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Old 03-04-2008, 03:25 PM   #21
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If you cut the principal, do you still pass along a poor credit report to the various agencies? Say, report that the borrower caused X amount of bad debt to the bank.......

If in five or ten years real estate has reversed and the home is now nicely valued ref the original mortgage principal amount, would the borrower owe some or all of that to the bank or would it simply result in extra profit to the borrower when he sells?
I'd imagine that your credit report would take a hit, especially since the borrower was probably late already. I'd also imgine that any profit would revert to the borrower. I have heard the idea of "negative equity certificates" floated, but I doubt we will see it come to pass. Frankly, the bank will probably hope the borrower straightens up and refis to someone else's balance sheet.
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Old 03-04-2008, 03:42 PM   #22
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Really, this is about pragmatism. Imagine you are a bank holding a mortgage that is now at 120% LTV. Your borrower gets a couple months late on t heir paments, but they live in the house and want to stay there. You could choose one of two paths:

1) Spend months and thousands of dollars foreclosing, wind up with a trashed house that sits empty for more months, helps depress prices of nearby homes (some of which you hold the mortgage on), and finally sell the house for maybe half of what you were owed (if you are lucky). During all that time, you get no interest on the loan.

2) Contact the borrower, make sure they want to stay in the house and are willing to keep paying, and cut them a deal. Maybe you reduce the loan amount by 25% and lower the interest rate by 2%.

Which one does less damage to the bank?
All that makes perfect sense. And, I'm sure the banks see it that way, too--they want to do everything they can to lose as little money as possible in the current situation. So (forgive my ignorance)--what business is this of Mr Bernanke? Does he believe that he and the Fed are smarter than the banks, and that they haven't thought of this already?
Maybe the FDIC insurance or other regulatory issues put this into the Fed's area of interest. But, somehow when the Fed gets involved with "helping,' the next thing that happens is that hand of the feds slips into the pocket of those who lived responsibly. (Or sometimes they don't use their hand--or a pocket).
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Old 03-04-2008, 03:46 PM   #23
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All that makes perfect sense. And, I'm sure the banks see it that way, too--they want to do everything they can to lose as little money as possible in the current situation. So (forgive my ignorance)--what business is this of Mr Bernanke? Does he believe that he and the Fed are smarter than the banks, and that they haven't thought of this already?
Maybe the FDIC insurance or other regulatory issues put this into the Fed's area of interest. But, somehow when the Fed gets involved with "helping,' the next thing that happens is that hand of the feds slips into the pocket of those who lived responsibly. (Or sometimes they don't use their hand--or a pocket).
Ummm, the Fed regulates the banks, dontchaknow. That makes it their beat.
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Old 03-04-2008, 03:56 PM   #24
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I will float my own proposal: instead of writing off a write down the bank should take an equity position in the house equal to the reduction. When it is sold the mortgage is paid off and the balance is shared with the home owner and the bank.
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Old 03-04-2008, 04:10 PM   #25
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Its finally true. We're suckers for avoiding unnecessary risk and making financially prudent decisions.
I dunno about that -- I think a lot of us have benefited from other people's unwise borrowing. For example, the speculation caused my buy-and-hold rental property to shoot up in price, at which point I changed course and sold it to lock in gains. So all those folks who ran up the market did me a favor, in some sense. My having saved and spent wisely didn't make me a patsy -- it put me in a position to take advantage of circumstances when they presented themselves.

Most of the people on this board are the same -- their prudence has bought themsomething intangible but very valuable -- the ability to govern their circumstances vs their circumstances governing them.

This may be more than the debt-strangled folks trying to save their homes will ever be able to say.

Another way I'm thinking about it -- if the folks struggling to save their homes are getting such a windfall, would I trade places with them to get the same? Hell, no!

I think brewer's point about minimizing damage to the bank works for us as individuals, too. If we let everyone go down in flames our neighborhoods will suffer, our property values will sink, etc. etc., and that's not good for any of us. So I hope a lot of these people do get saved.

