Cram-Down is What Will End Foreclosures
February 20th, 2009 categories: Real Estate News
Loan modifications have proven they don’t work for over 90% of the population who have received them and fail within 6 months. Eventually, I feel that those that don’t fail have an excellent chance at Foreclosure down the line. You ask why?
BECAUSE the mortgage loan balance has NOT changed.
What needs to be done to help solve this housing crisis and stop the foreclosures, in my opinion is the “cram-down.” This is where Bankruptcy Judges could lower the mortgage loan amount for the homeowner/borrower.
If time is of the essence, doing loan modifications and having these banks that can’t manage the Short Sales and Foreclosures handling Loan Modifications seems a bit ludicrous considering their track record.
A little catch…Bankruptcy Judges do not have the authority with primary residences to lower the mortgage loan, only investment and 2nd homes. Congress would need to change the bankruptcy law and add this provision in.
Either the banks get the value or less for the property with a foreclosure sale or leave the homeowner in their own home and lower the loan balance to the value of the property. Seems like a no-brainer to me!
Don’t think for one moment that these troubled homeowners are getting away with anything. Their credit is ruined, they’ve been receiving countless calls and mail about their lateness in payments. They’re suffering. Not to mention children being uprooted from their neighborhoods and schools. Don’t worry, they suffering.
This would help those homeowners in trouble, save the neighborhood and show a little empathy for mankind. Something sorely missing these days.
What are your thoughts? Do you have a solution or do you think there is a solution? Would you like to see the neighborhoods come back, the value of your home stop going down? Jobs return?
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Hi Gena, actually, there may be a change going on as we speak. A current proposed loan mod from one of the major loan servicers is reducing the current balance of $756,000 at 7.58% with delinquent interest of $54,000 down to a loan balance of $567,000 at 4.68%, with an initial contribution of $1300 (all dollar amounts rounded off). Amazing. They should have started doing this a year ago. I think THIS is what will help people.
Julia,
That is GREAT news. The only loan modifications I have seen left the mortgage loan balance the same. I certainly hope that the scenario you indicated is in fact what these troubled homeowners will experience.
You’re right, it should have happened a year ago. I have my fingers crossed!!! Thanks for letting all of us know this GREAT news.
Let me ask a question?
If you were a lender and knew that a judge has the power to lower the principal what would do?
Answer…
1. greatly INCREASE loan qualification guidelines…result = fewer people qualify, fewer homes are sold.
2. RAISE interest rates! Why, because lenders would have more risk and therefore want to be paid more for taking on more risk!
Principal reductions are being done every day without the involvement of judges via loan modifications. This is especially true when their is a 2nd on the house and the owner is upside down!
For example, if the home is worth $200,000, the 1st is $200,000 and the 2nd is $50,000 then the 2nd lender has lost their security in the house. If the owner stops paying the 2nd the lender is powerless because their security is gone! Solution…negotiate a principal reduction with the 2nd lender. Many times this can be a little a $.10 on the dollar!
Unless you’re willing to pay higher interest and see fewer people qualify for home ownership then keep judges out of the equation!
Alexandre,
You bring up some excellent views on banks increasing interest rates if they are forced to accept cramdowns. What do you think about the toxic assets being taken away from the banks so they can do business?
My thought was that the banks have not exactly shown in the last 3 years that they can handle any of this much less loan modifications. A Judge would be able to determine if a homeowner qualified for bankruptcy and there is a system in place.
It will be interesting to see how the banks comply with the guidelines set forth by the stimulus package.
Most will NOT comply. Here’s why…the plan pays lenders $1,500 to modify a loan and then $1,000 annually for the next three if the loan stays current. Do you think lenders will forgo the thousands that they are legally owed for $4,500. I don’t think so. Also, the plan is VOLUNTARY, so there is little chance this is a viable program IMHO.
Well, it’s the only way in my opinion that we will stop the foreclosures. Bankruptcy Judges have always had the ability to reduce loans for second homes and investment property and we need to have them, not the banks dealing with the primary homes to help stop this maddness.