Is there a solution to the mortgage foreclosure crisis?

Yes

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by Diana Howard

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The Mortgage Crisis can be solved, and we are making some progress, but much will depend on cooperation between the Mortgager and the Mortgagee. This crisis will continue unabated until the lenders and investors come to the understanding that they must participate in the cure and not remain aloof on the sidelines.

National Suicide in the Real Estate Market is being caused by a vicious cycle whereby, homeowners even those who can afford a home, find that they are unable to refinance their predatory loans because they have lost so much market value. The mortgage industry's inability to admit their greed and avarice has helped to get us into this mess along with an uneducated and trusting consumer. Now the only way out is for "both" parties to take their medicine.

It seems simple for them to work together, but it isn't. The complication is due to the way in which we allow people to invest in Real Estate. Each home loan may have as many as twenty to thirty different entities invested in that particular mortgage. These passive investors were just as ignorant of the pitfalls involved with the types of fraudulent easy money loans being offered to consumers, as the consumers that took them out. The ultimate mistake was allowing the stock market to be the base for many of these loans. Now there are millions of passive investors involved, that must approve any adjustments or aid given to the homeowners. You can imagine what a log jam that has created.

As for the banks and mortgagors, they are unwilling to admit that they overstepped the bounds of good lending practices. The true villain, as I see it, is the fund managers, bankers who greedy for a profit, saw that market prices were exploding. They gambled and lost, as did the uneducated consumer who dove in without seeing if there was water in the pool.

Not long ago this issue was being discussed by various "superstars of investing" among them Robert Kiyosaki. When asked if the homeowner should be bailed out, he said smugly that he didn't think so, because we shouldn't reward stupidity"; his words, not mine. I don't think that any comment has ever made me more angry. Mr. Kiyosaki did not allude to the complete stupidity of the bankers, pension and investment portfolio fund managers who allowed their investers to become involved with mortgage companies who approved under-qualified buyers and giving them "easy" money; mortgages backed by the volatile stock market. As always, they were merely hoping to make a profit on the public's ignorance. There needs to be accountability, especially in the professional.

There are two key components to solving the mortgage crisis that are being totally ignored by the banks. These components are "qualified" investors and by that I mean "experienced". These are the single family home investors who have not yielded to easy money, and have several successful rental units, and want to purchase more in this downturn. The banks should be bending over backwards to lend them money. Instead they have made it virtually impossible for them to make even the smallest profit, by adding fees and higher interest rates, and as a result no one is buying. The mortgage meltdown has created a demand for single family rental units and there is very little supply. Banks don't want to be landlords, so they would cooperate with the small single family home investor, we would move inventory and provide homes for displaced homeowners. Most of these evictees, who are being foreclosed on, have lots of furniture and actually do have some money for rent. So, instead of struggling to pay a $3000 mortgage, they rent a home for $1850.00 to $2200.00. This group is not out looking for apartments. In fact, the apartment industry is suffering.

The second and most important thing to understand is that Fannie Mae and Freddie Mac will not be the answer. Refinancing is not going to help either, because in order to refinance, hard cash money must change hands, and that forces the Federal Reserve to print more dollars, which is never a good thing for the economy. In addition as mentioned before, home values are declining and refinance is impossible.

The key to this issue is in the paper that is already in existence. Let's say that a homeowner's loan payment has gone up from $1600 per month to $2000 per month. He can't refinance, because values have dropped, and no one will give him a new loan. The only alternative is one that has been suggested by the Federal Reserve yet largely ignored by the banks and their investors... Loan Modification. The Federal Reserve has even suggested lowering the mortgage balances to current home values.

To modify a loan, all you need is the consent of the investor,(which is like obtaining permission from the Pope) and a new piece of paper to rewrite the loan. The balance of the loan or the interest or both may be adjusted. If banks would do this, some type of payment will continue to come in, and they would not have to pay fees for lawyers or back taxes or even vandalism. No hard cash is paid out in addition to the "on paper" loss. The investment depreciates slightly, but may recover over time, because with less supply on the market, demand will rise and so will prices. The turnover could occur in as little as five years, because most people move within that time period. Investors in the stock market have been living with this volatility for years, and it's time that the Mortage Investors understand that sometimes, you have to roll with the punches and take your lumps with the rest of us.

