Mortgage Modification System threatens Housing

[Kdillard]

http://247wallst.com/2009/05/26/the-failure-of-the-mortgage-modification-system-threatens-housing/



The theory was simple and elegant. By offering homeowners who could not afford their monthly mortgage costs lower monthly payments, people could be able to stay in their homes. That would lower the US default and foreclosure rate, in turn building a foundation under the housing market.

The programs are simple, but they appear to be a failure.

A report about to be issued by credit rating agency Fitch says that a large number of the people who get better terms for their monthly payments still walk away from their homes. According to The Wall Street Journal, “Fitch said a conservative projection was that between 65% and 75% of modified subprime loans will fall 60-days or more delinquent within 12 months of the loan change.” That makes the problem so severe that any effort to turn home prices back in the right direction is likely to fail.

Fitch believes that a major reason people still default on their home loans is that their mortgages are “underwater”. A homeowner whose home loan is worth 150% of the value of his house may believe that he has no chance to ever recoup the equity he has invested. He may be able to stay in his residence but over time it becomes more evident that there is no financial advantage to that.

The other, and perhaps more probable cause of defaults among people who have secured better payment terms, is unemployment and under-employment. As the non-farm unemployment goes up by more than 500,000 people a month and businesses cut more people from full-time to part-time to save money, the ability of many homeowners to make mortgage payments disappears even if they desperately want to stay in their houses.

Banks do not want to cut the principal value of mortgages because it effects their balance sheets. That means that the issue of underwater mortgages may not be solved. And, the more serious issue, unemployment, shows no sign of moving in a direction that will help the housing market this year, in 2010, or even 2011.

Douglas A. McIntyre




I really don't know how reliable this article is but it does make a good point about the reason why people even if they get better terms walk away due to unemployment or underemployment.

[PurityOfEssence]

1. Another irritating and frightening specter:

While having a nice chat with inlaws at a barbecue, I heard of one of my brother-in-law's friend's plans. He's under water with his note on his house in Las Vegas, while seemingly surrounded with bank-owned houses of similar value that are on the market for about a quarter of the cost. He can easily afford the payment as it is, but apparently he's thinking of buying one of them, then simply walking away from his current home. He's willing to take the hit on his credit for the short-term gain of paying far less.

Pardon the huffy moralizing, but this sucks. Not only will it cause more fallout in the housing market by yet another default, it could be the harbinger of a scofflaw trend.

It's wrong. He took out a note with the honor-bound premise that he'd repay it within the terms of the agreement. To deliberately sleaze out of the obligation is just plain wrong.

What if this kind of thing becomes widespread? This is a guy with a medical practice and a fairly stable and decent income; he can take a hit to his credit for awhile and come out quite a bit better for this little stunt, but if others do it (and I'd be surprised if it wasn't happening already) the rest of us will be left holding the bag.

[Kdillard]

2. Yep people like that piss me off. There should be some way to stop that from happening.

[depakid]

4. Not sure we can reasonably expect individuals to behave any differently than the banksters

and fraudsters- particularly since, unlike the Savings & Loan Crisis, the Justice Department seems to have little (or no) interest in holding anyone accountable for violations of any of a number of federal statutes.

[Phoebe Loosinhouse]

5. Your brother-in-law's friend has one other option

He could buy the much lower house, move in and rent out the original house. He would still be underwater, but at least a portion of the loss would be covered by the rent. Taking into account rent, maintenance, expenses, depreciation, etc. it's possible he might come out closer to even and not have to go through foreclosure and the credit ding.

[depakid]

3. Right to rent together with this plan and a bankruptcy cramdown would have been the way to go

But seeing as how a good third of the Democrats in the Senate are bought and paid for, it's too much to ask that we pass responsible and effective public policy.

Just goes to show that in certain areas, Nader was right- there's not a dime's worth of difference between the parties.