Modifying Mortgages Isn’t Working

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.

5 thoughts on “Modifying Mortgages Isn’t Working”

  1. I don’t know if I can speak to the rental market, but it also seems like there are a lot of buyers who got sidelined by the sudden rise in home prices who could take up a lot of the foreclosures. There are a lot of people who make $60k a year who weren’t about to take on a $300k mortgage, but would jump into home ownership if it went down to $150k.

  2. Steve, you need to think it the other way around. If there is 58% of modified loans still end up in foreclosures, there will be 42% of otherwise foreclosed homes saved. That’s actually a pretty good number imagine if you don’t do anything, 1 in 7 homes in America will be foreclosed. The damage to the entire housing business is going to be huge. The goal of modifying loans is not just to help out those who are still likely to fail, but to stabilize the market. Foreclosure is one way of fixing things, but it’s very much like killing the chicken to get the egg. In other words, it’s very expensive to go through foreclosure from the loan investment point of view. You lose 50% of the value of those houses if they go through foreclosure. Thus, if modified loan is not effective enough, we need find other solution.

  3. ARZ,

    But then you’d also have to factor in the number of people who would NOT have defaulted even without a re-adjusted loan. Subtract those out and you have the true number of those who avoided foreclosure. Some people are going three months late in payment on purpose simply to qualify for the help, but they otherwise would have hung in there and not defaulted.

    Then add all the money that was provided to ALL borrowers who were helped, even the ones who eventually defaulted, and you learn the true “cost per avoided foreclosure”. I’ll bet the numbers don’t make sense.

    Then on top of that add the cost of the evantual foreclosure, which was not avoided but simply delayed. For those areas, recovery is delayed, and values for all homes remain depressed, as the natural process drags on longer than it otherwise would.

    There are a lot of moving variables when the government starts trying to monkey around and control markets. We are seeing that with the $700B bailout and all of the unintended consequences and the money not going where it was originally thought to be directed.


  4. Steve,

    I fully understand your argument and I actually support a quick and dry death and rebirth kind of natural cycle. Most classical republicans and libertarians in favor of this approach. The problem is that most people in favor of this aren’t in stress themselves. It’s like you are an outsider almost. A quick comparison would be like you child’s friends is having all kinds of health problems because his parents aren’t taken good care of him. So he caught a virus and he’s having a very bad fever. HIs parents are in panicky mode and are trying any means off the shelf – any anti-biotics and alternative medicine they can fine. The kid is not getting better. So you think, hmmm, why not just take the kid off the drugs, and let him rest and having 104 degree of fever for 2 days. His immune system is going to take care of it eventually. You might be right, in the end, if nothing taken, the kid probably heal in a week and come out stronger. But there are two problems: 1) the kid may die. 2) he’s not your kid.

    You will get a completely different prospective when you are the one whose losing losing his shirt. If your kid is sick as dog, you naturally want to do anything you can to reverse it asap. It takes much more courage to go through the natural process, and in case he dies, you will bare the blame for the rest of your life. Do you really want to do that?

  5. My 2 cents: The banks, having caused this mess which includes mass layoffs in the global economy, owe it to their honest borrowers (those who can demonstrate a fair attempt to pay on time every time) to allow them to defer payments whilst unemployed just extending their mortgage term in effect, including when their unemployment check might run out. Maybe just nix the interest portion whilst they are unemployed which of course is the major monthly cost and the reward to the banks for their shenanigans. Why reward your bank for getting you laid off?


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