Behind The Mortgage Curtain

For those of you who would like a peek into the mortgage paperwork mess that the news media has called “robo-signing”, check out a seven page article in this week’s Bloomberg Business Week.  In a well written narrative, three reporters provide both a macro view of the mortgage and foreclosure machinery situation as well as some stories of individuals who have faced the madness.

Underwater

In a 5/6/09 WSJ article, Ruth Simon and James Hagerty report on current housing values after the release of industry results for the first quarter of 2009.

Across the U.S. 19% of mortgage holders are “underwater” or “upside down” – they owe more than their house is worth in today’s market. This is more than a 50% increase in the number of underwater borrowers since the end of 2008. According to one company that tracks this data, “more than one in 10 borrowers … owed 110% or more of their home’s value at the the end of last year.” Las Vegas homeowners have been hit the worst. Zillow.com estimates that over 67% of mortgage holders there are upside down.

Why wouldn’t a bank holding a mortgage agree to write down some of the principal on the mortgage? Let’s say a homeowner with a job is struggling to stay current on a $300K mortage on a house that is now valued at $240K. If the bank forecloses, they will probably sell for closer to $200K and will have expenses for legal fees, maintenance, fix-up and taxes. Wouldn’t it make sense for the bank to at least write down half of the $60K principal difference if that would mean the bank could avoid foreclosure?

The answer is – wait, sit down first. The loss on a foreclosure is a long term loss on the bank’s loan portfolio that can be spread out over several years. A write down in principal on the mortgage is an immediate loss that affects the bank’s bottom line this year. John and Mary Homeowner may have lost their chance to avoid foreclosure because of an accounting rule.

House Walkaway

The following is not a script from a Monty Python episode.

In a 3/29/09 NY Times article, Susan Saulny reports: “Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal – from legal fees to maintenance – exceeds the diminishing value of the real estate.”

After vacating the house in anticipation of foreclosure, the “former” homeowner finds that, to the city, they are still the “current” homeowner and the city wants them to clean up and maintain the abandoned property.

It does sound like the “dead parrot” episode from Monty Python, doesn’t it?

Foreclosures

This was something I wrote back in Sept 2008 and sent to my Senator. I’m sure it was one of many, many suggestions. Almost six months later, I still think this is the best solution. It involves a principal write-down in which the taxpayer absorbs 15% – 25%, on average, of the principal reduction. The lender effectively absorbs 60% of the cost. The U.S. taxpayer absorbs the rest. Everyone who played a part in this fiasco, the buyers of the mortgages, the lenders and the lawmakers, pays some price.

For those facing foreclosure who can show that the house is their main residence:
1) If their household income is more than twice the average income in that area, they do not qualify for this program.
2) If the purchase price of the house is more than 50% above the median house price in that area for the past 4 quarters, they do not qualify for this program.
3) They can show that their mortgage payment as a percentage of income is more than the lending criteria. See CRITERIA below. In addition,
4) Their home will be evaluated using current comparative sales in their particular community (EVALUATION).
5) Based on that EVALUATION, a monthly mortage payment (PITI) will be determined for a conventional 30 year fixed loan using a competitive interest rate and including a) any real estate taxes based on that evaluation, and b) an amortized insurance premium equal to 1% of the evaluation and payable to the mortgage holder, and c) an amortized administrative fee equal to 1% of the evaluation paid to a special housing fund to be set up and administered by the US treasury to cover costs associated with the program.
6) The homeowners must be able to meet a more traditional mortgage lending criteria (CRITERIA), either a or b:
a) They can document monthly net income that is 3 times the PITI; or
b) They can document monthly gross income that is 4 times the PITI.
7) (This will be controversial). Anyone taking advantage of this program must pay Federal income tax on the difference (WRITE-DOWN) between the EVALUATION price negotiated and the purchase price less homeowner equity. This tax will be spread out over a consecutive 5 year period. The first 20% of declared income will be declared in the tax year after the closing of the 30 year fixed mortgage contract.
8) The lender can deduct the entire WRITE-DOWN amount in the year in which the contract is altered under this program. The Federal tax savings for the lender would be about 35%. State tax savings would vary.