Deciphering the “global market crisis” is like the mensa version of herding cats. However, we do know that real estate foreclosures are wreaking havoc that goes far beyond your neighborhood. So it won’t knock you off your chair when you read that when it comes to stopping foreclosures, Ben Bernanke has this to say:
“More needs to be done.”
Oh.
As someone who has had the repeated and unenviable task of trying to get hurting borrowers and their lenders together all year, I have this to say:
Attention Lenders: Talk to your home owners. Now.
We know by now that when push comes to shove, home owners will walk away. In many cases there isn’t a whole lot of pushing and shoving, they just do it, but there are lots of well-intentioned, honorable folks who want to do the right thing. Sadly, lenders are not making it easy.
What is the right thing? Well, it’s up to you, but imagine this:
You loan me $100,000 to buy a house and I put that house up as collateral. We agree on some payment structure and off we go. Some time later I lose my ability to make the agreed upon payment. It’s only been a couple of years so I still owe you pretty close to the original $100k.
I’m a decent guy and when I make a deal, my word is my bond. Still, can’t get blood from a stone, so we are at a crossroads.
I come to you: “Hey, remember our deal? I meant to keep my promise, and I really want to, but I just don’t have the money to make those payments. If I never give you another penny, you can take my house. Of course, there will be costs involved in doing that and lots of legal stuff, but that is your right of recourse. Oh yeah, I would sell the thing to pay you back, but it’s only worth $70,000 now, and of course there are costs involved there, too. When it’s over I would probably only be able to give you $60,000 or $65,000, tops.”
Things are not looking good for either of us at this point. You can settle for 60-65% of the hard-earned dough you shelled out, or you can foreclose (and hope I leave the place in shape). Then you’ll need to babysit the house while you wait for it to sell, pay for utilities, and so on. Let’s say you’re able to get the amount I might sold it for, you might end up with 50-55% of your money in the end. Ouch.
And me? My credit doesn’t look so good anymore and I need to find a new place to stay. So much for the American Dream, I’ll probably rent. Ouch again.
But wait! Rewind.
What if instead we sit down at the kitchen table with a legal pad and scratch out a new deal?
Loan modification
We’re both losers if you foreclose, so maybe we can put our heads together. Maybe you can lower the principle balance, or the interest rate, or extend the term of the loan, or a combination of all of those – all of which would reduce my monthly payments. Lowering the principle balance might sound “unfair”, but it would increase my equity and make walking away less attractive.
As Mr. Fed said:
Principal write-downs may need to be part of the toolkit that servicers use to achieve sustainable mortgage modifications…
We both have stakes in the game that need to be considered. If I lose, you lose. Remember, I can walk away. Please don’t tempt me!
You get the point. If you and I get it, what’s going on? I am here to tell you that communicating with lenders on this topic is extremely difficult and frustrating. I won’t go into detail today, but it’s bad and needs to get better on their end and fast. The longer it takes, the more likely the borrowers are to get fed up and give up and yes, walk away.
Let’s stop herding cats and have a seat at the kitchen table.
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This is one serious issue that should be taken cared of immediately and objectively.
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