Cutting mortgage principal could ease crisis

[brewer12345]

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.

 

[Nords]

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!!

 

[Brat]

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.

 

[twaddle]

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.

 

[Brat]

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.

 

[twaddle]

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.

 

[barbarus]

Dr.B's scheme will work brilliantly.


As long as the bowwowers' wages double in the next few years.

 

[megacorp-firee]

BB has lost his friggin mind. ... and that's all I'm gonna say ... otherwise this would end up being a 2 page rant.

 

[Notmuchlonger]

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.

 

[Brat]

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.

 

[Texas Proud]

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...

 

[barbarus]

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?

 

[mathjak107]

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

 

[chinaco]

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).

 

[brewer12345]

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.

 

[ziggy29]

Makes me want to go out and take a 100% cash out refi on this paid-off home. This being Texas, though, that's not allowed.

I'm tired of the responsible always bailing out the irresponsible through Uncle Sam.

Any direct bailouts should be placed as a lien on the property, payable when the property sells, assuming there is equity remaining after paying off the mortgage(s).

 

[cute fuzzy bunny]

they are raising prices tremendously

One of those things I never understood completely. "We're not sure if you're going to be able to make your payments...so we're going to make them bigger"

 

[Nords]

One of those things I never understood completely. "We're not sure if you're going to be able to make your payments...so we're going to make them bigger"

Well, that may be with some subprime/predatory lenders on delinquent clients, but Brewer's referring to the premiums that insurance companies charge on mortgages to insure them for repackaging to investors.

Buffett sure seems to be training a new generation of insurance analysts. The next few years of premiums in this industry are going to be like 2006 was for property-damage premiums or 2002 for junk bonds...

 

[ziggy29]

Buffett sure seems to be training a new generation of insurance analysts. The next few years of premiums in this industry are going to be like 2006 was for property-damage premiums or 2002 for junk bonds...

Buffett sure knows how to capitalize on periods where premiums are very high and security is a major concern. A rock-solid AAA rating and a ridiculous mountain of cash can certainly make you the one scared individuals and institutions want to do business with.

 

[Retire Soon]

I disagree with Bernanke's suggestion that lenders should forgive a portion of homeowners' loans. I also think Ben is having trouble sleeping at night, because he knows full well just how serious the condition of our economy is in right now. Sure, he is very desperate, but his apparent pessimism should be a clue to us all that some very ugly things are about to happen to our economy.

 

[ziggy29]

I disagree with Bernanke's suggestion that lenders should forgive a portion of homeowners' loans. I also think Ben is having trouble sleeping at night, because he knows full well just how serious the condition of our economy is in right now. Sure, he is very desperate, but his apparent pessimism should be a clue to us all that some very ugly things are about to happen to our economy.

I think Ben needs to shut up for a while. He didn't create this problem -- I think lack of institutional/regulatory control in the banking sector plus Greenspan's easy money are largely to blame for that -- but unlike Easy Al, Helicopter Ben doesn't have the street cred to calm the markets. Even when he made mistakes, the markets were calmed with Greenspan at the helm, but any time Bernanke speaks, the market panics.

I tend to think Bernanke is an underpromise-and-overdeliver kind of guy, someone who doesn't want to give false hope. As a result I think he exudes a pessimism the markets don't want to hear. He seems to fuel the fires of uncertainty which is the worst fuel to throw at financial markets.

 

[Retire Soon]

I have to agree with the President of the Mortgage Bankers Association in his response to Bernanke's Proposal to cut the principal for homeowners facing foreclosure, "It is not a casual thing to disrupt an existing legal contract, as those contracts are the basis on which our market economy is based. That said, there is an incentive for lenders, borrowers and investors to work together to maximize the value of the relationship."

Sign Up

 

[tryan]

Scott Burns says the crisis is overblown ...

Foreclosure 'crisis' is overblown - MSN Money