Posts Tagged ‘underwater mortgages’

Underwater Homeowners & HAMP: The Huge Problem of Negative Equity

Most homeowners who receive assistance from the Home Affordable Modification Program remain deeply underwater. The average homeowner in HAMP owes $1.50 for every dollar of their home’s value. This puts them at a greater risk of “walking away.” even after receiving a modification.

Republican critics of the program, like California Representative Darryl Issa say “It defies common sense that taxpayer money is being used to pay banks to modify loans that are likely to default anyway.”  In his usual “the free market is the answer to everything” zeal, he went on to say “In cases where the loan changes could keep borrowers out of foreclosure, banks have a clear incentive to make changes without a need for public funds.” He’s written to Treasury secretary Geithner to call for an immediate end to HAMP.

Except banks’ track record of loan modifications pre-HAMP was even worse than their record with HAMP.  The problem with banks and loan modifications, whether they’re private or government subsidized is that banks have proven singularly unwilling to do the one thing that will correct this entire mess: write down principle.

While recent changes to the HAMP program include provisions for principal reduction,  like everything else about the program,  it remains voluntary. Moreover, HAMP is designed so that the banks only modify loans from which they can profit. The entire NPV test, which is the test that determines whether someone qualifies for a HAMP modification or not, is designed to test whether it would be more profitable for the bank to foreclose or modify.  You don’t have to be an economic genius to see that it favors homeowners who are underwater since foreclosing on those folks will cause the bank to take that immediate loss. The deeper the home is underwater, the less profitable foreclosing becomes.

Of course, you also don’t need to be an economic Einstein to see that it also makes sense to bring loan values in line with the values of the properties securing the loans. I mean, that would make perfect sense, right? How can someone have a $300k mortgage on a home worth $150k and actually call that a secure investment?

The bean counters at the banks, unfortunately, don’t have too much economic sense. They just look at the dollars and cents on the banks’ balance sheets and if they’re decreased in any way, well, the sky is falling. I am not going to argue that principle write-downs won’t affect the banks’ bottom line. Of course they will. However, it’s a bit like receiving your bank statement, which , through an error shows you have a million dollars instead of only a thousand dollars. Of course, you’d much rather pretend that there wasn’t an error, and bank of the basis that you have a million dollars to spend, or invest,  but at the end of the day, that million dollars doesn’t exist. It is  just $999,000 of funny money. Mortgages that far exceed the value of the homes upon which they are secured are just as much funny money as the million dollar account error is. 

The world works differently for banks than it does for the rest of us, though. For the banks, they can continue to play with funny money, while you won’t be able to even pretend you’re $999,000 richer than you actually are for very long.

New Law Exempting More Borrowers From The Threat of Deficiency Judgments Will Have No Effect Today

Under current California law, no borrower is liable for a  deficiency judgment on a purchase money loan. A borrower may be held liable for a deficiency judgment on a refinance, however, but only if the lender chooses to foreclose through the court system in a long and expensive process known as a judicial foreclosure.  Most California foreclosures are non-judicial, and in that case, the lender would never be entitled to a deficiency judgment.

Where the deficiency judgment debate matters is in negotiations for short sales on non-purchase money loans. Currently, lenders can require homeowners to sign an unsecured promissory note for the difference between the sales price of the home and the amount of the note as a condition for accepting the short sale. They use the threat of pursuing a deficiency judgment to coerce homeowners into such agreements. Accordingly, the current rules merely serve as a dis-incentive for short sales as opposed to allowing the lender to foreclose.

Savvy homeowners may call the lenders’ bluff by making them start the foreclosure process. A lender has the choice as to which remedy it may use to recover its money, but it may not choose both. Therefore, if a non-judicial foreclosure has been started, usually by the recording of the Notice of Default, the lender has already made its choice.

A law currently being debated in the California legislature would have ended the threat of deficiency judgments completely. As it stands, if the law does pass, it would only affect borrowers who used refinanced money for home improvements and only on new loans. So, for most homeowners, this new law, if passed, would not change anything.

Strategic Default = A Free Rent. Really??

I am sick and tired of posts like this one. It is yet another moralistic, snide view point from a person without an ounce of common sense.

The Times story features Alex Pemberton and his mom, Wendy Pemberton, who both live in St. Petersberg, Fla., and who both pay an attorney $1,500 who says he does “as much as needs to be done to force the bank to prove its case.”

That $1,500 these homeowners are paying in lawyers fees is considerably less than what they’d pay to keep up with the mortgages. So they pay the lawyer and justify their defaults by saying that this is simply business. And nowadays, homeowners finally seem more apt to approach homeownership in a cold, even ruthless business manner

I have two major problems with the above statements: For one, how does the author know that paying on the mortgage would cost less than the $1,500 that these homeowners are paying the attorney? Moreover,  where in the story does it say they pay the attorney $1,500 per month?

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Shocking News: Banks Fight Against Principle Write-Downs

shocked

During Congressional  hearings last week, the heads of several big banks, chief among them, David Lowman of JPMorgan Chase,  argued strongly against writing down principle balances. In a line all too often spouted by the executives of the very firms responsible for the current crisis, Mr. Lowman stated that principle reductions would invite homeowners to spend more than they could afford and raise the cost of financing for future homeowners.

The House had convened this hearing to discuss the Administration’s latest efforts to put a tourniquet on the hemorrhaging housing market by coaxing lenders to write down mortgage balances.  According to the latest Congressional Oversight Panel report, one in four mortgages are underwater.  Apparently, despite all of the incentives Treasury is throwing their way, the banks remain unwilling.  

It is time to stop coddling the banks and get serious about addressing the foreclosure crisis.  There is a way that would give the government’s loan modification program the teeth it needs to make the banks cooperate and it won’t cost the taxpayer another dime. Amend the bankruptcy laws to allow judges to modify mortgages on primary residences.

Should You Walk Away From Your Mortgage?

underwater mortgages This is a question that many homeowners are facing today as mortgage delinquencies rise and as many people find themselves saddled with homes that are worth less than the mortgage note. Even people who can afford their mortgage payment are considering giving up their home because of negative equity.

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