It's the Foreclosures Stupid... It's the Foreclosures

Sunday, February 22, 2009

Congress failed to require real, true, viable loan modification in the Housing & Economic Recovery Act as well as EESA and again in the ARRA. "We the People" have now spent or committed to spent some $2 Trillion, with trillions more to come, all without ever having addressed the root cause of this crisis.... the real estate defaults and foreclosures. In addition, proper loan modification WILL eliminate the vast majority of loan defaults that have brought about the massive increase in bankruptcy filings. Should our bankruptcy judges have the authority to modify real estate loans… most probably the answer is yes, however this is and ought to be a separate issue apart from the current economic crisis.

It has been stated that some 58% of loans that have been modified to date are back in default and foreclosure. A review of these loans will reveal that the cause for these failures has been the method of modification... the rate and terms applied in these instances have been a prescription for failure. Therefore, I suggest that congress require that any lender, brokerage, insurance company, or and any other firm that has received TARP or other federal funds, either directly or indirectly; and holds a beneficial interest in an any loan secured by 1-4 unit real estate, either directly or indirectly, be required to offer to modify all real estate loans with less than 3 years remaining to the next rate adjustment along the following lines:

WITHOUT the time consuming, meaningless process of (effectively) re-qualifying for a new loan, the existing loan balance is to be modified into a 50 year amortized loan, with a 5 year reset and an initial rate of 4%. The maximum rate change each 5 years would be +/- 2%; with a 9% lifetime cap. Loans already in default would carry a forbearance agreement added as part of the process.

This method of modification will reduce the loan payment by some 55%; while at the same time preserving the amount due to the lender. The aggregated annual savings of in excess of $150 Billion realized would, most likely, go into savings, pay down revolving debt or be spent fueling the economy through the purchase of goods and services (cars?). All of these options are positive and necessary for a cure to this crisis.

In most instances, this process would eliminate the urge to simply walk away from a property in which the homeowner has no equity. They require a home for their family; and what is better than the one that they already have. This proposal will stabilize not only the real estate and financial markets... but also the lives of these millions of Americans... while at the same time providing the knowledge and hope that, given time, they will regain the lost equity in their homes... the hope and positive attitude that my proposal brings to the table cannot be overlooked.

It is quite easy to verify that the number of families currently effected by this crisis is not, as reported 13 million, but more likely over 25 million real estate loans are in jeopardy... we cannot continue to ignore these people... as to stay on the present course, impacts every American family negatively.

Every time a homes sells as an REO or "Short Sale" the real estate tax base is reduced... the states and local governments are all reeling from these loses. This plan will put an end to this hemorrhage in tax revenue too.

What am I missing?

We keep hearing from the din on CNBC, Fox News, CNN and radio personalities... as well numerous members of congress and of the hoards of people carping about providing assistance to people who "got in over their heads".... so help me understand the following scenario that is occurring in the vast majority of industries and every state and city throughout the country... company names are interchangeable...

Caterpillar recently announced that, due to reduced and canceled orders from China and other countries around the world, and fearing that this could be a long drawn out down turn in income, and to stretch out its cash reserves it was cutting back in expenses... laying off people... cutting outlays, turning off lights, turning down the thermostat suggesting that employees wear sweaters...it internalized and cut costs wherever possible and then renegotiated its multi-million dollar debt with "ABC Bank"... The bank, feeling that Caterpillar has been a good customer, and is current on its loan payments, owes it millions of dollars and has done "all of the right things" agrees to a rate and term modification of the company debt... and in doing so maintains the firms fine credit rating... given the cause, Wall Street "experts" (are there really any?), deemed this a very prudent business decision on the part of the Caterpillar management... the stock sort of holds steady... not a bad feat in this business climate...

"Bob and Betty Jones”, are residents of Moline, IL... Bob has worked at Caterpillar for 20+ years... and has some seniority, in the cut back he gets to keep his job... but his hours get cut by 30%... Betty is the local librarian... due to the economy the city decides to cut expenses and close the library one extra day per week... thus Betty's hours get cut by 20%... "The Jones’s" have stellar credit... great retirement accounts... outside of their mortgage, little debt.... fearing that this could be a long drawn out down turn in income, and in order to stretch out their reserves, cut back in expenses... turn down the thermostat, and wear sweaters, turn off lights around the house... buy chuck instead of prime... use regular grade of gas instead of the recommended mid-grade... instead of dining out each Friday, they cut that to once a month... and then to a less expensive restaurant...cut back on any credit card use... internalize to find and reduce expenses wherever possible... and lastly contact the very same "ABC Bank", their mortgage holder, to negotiate a modification in only the rate and term ...of their $150,000 loan. The bank recognizes that the "Jones’s" have been very good customers... HOWEVER, BECAUSE they are current on their loan, ”ABC Bank" refuses their request; advising them that, before the bank will even entertain any modification, they first must be delinquent by at least 60 days... and in the process, make a mess of their previously superb credit rating…

For "ABC Bank", Caterpillar is simply too big to allow to fail... "Bob and Betty" don't have a large enough mortgage... simply don't owe "ABC Bank" enough, and it's OK if they fail... What I am missing... At this juncture of these economic and real estate catastrophes it is not just the “sub-primer’s” who are in trouble… this cancer has metastasized throughout the entire country… There are far more “Bob and Betty Jones” in need a relief than people who “stretched the envelope”… does anyone really want to contemplate the result of some 25 million mortgage defaults…

What am I missing…?