A life preserver for underwater homeowners
Perspective: The win-win potential of equity-sharing
By Inman News, Friday, September 25, 2009.
Editor's note: Alex Perriello, president and chief executive officer for the Realogy Franchise Group, submitted this guest perspective, which offers a way for homeowners in financial distress to remain in their homes while giving lenders an ownership interest.
By ALEX PERRIELLO
Depending on the source you choose to believe, there are estimated to be more than 15 million homeowners in this country who owe more than their home is currently worth.
Rather than debate what the exact number of "underwater" properties may be, the reality is there were a lot of homebuyers back in 2004-06 who bet that home prices would continue to climb and a host of misguided lenders and investors that were ready and willing to take that wager.
The daunting problem facing the housing industry and the general economy today is how to unwind the aftermath of the boom years in a fair and equitable manner.
When you consider the dilemma, an underwater homeowner has five choices: 1) bite the bullet and pay the mortgage (not likely if the loan-to-value ratio is greater than 125 percent); 2) default on the mortgage and hope to qualify for a loan modification; 3) mail the keys back to the lender in a "deed in lieu of foreclosure" arrangement; 4) sell the property in a short-sale transaction; 5) or finally, default on the loan and wait for the sheriff to arrive with an eviction notice.
With the exception of the first choice, in all other cases families are displaced, credit scores are destroyed, lenders suffer significant losses, average home prices continue to decline, and neighborhoods are blighted. The magnitude of the problem is daunting, but there is a solution.
The reality is both homeowners and lenders made bad financial decisions. Rather than be at odds now, when the investment has soured, they should partner with each other in a long-term equity-sharing arrangement. ...CONTINUED
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Submitted by Jerzy (George) Szkup on September 25, 2009 - 1:26pm.
George Szkup
www.DestinationTucson.biz
It appears to be a great idea - but implementation is up to lenders (voluntarily) or by "persuasion" from the legislature.
If one could get NAR brass to champion this idea - it may work?
George from Tucson
http://www.trulia.com/profile/httptruliacomprofilegeorgeszkup/
http://twitter.com/geoszk
http://www.DestinationTucson.biz
Submitted by Jack Guttentag on September 25, 2009 - 6:26pm.
Jack Guttentag I couldn't agree more, I even developed a calculator to guide the process,see http://www.mtgprofessor.com/Calculators/Calculator7e.html
However, to my knowledge the first servicer to use it has yet to appear.
Submitted by Sharon Tudor Isler on September 25, 2009 - 8:06pm.
Great idea, Alex! Seems to me like it's a win-win-win-win situation: for the homeowner, the lender, the neighborhoods and the market! Keeping people in their homes would help so many people. Hope it catches on. Would NAR promote it??
Sharon Tudor Isler
www.bozeman-realestate.com
Submitted by Christine Donovan - Costa Mesa Real Estate on September 25, 2009 - 10:09pm.
This seems like an interesting idea that probably needs more detail. Can the borrower "buy" out the bank at any time by refinancing and providing the equity share then? Would they have to hold the house for some period?
It seems like it's a win win for both parties.
www.donovanblatt.com
Submitted by William Metzker on September 28, 2009 - 9:14am.
I'm thinking this idea needs to go a few steps further. What if an owner can't stay in the home for five years for whatever reason--job change, illness, divorce, etc.? Mobility is a far greater factor in the 21st century than it used to be.
For that reason, consider establishing a GSE whose function would be to buy loans where the owner is 125% or more upside down in exchange for equity in the house, at the home owner's option. This entity could be funded with some kind of small transfer tax, a mortgage tax or combination.
The plan would work as Mr. Pierello has described. If an owner left before the period was up, he or she would not be entitled to any equity in the home, if there were any, unless he were to buy out the GSE's stake.
As it is now, with 125% LTV and greater, there's too much of a disincentive for an owner to want to do anything, and they don't. Nearly 70% of owners whose homes were foreclosed did nothing to intervene.
At the same time, if you run abstracts in many neighborhoods, you find a significant number of upside-down homes that aren't listed for sale and where the mortgage payments are being made. It may be true that these owners are a whisker away from a Notice of Default, but it also seems to be true that most people will pay their bills if they can--even if their home is upside down.
By using Mr. Pierello's idea and having a GSE partnership besides, a degree of pricing stability may return. The disincentive to loan workouts would diminish, and most of the "bad" loans would be eventually repaid through equity participation.
Submitted by Emmanuel Gigante on September 28, 2009 - 9:26am.
I agree with this scenario as a majority of home owner want to stay in their homs but feel they have no other options if I could of presented this option to my past short-sales I belive they would have taken it. most were just worried of paying for an asset not reflective of current market value. and 50% of something is better than 100% of nothing.
