This headline caught my attention this morning:
Ten months ago President Obama announced a $75 billion program to keep as many as four million Americans in their homes by persuading banks to renegotiate their mortgages. Lenders have accepted more than one million applications and cut three-month trial deals with 759,000 homeowners. But they have converted just 31,000 of those to the permanent new mortgages that are the plan’s goal.
It’s hard to fathom how many people are battling or have succumbed their life’s savings (their home) to foreclosure. In the third quarter of this year, 937,840 families received a foreclosure notice. (up 23% over the same period in 2008.)
It is important for me to state this fact– I don’t know a single person in which a bank has permanently helped during this housing crisis. They have done some short-term things. But every person I know, including ourselves, who has needed their bank to re-negotiate or process a short sale, has eventually had to accept foreclosure.
The government bailed the banks out, they’ve given them significant incentives, and yet they take the governments money– money clearly given to help re-negotiate loans– and just accept it as profit. Here’s another quote from the New York Times article:
The servicing companies make money either way. The Obama program pays them $1,000 for each loan modified, and another $1,000 per year for three more years if the borrower avoids foreclosure. On the other hand, the companies make large sums charging late and legal fees on overdue mortgage payments, and sometimes it is cheaper to foreclose than to cut the mortgage payment. link
Simply put, if your home is underwater (you owe more than it is worth on the market) and you need your bank to help you there is nothing they are going to do. They are going to stall, hem, haw, and outlast you. They know, relying that you are an honest person, that you’ll pay fines to try to keep your home but eventually you’ll get tired of the process and accept foreclosure. At least that is the banks great hope.
Maybe it isn’t always that way? Certainly, there are enough short sales going through to fuel the market and keep people’s hopes up. But for every person I know selling their house who has tried a short sale, it is merely a holding pattern– a glimmer of hope to hold on to– on the path of accepting the humiliation of foreclosure.
Bottom line, why is this happening? The banks make more money when you foreclose than if they do a short sale or modify your loan. It is in their best interest that you foreclose! The nature of how loans were created the entire Bush administration was that a loan was generated on a house, then the banks commoditized the loans and sold them off as securities. (Something like a bond) Then they hired servicing companies to make sure you paid your mortgange and that the investors got money.
Then the bank took out bets (credit default swaps) against the people they lended to. That’d be you and me. Read this little article about a 19th century confidence scam, it’ll sound pretty familiar to anyone who has bought a house! Don’t think it is possible to dupe the entire nation? Two words, my friends: Bernie Madoff.
See, in essence, the bank wants you to foreclose so they can make more money. And their processors (subsidiary companies) want you to struggle so you keep paying interest and penalties as long as possible. Then, when you finally give up, they still get the property. Cute, eh?
What’s the solution? The easy solution is for people to start paying 20% more for a house than it is actually worth. But who wants to do that? I’m afraid the government may be the only entity that can help. (Short of every American just stopping payment on their mortgages.)
Someone needs to help people on a wholesale level, renegotiate their loans. Like a one time amnesty program or something like that. It would seem reasonable that the local assessment office, which values your home for tax purposes, should be able to act as an independent agent to your mortgage company. “This home is now worth 25% less, you’ll need to reduce the principle on the loan by 12.5% to meet the homeowner half way or face a $50,000 fine fr0m the municipality and lose your license in this state.”
Of course, that isn’t going to happen either. There is too much money to be made.
This is why people say this is a mess! It’s a big ugly mess.
Want to learn more? Check out this special from This American Life called “The Giant Pool of Money.”
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