Nobody is surprised when they lose value in a stock, because some CEO mismanaged the company or the economy becomes weak. You don't see stock investors running to the government demanding that it print more money, so they get full value for their investment. Therefore, in this crisis, those investing in these loans need to scale down their expectations, or get out of investing altogether. When this kind investment is not paying as it should, you don't bail and lose everything, you change the terms and stop the bleed. It is certainly better than the mess we're dealing with now.

However, there is a solution;

Every home that is currently in a Short Sale will lose an average of thirty to forty thousand dollars in hard cash money. A Short Sale is a sale where the banker allows the mortgagee to sell the property for less than the value of the loan. The only real savings here over foreclosure is that the bank does not have to pay out fees for the process, and the Mortgagee may still be making payments. The loss from this kind of sale is not just a loss on paper, for the bank has to pay the closing costs and they receive less than the face value of the loan. In essence, like the homeowner who is foreclosed on, the Mortgage Investor will be "upside down" as well.

If the loan is an older loan, the Investor will have recovered much of his initial investment, and he can afford to be unreasonable. However, in this mortgage crisis, most of the defaults are loans that have not been in effect for very long. That being the case, why not simply offer a lower interest rate or even lower the loan balance to the person already paying the loan. If a bank Short Sells a property, it must lower the loan balance for a new buyer, or lose the cash for good as they are paid from another mortgager; all the while incurring the cost of Realtors and Title Company fees. As of this writing FHA is authorized to offer short refinances to any qualified Buyer who's bank has approved him for a short sale. If they continue to do so, many will be able to stay in their homes that would otherwise lose them.

Short Sales are poisen to Buyers and Buyer's Agents avoid them like the plague, so a "Short Refi could be the answer we are looking for. If the mortgagee can't short sale the property, then the bank will repossess. In this scenario the average loss to the investor or bank is $70,000 to $100,000 most of which is hard cash. Months go by without payments being made, and then there is a period after the filing, wherein the mortgagee may recover his property and pay any back payments. If that does not occur, the forclosure procedure creates further actual cash debt to the bank and its investors. In this case, only the lawyers get rich. The bank has to hire attorneys to service these foreclosures, and if the property does not sell at the court auction, then they must list with a Realtor or turn it over to an auction house and spend even more money. Both of these scenarios can be avoided altogether by offering a Loan Modification of some kind to help the homeowner keep his home. If your bank has refused to do this, call different mortgage companies until you find one that is familiar with these "Short Refi's"

Loan modifications are the best way to keep the money coming in and the properties from flooding the market and further lowering values. This would be helpful to both homeowner and investor alike. Even though less money would come in over time, at least some profit and income would be spared. I believe, that over time the Mortgage Investor will certainly net more than he is going to realize in the present circumstances. Loan Modification will work because the Investor or Banker is not coming out of his pocket with cash,and no bail out "funny money" has to be produced by the government, so the dollar will not be further weakened... at least not by the Mortgage Crisis

The public needs to be educated, but so does the Investor. By ignoring this solution for so long we now have people who are losing their homes, not because their loans are resetting, but because we have weakened the dollar by baling out the bankers. Jobs are being lost and businesses are going under because of the stupidity and irresponsibility of those who should have known better.

Professionals must be held to a higher standard. Offering easy money was a gamble that didn't pay off. Whenever you invest, you inevitably gamble. Banking in and of itself is also gamble. The problem is that they are not gambling with their own money. The banks gamble with the public's money. The are betting that a project or country that they lend to is able to pay it back. If the Bank doesn't "qualify" them properly, they lose "your" money. When we deposit our money in the bank, we are relying on the bank, not to use it "stupidly". When they do and we all lose, our tax dollars should not have to bail them out, while the average non-elitist taxpayer is prevented from getting a home. Since all lending is now "credit score" driven, those who have defaulted are hopelessly out of the picture and credit scores are not always a good indication of reliability. My daughter's credit score is 850 and she hasn't even got a job.

For all of you who hold these investments or are a homeowner, you need to write not only your Congressman, but whoever is managing this investment for you. It isn't enought that FHA is offering these. The Government bailed out the Investors and it is time for them to demand something in return; namely that they offer "Short Refi's" to their clients and turn this market around. It is infinitely better to lose a small amount of value, and keep the cash flow going, than to lose your entire investment. Wake up, and help keep people in their homes, you'll be helping yourself if you do.

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