Let foreclosure cycle run its course
Letter to the Editor
By Inman News, Wednesday, May 6, 2009.Re: 'Fixing the Foreclosure Crisis' (May 1)
Dear Editor:
As a Realtor with 40 years of experience, almost 30 of those working with bank-owned properties (REOs), I find it interesting that the government thinks it can fix this crisis by throwing money at the very banks who created the problem.
This is the third cycle of REOs that I've seen, and it is bigger and different than the first two cycles. Foreclosures are traditionally caused by a rise in unemployment -- not yet the main cause. This cycle is caused simply by the failure of poor underwriting and there is no way to fix the problem, short of forgiving the debt or foreclosing and letting the market take care of finishing the cycle.
Moratoriums have simply delayed the issue and will create an even larger problem, as the delay in reselling these homes will only result in larger losses. Additionally, the folks who aren't making their mortgage payments are also not making their property tax payments, insurance payments, or homeowner's association payments.
The result of these nonpayments creates further problems. Modifications aren't working because most borrowers can't survive unless the payments are much lower than what the mods provide, and most of the modified loans are once again in default.
The good news is that affordability is up, interest rates are down, FHA and GSE limits are up, and demand is good. Let's get these homes through the cycle -- it may cost the taxpayers less than the billions of dollars being spent to "save" homes that can't be saved.
David Schubb
The Schubb Group
Pleasant Hill, Calif.
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Submitted by Jon Boyd on May 6, 2009 - 6:43am.
David,
I agree with your view that this really needs to just "run its course".
I disagree that the problem was caused by bad underwriting. The government put pressure on lenders to make loans under conditions that they otherwise wouldn't have accepted. The free market system is very efficient. When politicians change the free market system problems like the meltdown are typical of the results.
That was certainly a significant portion of the problem.
Jon Boyd, Ann Arbor Exclusive Buyer' Agent
Broker/Manager
The Home Buyer's Agent of Ann Arbor, Inc.
1908 W. Stadium Blvd. Ann Arbor, MI 48103
http://buyersagentannarbor.com
Submitted by Bruce Hahn on May 6, 2009 - 7:03am.
American Homeowners Grassroots Alliance
The real reason that many modifications aren't working is that many lenders are both greedy and idiots. They are foreclosing on homeowners who can still afford to make payments on a market rate mortgage that would be larger than the amount of money lender would get from the proceeds of selling the foreclosed home.
The logical course of action for these lender would be to reduce the mortgage balance or interest rate as little as possible, but still reduce it enough so that the homeowner can realistically afford to pay. For example, that might mean some lenders might have to modify a $100,000 mortgage down to $80,000 to make it perform, but that's better than foreclosing on the home and selling it for a net of $60,000.
Instead of doing that many lenders ignoring the best interests of both their investors and their borrowers by either doing sham modifications or doing no modifications. Its a sham to simply reissue a payment book with the same or only a slightly reduced monthly payment when the lender knows full well in advance that there's virtually no chance the homeowner will be able to keep up with the payments. Its also a dereliction of responsibility for them to forgo a modification opportunity and foreclose on the same home when both the lender and the homeowner would be better served by an appropriately restructured loan.
Steps 1 and 2 of solving the problem:
1. Require any lender that abandoned sound underwriting principles to fire their CEO as a precondition of accepting any form of TARP money or other taxpayer subsidies. There is no point of throwing money to such irresponsible CEOs.
2. Make mortgages subject to bankruptcy laws. Bankruptcy judges are charged with protecting the creditors interest and will make the kinds of aforementioned mortgage modifications in cases where both the lender and the homeowner will benefit.
Submitted by Fred Merriam on May 6, 2009 - 7:15am.
Isn't it interesting that a real estate agent specializing in REOs thinks that government has no place in trying to help homeonwers facing foreclosure...
Fred Merriam
Certified Foreclosure Specialist
Prudential California Realty
Auburn, CA
Submitted by Ken Lampton on May 6, 2009 - 8:15am.
When I hear people say "just let this foreclosure cycle run its course" I think back to the Savings & Loan Crisis and the Dallas, Texas home market from 1986 through 1995. An enormous number of homes were foreclosed and dumped on the market from 1986 through 1989, and it took the market seven more years to recover. This was not healthy. It seems to me this destructive pattern will repeat itself at the national level if our government does not take extraordinary action.