So long as I'm warm and dry and well-fed I'm resolved not to spend a lot of time worrying about the prodigal son.
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Old 03-04-2008, 04:25 PM   #26
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I will float my own proposal: instead of writing off a write down the bank should take an equity position in the house equal to the reduction. When it is sold the mortgage is paid off and the balance is shared with the home owner and the bank.
This is the "negative equity certificate" proposal I mentioned. I think its a good idea, but probably won't fly.
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Old 03-04-2008, 05:31 PM   #27
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Really, this is about pragmatism.
2) Contact the borrower, make sure they want to stay in the house and are willing to keep paying, and cut them a deal. Maybe you reduce the loan amount by 25% and lower the interest rate by 2%.
Which one does less damage to the bank?
Pragmatic? I can be pragmatic.

So all I should do is skip a couple mortgage payments and then wait for the credit union to offer me a lower interest rate? Heck, I wouldn't even be greedy about reducing the balance.

Beats the heck out of paying for a refinancing!!
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Old 03-04-2008, 06:19 PM   #28
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In my community affordable housing has been an issue. It stunned me that some thought that the buyer should be obligated to sell a home they purchased through the program only to others who qualified for affordable housing. That seemed counter-productive to me. I suggested that the home owner be able to sell to anyone but that community housing authority receive a % of any gain on the house when sold and use that to fund more affordable houses.

Eyes widened.

I have no idea what happened, but it seemed like such a no-brainer.
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Old 03-04-2008, 06:34 PM   #29
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In my community affordable housing has been an issue. It stunned me that some thought that the buyer should be obligated to sell a home they purchased through the program only to others who qualified for affordable housing. That seemed counter-productive to me. I suggested that the home owner be able to sell to anyone but that community housing authority receive a % of any gain on the house when sold and use that to fund more affordable houses.
So, the original owner of the subsidized house would get part of the gain (how much?) and the city would get the other part? So neither would have enough gain to buy another market-priced property, right?

My BIL is a professor, and that gets him subsidized off-campus housing. They give him some formula-derived gain if he sells. He's unhappy during housing booms, but he's very happy during housing busts.
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Old 03-04-2008, 07:49 PM   #30
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Who knows what % respects the interests of the parties, but to limit subsequent purchasers only to those who qualify for 'affordable housing' is dumb.

I asked, 'Who in this room would buy a home with such a restrictive covenant?' No answers. Having rental housing with that restriction can work, but not homes you sell.
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Old 03-04-2008, 07:58 PM   #31
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I asked, 'Who in this room would buy a home with such a restrictive covenant?' No answers. Having rental housing with that restriction can work, but not homes you sell.
Hmm, try rephrasing the question as "who would buy a home guaranteed not to lose money?" Although, it might be better to ask it next year.

If the target market for the home is, say, firefighters, and you tell them they can buy a $500,000 home for $100,000 and they get a guaranteed appreciation of CPI+2%, I think you'd get some takers.

As I understand it, that's basically how the university-subsidized housing works. And it seems to be considered a perk by the profs.
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Old 03-04-2008, 09:40 PM   #32
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Dr.B's scheme will work brilliantly.


As long as the bowwowers' wages double in the next few years.
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Old 03-04-2008, 10:46 PM   #33
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BB has lost his friggin mind. ... and that's all I'm gonna say ... otherwise this would end up being a 2 page rant.
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Old 03-04-2008, 10:53 PM   #34
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BB has lost his friggin mind. ... and that's all I'm gonna say ... otherwise this would end up being a 2 page rant.
Ya why get worked up over stuff you have no control over.
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Old 03-04-2008, 11:18 PM   #35
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IMHO nothing will happen until FDIC picks off a couple med sized banks and starts sniffing around a large one.

The folks who liquidated the holdings of S&Ls will push the ball along.
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Old 03-04-2008, 11:33 PM   #36
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The HUGH problem with a lot of this hot wind going around is that the banks don't 'own' the mortgages... most of them are owned by trusts... and they own a piece of the trust...

