debt forgivness "en masse" for under-water homes?
If large numbers of home-owners find themselves DEEPLY under-water (i.e. with homes worth significantly less than the mortgage) could we expect many lenders to forgive a significant chunk of the debt for anyone who asks?
Even if someone is fully able to continue making payments on a $400K mortgage, I wonder if lenders wouldn't feel worried that even these good credit risk types would get cold feet if the home price dropped to $200K. I wonder if some lenders wouldn't just decide that it made good business sense to forgive $100K of the $400K mortgage to gender good-will, rather than face the prospect that the disillusioned home-owner (who faces a life of perpetual in-debtedness due to a massive price drop) just throwing their hands up and walking away. Losing $100K in a write off is a whole lot better than losing something like $250K if they had to foreclose and sell the place in a dead market.
Sure, I know that some people think a massive price decline is highly unlikely, but IF such a scenario were to occur what do you think lenders might do?
If lenders did become very liberal in forgiving chunks of debt for massively devalued homes they might be able to keep a sort of bottom on the market, preventing even larger numbers of homes going into foreclosure. And maybe these thick-headed lenders would think that's in their interest...
On the other hand, I can also imagine a situation where lenders refuse to forgive debt to those who are financially stable as a matter of principal. They wouldn't want customers getting the idea that they can always get off the hook for their debts if their gambles (on price appreciation) go sour.
Even if someone is fully able to continue making payments on a $400K mortgage, I wonder if lenders wouldn't feel worried that even these good credit risk types would get cold feet if the home price dropped to $200K. I wonder if some lenders wouldn't just decide that it made good business sense to forgive $100K of the $400K mortgage to gender good-will, rather than face the prospect that the disillusioned home-owner (who faces a life of perpetual in-debtedness due to a massive price drop) just throwing their hands up and walking away. Losing $100K in a write off is a whole lot better than losing something like $250K if they had to foreclose and sell the place in a dead market.
Sure, I know that some people think a massive price decline is highly unlikely, but IF such a scenario were to occur what do you think lenders might do?
If lenders did become very liberal in forgiving chunks of debt for massively devalued homes they might be able to keep a sort of bottom on the market, preventing even larger numbers of homes going into foreclosure. And maybe these thick-headed lenders would think that's in their interest...
On the other hand, I can also imagine a situation where lenders refuse to forgive debt to those who are financially stable as a matter of principal. They wouldn't want customers getting the idea that they can always get off the hook for their debts if their gambles (on price appreciation) go sour.
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Secondly, and I think this is more important, all markets are ultimately based on figuring out what each participant is willing to pay for a given good. If you take away the ability for the most inclined participants to overpay you're killing the part of the market where most of the money is made.
One of the most interesting things I think we'll see as a result of the bubble is that some neighborhoods are going to get absolutely brutally slaughtered and others will emerge relatively unscathed. All the drama and excitement will be in trying to figure out which areas get killed when and why.
My prediction is that areas that were either developed or significantly gentrified during the boom will experience greater price weakness just because the vintage of the loans is so poor. However, due to sheer luck some of these areas will turn out to have little or no toxic loans and be ok.
This is why an across the board approach will fail. I even doubt that a massive targeted effort would work because it would feed into itself.
What if I'm the bank that doesn't even own that loan anymore? Why should I take a write-off for debt that someone else was willing to buy? Selfish motive is reason enough that I doubt anyone will buy off underwater borrowers enlarge.
Not all mortgages are securitized. And even for those that are, I would expect that aggressive investors would be buying out many of the securities for pennies on the dollar. If you bought a mortgage security for 5 cents on the dollar maybe it would be worth your while to change the terms of the security contracts to allow loan modification so you could forgive 80% of the loan. Getting 20% of the loan value would still leave quite a profit if you bought the mortgage for a 95% discount.
So what would the value of the house be if the owner gave up and walked away (not because they couldn't make payments, but because they felt things were hopeless) and the bank had to re-sell the place for $300K? It's not as if the bank can just sit on the reposessed property for 5 to 10 years until prices come back. It would have been better for the lender for have forgiven a portion of the original loan rather than take the full hit of selling at the very low market rate.
