is
to let it return to market equilibrium at realistic
affordable prices, which still have further to fall.
And no amount of tinkering is going to alter that.
Meanwhile, patience is a virtue.
Gerald T
Minister, Youth Services at Dixie Area Detention Center
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For many of us that are homeowners and don't live in our homes because our employment took us elsewhere, this is a very fair question. I live in St George, UT but my home is in Belleville, IL. I'm paying for two homes and can't afford but one without struggling. With that being said, continuing to rely on the government to bail us out, is ridiculous. The deficit is growing and growing and no way of recovery in sight.
We cannot continue to believe or expect for the government to solve all our problems. As much as I want to get from under the house that I can't sell and hard to rent without significant loss, I would rather continue to be content with where I am. I believe that the Lord will keep me on the right path and whatever happen is because it's something to prepare me for future endeavors.
Almost everyone that is affected will embrace this tactic of bigger government and feed into this socialistic system. We must resist the urge to take these short-cuts and weather this storm, which will also pass.
Will H
Progressive Inspection Service | Residential | Commercial | REO | FDIC | FHA | HUD | VA | LION
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No more movement towards a full blown "Socialist Market Economy". We're almost there now. Taking the education systems advice on the housing industry is not in our best interest. For example, the education system here in California is responsible for consuming approximately 52% or $60,000,000,000.00 of the California budget. Oh, by the way, we're bankrupt, and they want more!
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Two phrases that I do not like. "Government money" and "cost taxpayers."
The government needs to keep it's inefficient hands out of the private sector. Period. If a bank wants to forgive a loan, it's the banks choice.
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Heidi T
Independent Computer Networking Professional
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If a homeowner has no equity, they really don't own anything, now do they? It may be that they should walk away if that's the best financial decision for them and their family.
Forgiving mortgages doesn't make a lot of sense. How will that solve the underlying problem? The market forces will continue uncorrected, assets overvalued, and people not realizing the full ramifications of their personal financial decisions.
The reality is that investments can grow, shrink, or stagnate. People that gambled that homes would only grow in value or somehow magically pay for themselves and got overextended may have gotten bad advice from mortgage brokers and real estate pros.
The idea of mortgage forgiveness is appealing to those in over their heads and those holding the notes. I don't see how it can do anything but artificially prop up an unstable market.
It would be better to return the homes (assets) and pay rent.
We have seen thousands of foreclosures and there are more to come and we have sympathy and a desire to help. Job losses and ARM adjustments are the leading factors and are often beyond the homeowner’s control and these homeowners want more than anything to stay in their homes regardless of the declining values. But in crafting a solution we have to be fair to the vast majority of homeowners who have maintained their payments despite the declining values and fair to those who have paid off their mortgage. So the notion that we need to help those who are disappointed that the value of their home didn’t go up like they planned and we are concerned they might get discouraged and walk away simply sets the stage for us to reward and encourage wholesale irresponsibility.
The merit in the above plan is that it recognizes the motivational value of economic gain, but there is a simpler four part solution intended for those either having problems or face potential problems in making their payments. 1) leave FNMA out of this and 2) have the current lenders keep the loans, because a) we don’t want the expense or bother to have to do appraisals to value each property; what if the disappointed homeowner doesn’t agree with the appraisal?, b) we don’t what to have to find new lenders for each loan, what if their rates were higher?, c) we don’t want the transaction costs (recording fees, tax stamps, etc.), and d) we don’t want the hassle of transferring servicing. 3) Lender and borrower figure out what payment the borrower can afford and set up a line of credit for Treasury to supplement the borrower’s new payment in order to keep making the original payment. Then include provisions for: a) care and maintenance of the property b) structuring the agreement on how to divide the gains, or then forgive the losses when the house is sold and c) provide for when the house is to be sold or the loan paid off. 4) The original investor gets their payments as if nothing happened. Qualification can consider both real and impending difficulties. The biggest advantage is the up front money required. If values were down 25%, then Treasury funds that deficit for one borrower, or they could use the same $ to fund 25% of the payments of 3 borrowers over a 5 year term.
Now, I am a little confused with Mr. Rosen’s comment because it looked like the plan called for a new lender to fund the value of the house and the Treasury loan to make up the difference and pay off the original lender. If the original lender is being paid off, how are they being patient and needing to be rewarded? If they are not, why should they take a loss because the borrower is discouraged? And how then should they consider themselves “rewarded” if they recoup some of their loss while the discouraged borrower restructured their indebtedness at the lender’s expense and then profited at the sale? If we are meaning the Treasury should absorb this loss, that means we the taxpayer, the homeowner making payments, and the homeowner who has paid off their loan have to fund their irresponsibility and even their profit.
Let’s hope we learn from these scenarios about the risks of 0-low % down payment loans going forward as we hear about new loan programs and ideas already being proposed by the government.