Let's say you have five children and a bear breaks into your home and devours your little baby girl. You don't say "let's let this bear situation run its course." You go looking for your shotgun.
Ken Lampton
RE/MAX About Dalllas
www.mstreets.com
I think the "cramdown legislation" was the shotgun.
I am open to the idea of allowing "cramdowns" by bankruptcy judges. I was sorry to see the Senate vote against that idea.
Submitted by Clete Pfannenstein on May 6, 2009 - 9:08am.
The more Government tries to do, the higher our taxes go and the more dependent we become on government. And from past experiences, government usually screws it up. So I say less government, lower taxes, and let the free enterprise system do it's thing. I think the sooner we get thru this current foreclosure crisis, the better off we'll be.
Submitted by Matthew Ferrara on May 7, 2009 - 5:49am.
David Schubb is absolutely correct, except I'd add one small suggestion: We don't want foreclosures to just run their course, but we need to SPEED THEM UP. The long delays in the process harm everybody: the defaulting borrower, the banks, potential new buyers for the home and the local neighborhood values. If we can speed up foreclosures, get the troubled borrower into a rental and onto the path of fiscal responsibility and credit rehabilitation faster, then we can facilitate the market correction. Since it's going to happen *anyway* then REALTORS should be the ones making it happen as quickly as possible.
Remember, even after billions of subsidies and months of delays, Chrysler ended in bankruptcy anyway. That's because, wishful thinking aside, the market mechanisms cannot ever be stopped.
I've been blogging on this for months: Most REALTORS have yet to grasp that they are in a commodities market that cannot be operated by emotions and whims. Some people bought their commodity (stock, houses, all the same) on "margin" and now the bill is due. When you can't pay, you get repossessed - car, house - no matter. Let's not just stand back: let's find out how to speed this process up. And return everyone back to a healthy value level in the market.
In April 2008 I wrote: http://www.matthewferrara.com/realtors/why-realtors-should-applaud-the-m...
We could have been an entire year ahead of where we are today, which is still on the verge of doing what the market will make us do anyway.
Matthew Ferrara
www.matthewferrara.com
Submitted by Alvaro Ramirez on May 11, 2009 - 4:20pm.
We should remember the servicer's job - To protect the intersts of the investor. Under the PSAs which most loans are in the servicer can do what it needs to carry out such task.
Foreclosing on everyone? No that is not the answer. We could agree that all the help the administration is putting out is confusing and servicer which were created to talk as little as possible to borrowers don't have the capabilities to handle the volume.
Also - a realtor who handles REO, while yes we have had foreclosures every year in every market, for the last few years,( 2003 to 2006) REOs where not heard of because of the low volume. So I dought a realtor made a living out of handling foreclosures only during the boom times.
Preserving homeonwership is not just to help the person who can't make a payment but those who could make a reasonable payment and those borrowers who did everything right and now can't take advantage of the low rates because their proparty values are upside down. The less properties on the market the more values can sustain.
Why should a realtor say let them foreclose and move the inventory? After all is how the realtor makes money. At the end of the day we all look at our own pocket book. Such as the RMBS Investor who is a senior holder says short sale everyone before they foreclose. It saves me money and I get paid my full investment. The homeonwer who says lower my payment so I can keep my house.
Now a government that knows needs to find more money and doesn't know where has a creative way to brinig money in. Refanance at risk borrowers and share equity. What a creative way to create another source of revenue.
Submitted by Caterina Platt on May 12, 2009 - 1:50pm.
To Ken Lampton,
I lived in Denver during the S & L crisis. I too remember the pain experienced in the market at that time, but there were also fantastic opportunities. While your principle residence equity may be down, there are opportunities to invest if the downpayment can be obtained elsewhere.
Matthew Farrara reminds us, real estate is a commodity. While it is not a volatile commodity in terms of pricing, it is not fail safe.
Find that silver lining and let the correction do it's job. Whenever the government steps in, it usually results in unintended consequences. Remember, this credit and real estate bubble wouldn't have existed without them.