Bank 'haircut' can save homes

In a recent column, we explored some of the steps suggested by longtime housing experts that would allow traditional forces to return to the market.

While the initial moves are not easy, they are somewhat logical: Scrutinize the loan qualifying process, subsidize those who would be temporarily displaced from the homes they could never afford to begin with, and instruct lenders to reduce principal loan balances for qualified borrowers.

The amount of the reduction probably would be dictated by the borrower's present equity position and income. The goal is to eliminate some of the inflated appreciation brought by years of cheap money and overheated demand.

Some lenders are already seeing the writing on the wall, especially where the present value for a home is far greater than what the market would realistically bear. They want to continue in the home-lending business, not the homeowning business. The costs of repairing, maintaining and selling a vacant home can be expensive, not to mention the legal preparation and the actual foreclosure process.

The financial "haircut" taken by the lender to reduce the loan principal may outweigh its cost and internal labor and anxiety of finding another buyer.

For example, Joyce Lennon, 71, has a little home of approximately 1,000 square feet. The place was built in 1910 and has a two-car garage with a small rental unit -- all situated on a 5,000-square-foot parcel of land. The property was appraised at $285,000 and its drive-by condition was "fair" at best.

"Joyce's problems started when she injured her arm late last year and lost her job," said Maggie O'Connell, reverse mortgage specialist for The Reverse Mortgage Store. "She didn't make mortgage payments for all of 2009."

In an attempt to lower her monthly payments, Joyce first investigated the various loan modification programs offered by government incentive programs. Not one of them proved helpful.

She then looked into the possibility of a reverse mortgage, but the combination of her age and property value proved to be a challenge. And, borrowers are not allowed to refinance a current loan or acquire "subordinate" financing simply to acquire a reverse mortgage. ...CONTINUED

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