Clarification added 4 months ago:
FYI Debt forgiveness is not part of this plan. Its also interesting that the ideas and supporters are from CA where people have bought low and sold real high for years and now some are left holding the bag.
Hi Tita,
Busy busy here with short sales and foreclosures...
I am not a fan of this concept. Mortgage forgiveness is like telling a child they should not be accountable for their actions when they make a mistake. As my grandmother always taught me...when times get tough, put a rod up your spine, pull your bootstraps up and muscle through the mud.
True, the mortgages are not value-driven at this time...but when did we start looking at mortgages like stocks? Tsk, tsk.
Loan modifications are acceptable only if th TARPs are repaid and the owners regain momentum in employment and income while keeping their commitment to pay the debt fulfilled.
That's it form my soapbax stand...have a great day!
The solution is not loan forgiveness; the solution is create an appropriated economical infrastructure with employment and high saving levels. Loan just can´t be forgotten they exist before capitalism!
Links:
Jean B also suggests this expert on this topic:
Absolutely not. The problem with the US economy is the the significant increase in leverage that the average US family has obtained in the past six years. There are many studies that suggest certain demographic sectors have doubled their average debt over the last four to seven years.
I continue to tell everyone I train in my seminars and in the mastermind groups I am a part of, just hold on to your cash, and get ready.
The US as a whole is preparing to go through a massive deleverage. Only once this deleverage is complete, will the economy stabilize. The companies with the "bad loans" have made a lot of money getting to this point. They will write down the assets, and dispose of them. We (the US government) has spent trillions of dollars on this "crisis", and still credit continues to tighten.
I read one article that estimated there are 30% less buyers this year than last. The primary factor is that the nation's lending institutions have drawn back in their shell, and don't want to originate loans. They are simply sitting, waiting for the government to help. The problem is (just like with GM, AIG, Citi, etc.) that the institutions that accept government assistance, rarely change their MO.
The solution to the problem is simple. We (Americans) must allow the companies that created the mess, to work there way out of it. If they do not, there is a built in safeguard called the FDIC.
There will be new lenders, new investors, and new companies develop from the remains, and we (as a country) will be more solid than before.
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Isn't interesting that no one spoke up when we bailed out automobile companies, banks, and insurance companies BUT EVERYONE is speaking up AGAINST homeowners! No bail outs for home owners. No health insurance for Americans. No nothing, nada, nada for the working class and middle class! Let's just keep giving tax breaks to multinational corporations, corporate farms, oil companies, huge raises for Wall Street, Citigroup, BofA, you name it!
Dispicable! It shows your true colors!...and oh yes, you are all Christians, are you not? Where in the heck is your compassion?!?!!!
As has now been proven, the all American capitalistic system does NOT work without putting in some controls (yeah go ahead and scream socialism!!). As has also been proven, neither does an all out communistic system. Perhaps there is some happy medium?
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Clarification added 4 months ago:
Banking Industry: How to Buy Friends and Alienate People
By Simon Johnson
The banking industry is exceeding all expectations. The biggest players are raking in profits and planning much higher compensation so far this year, on the back of increased market share (wouldn’t you like two of your major competitors to go out of business?). And banks in general are managing to project widely a completely negative attitude towards all attempts to protect consumers.
This is a dangerous combination for the industry, yet it is not being handled well. Just look at the current strategy of the American Bankers’ Association.
Edward L. Yingling is justifiably proud of his organization’s position as one of the country’s most powerful lobbies.
His testimony (.pdf) to Congress on the potential new Consumer Financial Protection Agency plainly shows where his group stands. The most revealing quote, highlighted in the ABA’s own press release, reads:
"It is now widely understood that the current economic situation originated primarily in the largely unregulated non-bank sector,” he said. “Banks watched as mortgage brokers and others made loans to consumers that a good banker just would not make and they now face the prospect of another burdensome layer of regulation aimed primarily at their less-regulated or unregulated competitors. It is simply unfair to inflict another burden on these banks that had nothing to do with the problems that were created."
The premise here is false. If major banks had really not been involved in the mortgage fiasco, we would not have had to roughly double our national debt-to-GDP in order to save the US and world economy.
Within the banking community, and presumably within the ABA’s membership, there is serious tension. The small banks feel – overall with some justification – that the essence of the recent problem was not about them. But they can’t bring themselves to suggest publicly that the economic and political power of the largest banks should be curtailed.
Small banks have always had clout in the American political system, particularly when they work through the Senate. But we have not always had our current kind of crisis. The executives of these banks lived comfortably in the 1950s and 1960s; their kind of banking was boring, stable, and nicely remunerated.
It is the changing nature and power of the largest financial institutions – banks of various kinds – that has damaged our system since the 1980s; the rise in financial services compensation is part symptom and part pathogen. Big banks present the major risk going forward – to both the economy in general and to smaller banks in particular.
