An opinion seen at HW:
Here’s a familiar scenario: Jane and John live in a nice house and pay their mortgage on time every month. Their outstanding loan amount is higher than the home’s market value, making them underwater borrowers.
They wish they could move into a bigger house in a better neighborhood, but realize they’re stuck because they can’t sell for what they owe — let alone turn a profit into a down payment.
The most responsible type of borrower today is jaded, to say the least. And they’re exactly the borrowers we should be helping. Banks need to create lending programs for perfect-credit borrowers who are underwater and held hostage by their current mortgage. Of course, it’s not as easy as all that — but it is doable — and is exactly the kind of program that the recent attorneys general national mortgage settlement should inspire.
Why not help the creditworthy homeowner by using some of the recent attorneys general mortgage servicing settlement funds to pay the difference between market value and unpaid balance for those borrowers who wish to move?
Let’s actively invite responsible owner-occupant homeowners into the market — and stop catering to whiners and walk-aways (where all of the focus is today).
What’s more, if banks take an active (rather than a passive) role to get the industry moving, they’ll find myriad ways to turn problems into profits.
This isn’t much different than rolling your last few car payments into a new lease. The biggest pool of potential buyers, the market’s biggest catalyst, is people who are stuck in a house they’d rather leave. They can’t or won’t take a loss and bring money to the table in order to sell — money they’d rather invest in a new home.
According to the National Association of Realtors, 63% of recent homebuyers were repeat or move-up buyers, and 60% of buyers were first-time sellers. Simply put, the largest pool of potential homebuyers consists of those who already own a house.
All of today’s existing assistance programs cater to the person who is delinquent or calculated to be at risk of imminent default. And the irony is, the root of that person’s problems is deeper than any of our programs can solve.
Forgiving principal on a loan in default won’t solve the problem. But what would a stand-up homeowner say if you removed their shackles and helped them move? I’m picturing a dance, cartwheels and exclamations of joy.
This is a giant population of people you can count on, who can pay a bigger bill, who would love to pay a larger mortgage if it meant they lived in the home of their dreams.
This is how it looks: The Big Bad Bank turns into The Big Generous Community Institution, approaches Mr. 850 Credit Score and says, “We have a once in a lifetime opportunity for you. Because you have willingness to repay, because we see how diligent you’ve been in consistently paying your mortgage, because we agree that it’s awful to be underwater, we want to make you a deal. We’ll help you get out of the house you’re in and into a new house with a new loan from our bank. We’ll help you take advantage of today’s low interest rates and depressed pricing. We want to reward good values.” Now the bank is a good guy, not the enemy. A bank for life.
It could even be more far-reaching. Banks could partner up with homebuilders and give preferential treatment to current customers who would consider new construction. Or, what if the bank took the REO and short sales already on its books and turned them from losers into special opportunities for current, paying customers?
Part of the inventory problem today is that the biggest pool of buyers is prohibited from purchasing. Let’s drive the economy with new homes, with people who want to spend money, who have good jobs and good credit. Let’s shift the large percentage of housing inventory from investors to owner-occupants — who can and will improve the neighborhoods they live in.
So far in 2012, investors have purchased more than 40% of the REO sold via OfferSubmission and more than 55% of transactions were closed with cash. These telling numbers suggest that the liquidation strategy of bank-owned properties is weighted heavily toward moving volume and less about creating value for shareholders and taxpayers alike.
Those who can turn the housing economy around are owner-occupant buyers leveraging traditional financing options — with a twist. We need to embrace the homeowners who pay their bills, and create the programs that turn this ongoing crisis into a once-in-a-lifetime opportunity.
Jasgur is president of Woodward Asset Capital.
I suggested this years ago on CR. Home builders would operate just like car dealers have for years, rolling the underwater amount into the new loan.
Great idea that should have been in place already. Why are investors portrayed negatively in this market. Who is their end-user in a rental or buyer in a traditional sale? I would hate to think where we would be if there weren’t private funds available to fix up many of these homes that were in inhabitable condition. No comment on those rehabbers that are doing less than quality work.
Good Idea, The basic issue is why the economy cannot get going, most of the current potential move up home buyers “CAN’T!!!” because they are stuck.
You have to solve the underwater home owners dilemma before we will move forward IMO
(one way or the other).