Submitted by Jack McCabe on September 28, 2009 - 2:02pm.
Alex Perriello's opinion of the necessity of principal writedowns by lenders to stem the tsunami of foreclosures is partially correct. However, the concept of sharing potential future profits between property mortgagees and lenders in return for principal reductions would absolutely fail. Here's why;
1. It dilutes the main benefit of homeownership which is potential future appreciation. Property owners in essence would become "glorified renters", yet with full responsibility for any future decreases in value. Experts like myself and others are projecting single digit, minimal increases in value over the next several years that borrowers would have to split equally with a bank upon a sale. This would be another excellent reason to rent rather than own, and another nail in the coffin of the "American Dream".
2. With the outlook in many markets of continued price declines and flat prices for at least the next three years, why would any banks risk failure by writing down principal balances that they do not have sufficient loss reserves to cover?
3. Banks and their investors would have to agree to be placed in a position of "rolling the dice" on whether hundreds of billions of dollars in principal writedowns would ever be repaid through future appreciation and sale.
Using Mr Perriello's example, if someone bought a home for $300K and financed 80 percent or more in 2004, and let's say the property is now worth $150K (think CA, AZ, NV, FL) how much profit would there be for a homeowner if split with the bank?
The buyers have lost their downpayment and no longer have an ownership stake in increasing the properties value. Will banks and their investors be willing to gamble on property apreciation when many markets have lost 50 percent or more of perceived value in the last three years? The simple answer is absolutely not.
There's only one solution to stem the tide of foreclosures. Here's the McCabe Recovery Plan, simply put;
1. Principal writedowns coupled with loan modifications is correct, but principal writedowns and remaining mortgage balances that are based on loan to value ratio at mortgage inception. Example. Home purchased in 2004 for $300K. 20 percent down payment, 80 percent LTV. Property is now worth $150K. Loan amount is written down to $120K, buyer keeps 20 percent ($30K) equity stake in home. This is the only way to have a recovery that includes the US consumer, and a reasonable increase in future GDP.
2. Banks receive loans from treasury to cover 100 percent of principal writedowns. Loans are 10-20 year term at 0-1 percent annual interest. Banks must loan out 100 per cent of federal infused loans for conservative new mortgages, consumer, and student loans. Banks mkae these loans at 6-10 percent interest, and are able to repay the government and make a profit.
3. The 200-400 banks that will fail in the next three years (411 currently on the FDIC "at risk" list) due to bad real estate loan portfolios will not only stay in business, but become healthy, without capital infusion at taxpayer expense.
The principal writedowns are only for owner occupiers. All investment properties in default should expeditously be processed through foreclosure and resold at today's market value.
Correcting the mortgage notes held in CMBS instruments can also be cured.
While real estate franchise megafirm Reology top franchise exec suggests ways for lenders and homeowners to fix the bad housing market and wave of foreclosures, I suggest his attention should be focused on how Reology can directly and immediately have a positive input on home sales in the future.
il greater initial and ongoing educational requirements for real estate sales agents and brokers are required, along with stiffer penalties for unethical, immoral, and inept behavior are legislated, real estate agents have an absolute share in the blame for the artificial boom and now bust resulting in a national/global recession.
In Florida, to give someone a massage, you must attend full time classes five days a week for nine months to be considered proficently knowledgeable.
To consult and advise the general public on one of the most complex investments in their lives, a one week class and passing a simple test is all that's required.
Is it any wonder why the image of real estate agents has been tarnished and corroded in the eyes of the public.
I would recommend Mr. Perriello consider what he can immediately do to increase the level of professionalism of the thousands of agents under the Reology franchise flags still pursuing real estate sales careers.
Possibly one of the primary and causitive reasons that "both homeowners and lenders made bad financial decisions", as Mr Perriello states, was the poor advice and supposed expertise offered by their sales agents. It was common practice by many to instruct buyers at the height of the artificial boom to make offers above list prices because they'd be able to take out 100 percent financing and refi at a later date as the property would keep going up in value.
When state business regulators, real estate brokers and real estate brand franchisors require higher educational requirements and professionalism from sales people that homeowners and lenders will be given good advice and won't make so many bad decisions.
Submitted by Terry Story, CRS, CDPE on September 30, 2009 - 2:25am.
Alex,
I think this is a great solution. Living in the Boca Raton, Fl area and dealing with over 50% of my sales now short sales, I would love to see more stability in our market. While I see the market improving, I believe we are faced with a long road of recovery and many more short sales/foreclosures ahead of us. This would solve many issues that will be facing us in months ahead.