Modifying Mortgages Isn’t Working

by Steve Crossland, REALTOR in Austin TX on December 9, 2008 · 5 comments

Was just reading the following in my Realtor email news update:
From: Daily Real Estate News – December 9, 2008


Just because their mortgage was modified doesn’t mean that a troubled home owner is out of the woods yet.

More than half of loans modified during the first three months of 2008 were again 30 days delinquent just six months after the terms of the loans were changed, reports John C. Dugan, comptroller of the currency. After eight months, 58 percent of the home owners were delinquent again.

Is anyone surprised? This would be like me showing up at eviction court and telling my tenant “You know what” I’m going to give you a break. Let’s forget the amount you are behind and lower your rent $100/mo. Will that help?” I can promise you I’d be back at eviction court within 6 months, if not sooner.

These mortgage bailouts will be no different. This is not to say I don’t have sympathy for the home owners caught up in this, or the communities that are being racked by foreclosures, but the government’s ham handed bailout efforts seems only to be postponing the default, not preventing it. The buyers who got in over their heads should be the primary recipients of the consequences of their poor decisionmaking, not tax payers at large.

My solution? Let the foreclosures happen and let’s clear the deck of these bad loans and unqualified home owners.

If government wants to help the displaced home owners, then help them become renters again, perhaps by covering the deposit and first month’s rent required to get into a rental home. Make it a requirement of receiving the rent credit that they don’t trash their foreclosed home and that they surrender it back to the bank in an orderly manner.

Then loosen up the loan requirements for qualified real estate investors who will come in and start buying the surrendered properties at true current market value with new 20% down loans. Get rid of the 4 loan limit and offer a capital gains waiver for investors who keep the home for 5 years or more. If done in a coordinated way, many of the foreclosured home owners could remain in the same home after it’s sold to an investor, and their rent payment will be much lower than an adjusted loan payment would be.

Are there enough true, quality real estate investors to make a dent in the excess housing inventory? Not in all areas, no. But in most areas, yes. Areas of declining population such as the auto-belt have systemic long term problems that won’t go away even without the mortgage crises. They need new industry and new jobs. Otherwise, there are more homes than people, and mortgage bailouts won’t help unemployed people.

So, what the government should be saying is, “raise your hand if you can afford to buy and own real estate”, and then getting out of the way, and even encouraging those who are able and willing to do so.

Instead, they are saying, “raise your hand if you bought a house you can’t afford”, and then trying to help those buyers avoid foreclosure. It’s not working. Try something different.

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