I don’t think there has ever been an economy recovery where housing did not lead, expecting something different to happen this time is not being very realistic.
tj,
It’s too bad that many solutions offered up on blogs went unheard, or not acted upon.
Thinking of the eminent domain idea, how about if governments prosecute banks who don’t promptly foreclose?
Letting deadbeats live for free for years is bad all around. Give the defaulters their due process, which is California is 111 days after NOD is filed to cure your problem. Otherwise, you’re out, with a pre-designated $1,000 cash-for-keys.
If banks deliberately postpone, then they should pay a pre-designated X amount for every month.
Kamala should get on this train.
Arguimg for quicker evictions is pissing into the wind.
Just operating within the existing law though – not going to evict anyone without due process.
Agreed, given the current environment of catering to defaulters it sounds unlikely, but look how the tide might be turning elsewhere.
In the same town where they are pondering the seizing of mortgages through eminent domain (San Bernardino) they declared yesterday that they will likely be filing for BK.
Over-debtedness is rearing its head, and could cause drastic changes elsewhere. It won’t be the feds who turn on the banks, because it was their cozy relationship that has prolonged this mess.
It would take someone like Kamala to do it.
The issue with San Bernardino, is they set the current budget when the housing boom was in full glory !!
They need to reset their budgets to pre-Housing bubble levels or get housing prices back to bubble levels….
Coming soon to a city near you!
Same thing will be playing out at the state and national level soon.
Kamala / politicians would sooner ban foreclosures altogether. The banks / financial industry must dribble out foreclosures and take losses at a rate that keeps their capital ratios in compliance. Homedebtors love free rent. Who with juice is gonna successfully advocate in opposition?
We could start a revolution.
Or join the current revolutionaries, if you don’t mind how they look:
http://politicalhumor.about.com/library/bl-tea-party-signs.htm
Haha! Nature is funny!
The cities of California are pretty much all in trouble. The beach community I left is a perfect example of how they got in trouble. Turns out the old city manager had a clause in his contract where he would get the same percentage raise as the staff on a yearly basis. The problem? The city manager was the negotiator for those raises. I would bet most city managers have the same clause in their contracts.
And pay a commission on both sides!
Can’t buy for this reason I suspect. Nothing on the market.
If an underwater owner’s negative equity is “rolled” into a new loan, wouldn’t that make the cost of housing go higher because a seller can operate under the guise that he/she can sell a home to underwater prospects much more easily?
What would new bloated loans due to the pricing of other homes in the neighborhood? The comparables?
First – I agree that this could ‘lube’ the home market, but can I confirm what you are saying/suggesting so I understand correctly:
FICO-850 Home Owner purchased a house in 2005.
Purchase Price (2005): 700K
Current Value: 600K (under water 100K)
Plus – if they could sell their house for 700K (amount they originally paid, they would get back their assumed 20% down payment of $140K they could put towards a move up house). It has been 7 years and they are theoretically ready to move-up.
FICO-850 Home Owner now offered a ‘deal’ to a new house:
Purchase Price (2012): 900K
Down Payment: 180K
* If bank buys back house #1 for $700 (and effectively rolls the borrowers $140K deposit from house #1 to house #2 plus an additional 40K from buyer. Bank now makes a larger profit on the loan in house #2 (ignoring all interest rate differences), and they have a $100K loss on house #1. Is that approximately what we are saying here?
– At this point it seems to me that the banks, who are in the for-profit business (and ignoring any govnt subsidies) would be the loser here as
a) the incremental difference in a higher loan on house #2 (esp. at a low interest rate) would not cover the loss on house #1 in the short term which banks probably want
b) Personally, I don’t see any long-term bank loyalty from customers in this ‘internet age’ (i.e., no such thing IMO as ‘bank for life’). Maybe in the past assuming a move up buyer moved every 5-7 years a bank could count on the repeat business, but i don’t see that any more.
– I could see this happening with with bank owned properties high level sort of like a musical chairs situation, but again I don’t see how the bank off-sets their one time large loss (if the home owner is not taking it in the shorts, then the bank is???)
I do get that the inventory is low. There are a LOT of people stuck in their homes and want to move. People are sitting on properties and probably would prefer to sell. There are positive economic factors that could juice up the economy (realtor fees, bank mortgages, moving companies, home improvement stores, furniture stores, painters, etc.)
But beyond that, guess I am not really clear what you are saying here as how this makes financial sense for the banks. Thanks.