Keep it simple, stupid. It sounds so “simple” doesn’t it?
I mean, who doesn’t want to use “common sense” principles to solve the massive problems in the real estate sector?
Who amongst us is for “stupid” solutions?
Which is why understanding our current real estate quagmire is so baffling.
There are so many easy-to-implement solutions to flush out the housing market and get it going again, yet regulators and bailed-out banks always seem to find a way to screw it up.
The regulators for the most part are completely clueless as to real estate structural inhibitors and macroeconomic stressors.
Simply stated, they don’t know how the rules mess things up and how to evaluate what’s going on in the rest of the economy.
Big banks, on the other hand, are incredibly sophisticated and prey on their less sophisticated partners in government. Banks driven by speculation decided to pump real estate markets to increase gains and build up balance sheets.
When those markets crashed, big banks went to their buddies in government and asked for a bailout. Their less sophisticated buddies obliged.
Now that our bailed-out banks are heavily capitalized and are making money, they refuse to do anything that would take a penny out of their pockets, even it is detrimental to the overall market.
What the banks have been doing is playing with government regulators and private individuals. The biggest farce that the banks have perpetrated since their pumping of the real estate market is the loan modification.
At first the government stepped in with its own ridiculous, ineffective system called HAMP (Homes Affordable Modification Program) that would use taxpayer money to fix the problem (never a good idea).
Originally $50 billion was allocated to the program. Only $12 billion has been spent.
Originally, it was supposed to help 3-4 million homeowners. To date a little more than 500,000 modifications have been made, and the default rate on those modifications has been as high as 92 percent.
All in all, it has been a disaster.
Rather than face government regulation due to popular will (the people feel that they should get a bailout because the banks got one … and I can’t really blame them), banks have started to self-regulate themselves, including the institution of their own brand of loan modification, to supplant the government’s program.
During the first quarter of this year, roughly 210,000 homeowners received permanent, proprietary loan modifications from mortgage servicers, according to HOPE NOW.
According to the same group, foreclosure starts (the initiation of the foreclosure process) were up 21 percent from February 2011 to March 2011, with 60-day delinquencies at an additional 2.63 million homes.
Combine this with the most recent S&P Case/Shiller index that shows the top 20 metropolitan areas are just a hair above their April 2009 lows, and that should tell you that the housing problem is real and the need for solutions is now.
What banks aren’t telling you is that they are just playing shell games. Yes, they can reduce your monthly payment but that’s because they are extending the term of your mortgage, or just lowering your interest rate.
At the end of the day, the mortgage is still worth more than the house, and eventually homeowners will just stop paying it.
An all-time high of more than 28 percent of single-family homeowners are underwater (in a home where their mortgage value exceeds their home value), according to research firm Zillow, which has been compiling this data since 2009.
Sure, there are some banks that have implemented principal reduction modifications but those only marginally reduce the amount owed on the property and that does not reflect market value.
The only way in which loan modifications will work is if a local appraiser appraises their property and a proper market value is determined. Then on a one-time basis, for primary homeowners only, the bank would reduce its principal balance to the market value of the home.
Some might argue that this is not fair to the banks, and that homeowners signed contracts and should be held to them. A program like this would cause billions of dollars worth of losses to the banks and would deteriorate their balance sheets and lower their share prices.
This is very true.
On that same note, all of the major banks signed contracts and made investments and lost a ton of money. Contractually, they should have defaulted on their debt and gone out of business. The U.S. taxpayers were under no obligation to bail them out.
And if banks want to make real money, they should stop holding onto the idea that they are going to get paid on mortgage paper that homeowners have no financial incentive to pay.
If we can rid the market of all of the mal-investment and bring mortgage and property values back down to market levels, we can start to see housing fundamentals start to rise again.
This creates more jobs and grows the market organically as opposed to holding onto overinflated values of mortgages that will never be paid.
But regardless of whether you think loan modifications are a good solution or not, you can’t argue this: if you are going to do loan modifications, do them right.
The banks have been implementing half-solutions which do not address the underlying problems.
The banks have been too worried about perception and who’s at fault. When a bank does a modification that only modifies the interest, or extends the duration of the loan to lower the monthly payment, or only marginally reduces the principal balance, and then a homeowner defaults again (gets behind on their mortgage payment), the banks think they look like the good guy.
In their minds, the banks were benevolent and tried to work with the homeowner giving them concessions on various items, the homeowner agreed to those concessions and pledged to make payments on time, every time.
We are just the good guys, and it is deadbeat homeowners who don’t keep their promises who are at fault.
Nice try, big banks.
A half-step response only escalates a full-scale problem.
So when you do a modification, do it right or don’t do it at all.