And the trust more than likely does not allow the trustee to 'forgive' or 'reduce' principal and/or interest.... their remedy is to foreclose... nothing else... (some have IIRC, the ability to do this for up to 5% of the loans... not enough)...

SO, you have a bunch of trustees who are bound by the trust documents to follow what was written unless they can get ALL bondholders to agree to change the trust... not likely with most of them as they have billions outstanding and all it takes is ONE bondholder to be a holdout...

When I was dealing with other asset backed securities, there was usually ONE small holder who did not want to do anything HOPING that one of the big guys would buy them out at a premium... on one of mine, there was a $2 mill holder on a $500 mill note... would not budge... and nobody wanted to reward him by buying him out...

And with mortgage backs... there are IOs and POs... which have the opposite investment, so they will never agree...
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Old 03-05-2008, 12:00 AM   #37
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The HUGH problem with a lot of this hot wind going around is that the banks don't 'own' the mortgages... most of them are owned by trusts... and they own a piece of the trust...

And the trust more than likely does not allow the trustee to 'forgive' or 'reduce' principal and/or interest.... their remedy is to foreclose... nothing else... (some have IIRC, the ability to do this for up to 5% of the loans... not enough)...

SO, you have a bunch of trustees who are bound by the trust documents to follow what was written unless they can get ALL bondholders to agree to change the trust... not likely with most of them as they have billions outstanding and all it takes is ONE bondholder to be a holdout...

When I was dealing with other asset backed securities, there was usually ONE small holder who did not want to do anything HOPING that one of the big guys would buy them out at a premium... on one of mine, there was a $2 mill holder on a $500 mill note... would not budge... and nobody wanted to reward him by buying him out...

And with mortgage backs... there are IOs and POs... which have the opposite investment, so they will never agree...
Unless you change the law to allow the trustee to act as the representative for all the real owners of the debt even without their knowledge or consent and hold the trustee harmless from any suits those down the line might bring.

Too bad isn't it?
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Old 03-05-2008, 03:51 AM   #38
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right now there are 5 million homes for sale in the country, a full 20% are in some stage of default. if those 1 million homes are dumped in foreclosure sales the rest of our homes may take a huge hit in value. i guess there is something in it for all of us afterall
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Old 03-05-2008, 04:22 AM   #39
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At first glance, it would appear that cutting the interest rate on the mortgage back would be a better approach for the banks.

However, since people are choosing to walk away from the deal because the house is worth less is a problem.

Ben B probably is thinking the lender would be better-off keeping the mortgage instead of getting the house back (which is worth less anyway). THe lender would just have to try to sell it.

It stinks from a consumer responsibility perspective. But he is probably correct from a business perspective. The bank does not want to own and resell all of those houses (in a declining market).

I suspect that banks will require much higher down payments from now on. Plus, they may require a different type of PMI. PMI rates will likely be higher and better protect the lender.

It would be interesting if the companies selling the PMI (probably the banks) began to change their underwriting practices. People who default on the loan are rated and charge significantly higher PMI rates. They have the information in a database. Example: if you default and buy a home in the next 10-15 years... You will pay a PMI of 200% compared to the person that has not defaulted. Banks typically adjust for the risk in the interest rate, but they may shift a bit more of the risk to an insurance pool instead.

I suspect there will be some new regulations or laws that force more consumer responsibility (can't just walk away free and clear if you have assets).
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Old 03-05-2008, 07:21 AM   #40
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Plus, they may require a different type of PMI. PMI rates will likely be higher and better protect the lender.

It would be interesting if the companies selling the PMI (probably the banks) began to change their underwriting practices.
Funnily enough, this has already started to happen in earnest. Mortgage insurers are making large revisions in what type of loan they will insure, taking much less risk on new business. At the same time, they are raising prices tremendously. Despite these moves, they are all seeing a huge uptick in their business because piggyback loans are gone and they are essentially the only game in town if you don't have 20% to put down. The situtation reminds me an awful lot of the catatsrophe reinsurance market after the devastation of the 2005 hurricanes.
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