Most banks are “small enough to fail” (seven closed Thursday). It is absolutely not in their interest to have some banks that are perceived to be “too big to fail” and to ever re-run any version of the last two years.
The ABA should be discussing and addressing this issue. Instead, it is making all banks unpopular by opposing sensible legislation aimed at protecting consumers – look at the public relations context provided, for example, by Citi’s (C) recent move on credit cards.
The ABA’s leadership needs to quickly rethink its approach.
Only on a case by case basis. FYI: The more reluctant a bank is willing to restructure non-performing mortgages:
1. the more they are eating away at their earnings.
2. the more they are allowing their tier capital ratios to rotten
3. the higher the chance of more illiquid assets they will hold
4. the less interest income they will be able to generate.
5. the more yummy bail out money will be requested.
I currently work with financial institutions with restructuring services and you would not believe how clueless some of these decision makers are.
Greg
Leonid L
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Nope it ain't! It is an unconstitutional measure that creates moral hazard. The mission "every man needs a home" is just ridiculous! This welfare state faces a grim future. Enough said.
Andy F
Director of Membership at British American Business Council NC
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Of course the answer will be "No" from the majority of people who are enraged because they are paying the price for the current debacle. Adjusting loans would nip the problem in the bud but we don't want it coming out of our pockets. This is the kind of attitude that makes recessions deeper and then we all suffer......we're a short-sighted bunch (and not very well informed either). Depressing isn't it?
James D
Experienced property professional fascinated in new technology enhancing the experience of both clients and staff alike
Okay, this is certainly an emotive subject! Good discussion Tita.
Let me comment from how I see it from over the pond in the UK.
A lot of you are blaming the banks and the politicians for getting all of us into this mess. Let me play "devils advocate" here and say that there are 1.5 million homes here at risk which constitutes a lot of people who probably, for the most part, thought they were doing the right thing. Is it fair to allow our opinions to affect the livelihood of these families?
Having said that it looks an awful lot of money from the tax payers to support these 1.5 million homes..........rather than coming from the tax payers shouldn't this come from the profits that the banks are now making? They are now obviously back on track with their horrendous profits and life is going to be a lot easier for them now. They seem to have gotten off rather lightly with only a couple of years of difficulty whereas there are 1.5 million families that are going to be suffering for some time.......
Best wishes everyone.
James
www.twitter.com/jamesdearsley
www.jamesdearsley.wordpress.com
Keith S
Portfolio Manager at Tricoastal Capital Management
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Tita,
A lot of emotion on this one.
Preventing one foreclosure costs society and benefits only one person - not a fair outcome, but...
Preventing a wave of foreclosures across a neighbourhood, city or region helps preserve property values for everyone (including mortgage investors)...whether in foreclosure or not.
The institute estimates that this would save 1.5 million homes from foreclosure or abandonment and cost taxpayers between $75 billion and $100 billion. Approximately $50K-$75K per house.
There is a solution (this particular proposal may not be exactly it) that achieves the goal of preventing a flood of foreclosures....but the parties involved are the investors who hold the mortgage paper (who aren't going to get their hoped-for coupon) and the homeowner (who isn't likely to ever see a capital gain on their property)....between the two of them, they can work out a deal where the homeowner pays something over time, and they can split the proceeds when the property is sold. No new money need be injected.
Two laws you want to change though: don't make mortgages non-recourse and don't make the interest tax-deductible.
I agree. What's the point of continuing to shovel money into an asset that is no longer worth what you paid for it.
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I think it would depend on if your ability to make your mortgage payment....
I can't think of too many people who wouldn't take the 'hand-out' if they were faced with foreclosure. For those of us who have lived within our means and even been able to save some money for a rainy day, it seems a bit unfair that we (as tax payers) would pay the bill for our neighbors who have spent more foolishly.
Economically, 'forgiving' dept will not ultimately solve the issue, and in fact, I suspect that it will make the situation significantly worse. All the cash that would otherwise be going into the economy will be paid to the US government (who has a perfect record of wasting a high percentage). It won't be pretty, but over the long haul, we'd be better off if people were forced to be accountable for their decisions. It may even require that those of us with a bit extra help our friends and neighbors out (no government intervention), but I would much rather do that than provide "debt forgiveness" though a government agency.
That's my $.02!
Gene & Kim Q
Owner, Northwest Equity Home Sales. No Gimmicks, Just Results!TM
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The majority of homeowners who do successfully modify their loans end up in default. The answer is NOT another hair-brained scheme from the same politicians that began this whole fiasco with the notion that homeownership is a "right" and the government is somehow obligated to ensure some arbitrary form of equality in the housing market.
