no third solution

Blogging about liberty, anarchy, economics and politics

What should you do about your rising mortgage payments?

March 11th, 2008

Some people think that the government should get involved in bailing out either borrowers, or banks. I think the government already involved itself, enough. They already guarantee that the banking industry makes a tidy profit, and that the big boys simply can’t go bankrupt, even though they are all bankrupt several times over by a strict application of the term (i.e., obligations exceed assets).:

“The government ought to get involved because there’s been a market failure,” said John Taylor, CEO of NCRC. “Our proposal is for the government to act as a cash-flow agent, to temporarily acquire the mortgages creating these problems long enough to refinance them into sensible terms and conditions. There would be no bailout because the government gets paid back.”

lulz @ “there’s been a market failure.” What about the “government failure” that depressed interest rates to a level far below what any reasonable person would consider the natural rate? Here’s looking at you, FED! You’re the reason that banks wrote ARMs, to protect themselves from inevitable inflation, all-the-while being able to sell them to unsuspecting dupes!

lulz @ “there would be no bailout because the government gets paid back.” The Government gets paid back but the people who financed it, that is, individual taxpayers who are not delinquent on their obligations, will not get paid back. For them, there is no recompense, only more hurt.

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What should you do, if your payment is rising? USAToday is reporting that a lot of people are simply walking away from the homes they bought during the peak of the boom.

Nationwide, more than half the borrowers who lose their homes through foreclosure never answered their lenders’ calls or letters, according to Freddie Mac. And an MBA analysis found that 23% of loans in foreclosure last fall were to homeowners who had no contact with their lenders, and that an additional 18% were to absentee owners.

…With home prices sliding and politicians calling for government and the mortgage industry to do more to help troubled homeowners, lenders and loan servicers such as Lauria are becoming more aggressive in contacting delinquent borrowers and modifying loans to make payments a bit easier.

Walking away is one-half of the plan I’ve advocated for a while now*. The other half, is trying to work something out. Industry people don’t like this sort of thing, and make straw-man arguments against it:

“If you buy a car and it depreciates,” Goodman says, “you don’t expect the automobile dealer to write off your loan. There’s a sense of entitlement (among homeowners) that is just unbelievable.”

I’m not sure that anyone’s asking to have their loans written off. That would be a bold request indeed. Basically, people are saying, “If you can’t make this loan more affordable, I’m not going to be able to afford it. Do you want some of my money every month, or would you be more content with none of it, and a house that won’t sell?” What people are asking the banks to do is to refinance their adjustable rate mortgages into more favorable terms. I don’t particularly like it, since a contract is a contract, but then again, I’m not terribly fond of the banking “system” in general.

The depreciation is secondary, and it certainly compounds the problem, but even if these homes simply stopped appreciating, there would still be the hardship caused by rising mortgage payments. And of course, teaser rates and variable ARMs were designed to protect the lender against inflation — not to provide the borrower with free money. The depreciation just makes it worse, by increasing the amount of cash required to unload one of these properties. And, if you can’t sell it because it’s not worth what you owe, and you can’t continue to make the rising payments, well, there’s not much you can do.

The strong-arm tactic is a possibility, but it’s not guaranteed to work.

Of course, they will tell you something like: We can’t refinance your $185,000 obligation because the underlying property is only worth now $145,000.

That’s when it gets interesting. See, the lender/servicer is already on the hook for $185k, for the next 20+ years. And although I understand that underwriting guidelines may preclude them from issuing debt in excess of the property’s value, they are already holding that bag! I understand that no lender would allow a purchase money mortgage in excess if the property’s value, but since these lenders are already laying claim to insufficient collateral, you’re not asking them to increase their exposure to default risk because they’re already upside-down. You’re simply asking them to revise their expectations to reflect reality. If anything, a lower interest rate (and hence, lower mortgage payments) ought to mitigate some of the defaults. If the bank is afraid you’re going to default, all else being equal, you’re more likely to default if the interest rate keeps inching upwards.

They might say something like, “Well, we look at your credit and your income and blah-blah-blah and we think you can afford to continue making these payments as scheduled, underwriting-such-and-such, we can’t refinance your loan at this time.”

At this point, you can kindly ask them where they’d like you to mail the keys, and they might listen to you:

Such tactics make sense for the loan industry: The last thing a lender wants is another vacant property to fix up and sell.

Nope. Not with a glut of vacant properties on the market. The bank doesn’t want your house. Not after you’ve stripped out the appliances and the copper wire. They don’t want to winterize it. They don’t want to mow your lawn, pay your property taxes, your water bill. They want you to keep making payments.

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* In the interest of full disclosure, I am neither a financial advisor, a mortgage banker, or a lawyer. My advice is pure conjecture and I make no guarantees, expressed or implied, as to the efficacy or legality of these proposals.

no third solution

Blogging about liberty, anarchy, economics and politics