But I would say it depends on how the bank made the mortgage loan in the first place. For a lot of banks having a house auctioned off at 300K might not necessarily be an actual loss even though the original mortage was 650K since banks have the ability to create money out of thin air, and the bank may have some accounting way of cushioning non-performing loans or the bank may get tax benefits.
To me, it'd be better for the banks to make sure the borrower keep on paying by enforcing the loan contract (by using debt collectors or threaten to ruin someone's credit for the rest of their lives) because as someone has posted before, a bank such as WAMU uses creative accounting to attach any unpaid portion of the loan to the original loan and consider that as revenue. I guess what I'm saying is if I were a bank I'd squeeze as much as out of the borrowers and not let them off the hook that easily such as just walk away. If needed I'd bring back debtors prison.
Forcing the debtor to continue paying the original loan is certainly the preferable option. However, there are limits to what lenders can do to force people to pay and there is also a breaking point at which most people would decide to face the negative consequences of trashed credit, etc, if their house is sufficiently under-water (i.e. there is some point of lost value in a home when the majority of people would just give up).
So, if it came to the choice of being forced to reposess a home and sell it at the going market rate or attempt to head off defaults (through partial debt forgiveness) I think the debt forgiveness option seems the least painful. Again, this whole scenario is predicated on a situation where property prices have fallen at least 40% to 50%. In such a case I believe there would be many home owners who would decide that it isn't worth paying their mortgage anymore since there was no hope in sight of ever regaining equity.
I believe I heard the FHA was offering to refinance 60,000 loans that are in non-payment status into 1% rates for a period of time (think it was 5 years). Now these senerios are more likely, as Banks wont just forgive large chunks of loans like many are talking about here.
Really? I just can't imagine that a bank would rather reposess a place that will only fetch $200,000 on the market with a mortgage of $600,000 if they can keep the borrower in the place, and willing to continue paying by reducing the mortgage to $400,000.
It just seems insane to decide to take a much bigger loss by going through foreclosure rather a much smaller hit through partial loan forgiveness. Just tinkering with interest rates won't be enough to prevent home owners who are DEEPLY under water from walking away (they have little incentive to keep making payments).
But maybe I am missing something here.
We're talking short sales where a lender forgives the difference between the sale price and the payoff.
Well, first of all, markets have dramatically slowed down. By the time an overmortgaged seller finally has a bonafide purchaser, it might be too far into the foreclosure process to make it work. These are complex transactions to put together and the VAST MAJORITY of real estate agents HAVE NO CLUE where to begin when they get one of these listings. (I have taught the Short Sale class to Realtors for about 8 years now.)
For a bank, it is strictly a business decision: The bank must try to mitigate losses. They're not required to try to predict future value of a neighborhood. They must focus on returning a profit to their shareholders.
How would they justify mass debt forgiveness to their shareholders? Answer: They can't. They must try to minimize losses and maximize the dollars they can make on the foreclosure and resale.
Now, do I see exceptions to this theory of no mass debt forgiveness?
Yes.
If a bank has reason to believe that the consumer will sue the bank for any number of reasons (predatory lending on the retail origination side for example,) I as a bank loss mitigation officer would try to make that borrower as happy as possible.
Which is why it is crucial for anyone facing foreclosure or a short sale to get legal counsel immediately. Financially distressed? Get free legal aid through the local Bar Association.
If I were a loss mitigation officer at a bank, and I thought that the BROKER who originated the loan on the retail side had violated the broker-lender contract, I would foreclose and then go after the broker to help share in my losses.
One of the schemes is to borrow a bunch of money right before a planned currency devaluation, convert it to USD, wait for the devaluation, convert the USD back to Pesos and pay back the loan for 1/3 of the value.
http://en.wikipedia.org/wiki/1994_econo ... _in_Mexico
On the other hand, one shouldn't ascribe to malice what can be explained by incompetence.