If homeowners can not make their payments banks have a legal right to foreclose. Period! The government has no authority to mandate, regulate, restrict or delegate how and to what degree banks implement the satisfaction of legally binding contracts. If big brother wants to manage their loans, FHA, V.A. HUD etc go right ahead but to contrive and impose some federally mandated regulation across the board is not what America is all about. When we work hard we hopefully enjoy success, but we must also be willing to learn from failure.
The Housing Problem Solved
In order to begin to solve the “Housing Problem” we must start to encourage good behavior in the consumers, banks and the government. The reason we don't allow children to enter into binding contracts is the same reason that the home owners should honor their word, children don't know what their doing and adults do. This country “the government” needs to stop overruling contracts and contract law before a contract means nothing anymore. If the government would like to help prevent this sort of thing from happening again they might consider passing a national law to make Home Equity Loans illegal. What about making Adjustable Rate Mortgages illegal??? The problem is no matter what the government does, it will never be illegal to be stupid. Wake up America and take responsibility for your actions. The people that are currently not paying their mortgages now are some of the same people that were so proud that they were able to get a house that they couldn't afford. Pride cometh before the fall. The governments bad behavior started with the community reinvestment act. The banks bad behavior was making home loans to people with no money and poor credit, all so they could make huge profits. Home owners singed up for what ever type of loan that was put in fount of them as long as they get the keys to a house and they look good. I could go on and on playing the blame game, I didn't even mention the shell games the builders, title companies, inspectors and real estate agents played to get people approved for homes they should never have been approved for. So, where do we go from here? We've already raised the standards to get home loans. We've cracked down on fraud “the shell games”. So, now what? We allow people to lose their home that they can't afford and hopefully learn a lesson that will last a lifetime. If everyone saved for years to get that 20% down payment, while learning to pay their bills on time; then got a home loan for no more then 25% of their take home income and no more then a 15 year loan, we would never have a housing problem again.
I've been an advocate of this for a long time, but people are generally put off by the notion. I see it as not just a solution, but THE only solution.
It seems to me that its pretty simple. There are loans that will work, and loans that won't. Yes, there's a grey area, but usually it is pretty easy to tell. My solution is that however you define loans that don't work (I have my opinion on how to do that, too), people that are 30 days late on these types of loans are subject to immediate foreclosure. No NOD, no NOT, no get the trustee sale delayed by putting a cloud on title. Just a very clear, transparent process. You miss your mortgage payment by 30 days, and a sherriff shows up on Day 31.
You wanna take out the garbage with people who should have never been homeowners in the first place? This is how you do that. Lose your job? Sorry, you should have been more prudent about your finances to allow for a scenario like this, and have money saved up.
Why not apply this to all people, not just people with bad loans? Well, you have to reward someone here, and I don't think punishing the guy who put 20% down in a time where people were taking 95% LTV option ARMs is going to set the precedent we want.
So in conclusion... having a "good loan" buys you some time if you had a rough patch, having a "bad loan" makes you subject to immediate foreclosure.
Thoughts?
Before I could say what my final opinion is on this, I'd like to see the actual numbers involved. Either side of this issue makes it sound like there is no option but to hold back/move forward because of the problem scope. There are many areas of the country that are having a rough patch, but I'm thinking that the actual problem is a little more isolated to more limited areas of the Nation. My current take on this, is that it's a CYA for some of our current leaders, who cannot admit the mistakes that were previously made by them in bring about this whole mess to start with (both Democratic and Republican). Stop buying votes and start looking for realistic solutions that aren't going to bring the whole structure to a screaming halt. The rule of unintended consequences does come to mind.
Wrong question...but by and large the right answers, as most are clearly against the idea as posed.
"The idea that the loans are worth face value" may indeed be a fiction, but that doesn't mean that writing off principal is a good idea. It's a bad one, particularly for the banks, but also for the mortgagee individual's moral compass...and sense of integrity.
Instead of write-offs, the best idea I've come across is the concept of restructuring the mortgages to reduce the monthly payment, possibly by way of a balloon payment 5-20 years or so downstream, depending on the existing loan structure. This will still reduce the banks cash flow, but mitigate foreclosures substantially.
Much to my own regret, the government might have to step in with respect to standardizing who qualifies...and it should go without saying that if someone WAS qualified and IS paying the mortgage on time then they ARE QUALIFIED for the restructured deal. As it stands, the banks are screwing themselves and the populace by ratcheting up requirements to the point that many people no longer qualify for mortgages on houses that THEY ARE MAKING ON-TIME PAYMENTS FOR. It's an absurd situation to deny restructuring to people that are doing their level best but need help, and so it may require a 'big stick' to get the banks on board.
If we can reduce and spread out the pain while maintaining personal integrity, and we might just keep the wheels on the applecart.
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Marty C
Visionary Entrepreneur and Investor
Best Answers in: Financial Regulation (1), Equity Markets (1)
No!
Of course NOT
