A few years ago, I decided to put my thoughts in writing regarding “the mortgage mess”. It seemed to me then, as it does now, that the solution was simple: make mortgage payments affordable so that fewer homes are foreclosed. So I started to write an article which was on point, showing how a matrix/chart/interest table could explain in financial terms what was required. That article I have included here, and I suggest you read it for background on the issue of mortgage modification. See The Mortgage Crisis
The question I pose in that article is quite simple: why are we forcing foreclosure to be the “one size fits all” solution, when both parties essentially want the same thing? Homeowners want to stay in their home, and lenders want to keep being paid? What are the creative ways we can use to slow down the foreclosure crisis? Is there a way to stop the loss of neighborhoods, investments and homes?
Why should lenders go to the trouble of modifying mortgages? What’s in it for them? Why bother? The answer is quite simple: lenders modify mortgages to make money, and to avoid losses that are certain in foreclosure. Yes, that’s right…to make money. Studies by lenders, the American Bankers Association, and mortgage servicers show that foreclosure is no way to a quick profit. It is actually a dead loss, with the lender losing 50% or more of the loan value, as a result of deteriorating real estate, legal and realtor fees, and loss of mortgage payments. All commentators agree: foreclosing on homes will not make a profit.
Many lenders blame the current mortgage crisis on foolish consumers borrowing too much money. They are quick to forget the lender’s role, and the huge sums made in the structuring of loans for 125% of equity, thousands of dollars in hidden charges, floating rates of interest, misrepresented payment structures, false appraisals, prepayment penalties, and making loans beyond the ability of the consumer to pay with no proof of income. Much lending activity has been subject to investigations by state and federal authorities and condemned as less than honest. Truly, the mortgage community has talked consumers into many a foolish loan for excessive short term profit on their end. As a primal cause of the current mortgage crisis, the lending community can see that their mistakes have created a bad result. Of course, the consumer is also to blame, but which came first, the chicken or the egg?
Lenders and bankers can be a cynical lot, with little willingness to take blame for their own mistakes, and little trust that the homeowner will pay. Many are like adolescent “sore losers”, disheartened and threatening to “take my ball and go home”. The assumption was that they should have been able to profit handsomely from bad loans to more consumers, with no downside risk. But it didn’t work out that way, and now bad loans must be adjusted to more reasonable terms in the present circumstances. The times have changed, and they call for a change in approach.
Both parties are to blame, and both must “give a little to get a little”. Even while acknowledging that some real estate deals will never work out, lenders and borrowers all profit when a homeowner pays consistently and foreclosure is avoided.
Of course, workouts don’t work in every situation. Some homeowners just can’t stay caught up with mortgage payments. But when loans are adjusted to levels where they can and do perform, everybody wins. Adjusting mortgages is good for the lender, the investor, the servicer, the homeowner, neighbors, businesses nearby, and the town where the neighborhood is situated. When homeowners do not pay mortgage payments steadily, everyone loses. And most importantly, the economic picture becomes bleak: depression sets in. When that happens, it’s bad for the entire country.
The economy runs on consumption, and consumer spending is 70% of that consumption. If the consumer is evicted from his home, he spends less, works less, and gets disoriented and detached from community and friends. His job performance may suffer, as he works through his personal crisis.
Do we want to save the economy? Then save the consumer’s peace of mind, and his home.