From down here in the trenches I know that a roof over a person’s head and a job are numbers 1 & 2… with heath care, as critical as it is… a distant 5th!
As of today lenders are not freely cooperating with homeowners in granting mortgage relief... It simply is not there. Despite everything that has been published in the media... despite all of the administration pronouncements, despite Secretary Geithner’s boast of success, it still is not occurring in anywhere the numbers required to halt this economic disaster. Underwriters are interpreting HUD/FHA, Fannie Mae and Freddie Mac guidelines as though they are regulation. I have had clients denied consideration because their debt-to-income ratios were too low! The self-employed need not apply.
By allowing the lenders complete tax write off of mortgage related losses the current IRS code encourages excessive non-cooperation! Despite HAMP and HUD guidelines, lenders not providing adequate relief; and then are compounding the economic crisis by demanding extended delinquency before even considering assistance, often seven or more months, thereby making it virtually impossible for the homeowner to save their home when a rejection is delivered. This required delinquency lowers credit scores by 150-180 points, followed by credit card issuers lowering credit lines to a level that causes an additional credit score "hit" of 30-40 points PER CARD! This further impedes the economic recovery by stemming consumer spending. In a matter of as short as 90 days, a superlative credit score of 800 can and will be driven down to the low-mid 500’s! Universal default was not covered in the recent credit card reforms. As onerous as the 30% interest rate may be, lowering credit lines to a level where the balances break the “75% Rule” is far more egregious.
Recently, in seeking relief for a client, after finding reluctance to assist in the process, I commented on the “presidents kinder gentler” approach for loan modification, only to receive the following quote from the representative at US Bank..."We don't care what the president has to say... he has his programs and we have ours..."
In order to provide the “incentive” for lenders to understand the harm that they are continuing to cause the nation, I suggest that the IRS tax code be amended to a) provide a 125% tax incentive* for each loan modified; and b) eliminated the tax write off on any loan unless it is verified that a proper, diligent effort to modify a loan was attempted by the IRS. Documentation would be required; and verified from both the lender and the homeowner or representative prior to taking any write down. The very nature of this procedure would be such that the lender would then be forced to forgo the write off; and then after the loss has been properly verified** seek the tax credit. The simple fact that the lender would be forced to "advance" millions in taxes; and then seek a refund/credit would act as a motivation to induce more cooperation.
As for the modification of the loan, the cause for the high recurrence of defaults has generally been the method employed, now compounded by the unemployment factor.
My proposal for modification is:
a. Modify or amend EESA to require that any holder of any note, acquired directly or indirectly, secured by 1-4 unit residential real estate shall be required to offer reasonable loan modification
1. The existing loan balance. If need be partially deferred.
2. 50 year amortization.
3. Either a 5/5 ARM, with the entry rate being the lesser of the yield of the then current 10 year treasury bill, or 4%,or
4. 50 year fixed rate loan set at 1% over the 5/5 rate.
5. Loans already in default/foreclosure to carry a forbearance agreement.
6. Homeowner waives any reduction in real estate taxes, thereby stabilizing the state and local tax revenues.
7. In the instance of an unemployed homeowner, up to one year of payments to be deferred, and added to the loan balance.
8. NO loan qualifying.
These people are in the homes, everyone gains from keeping them there. This plan will calm down the real estate markets, stabilize neighborhoods, and through this method of modification infuse well over $150 million back into the economy. As you are aware, 100% of the WaMu, Wachovia and Downey Savings loan portfolios are comprised of Option (negative) loans and their variations. Due to the free fall in values, the several million of this loan product are impossible to refinance, leaving only modification as the only answer. Modifications that even when successful, are taking an excruciating length of time to complete.
As noted there is no incentive for lender cooperation; and to the contrary, the “system” encourages the lenders denial of providing relief.
Without fast, effective loan modification the housing crisis will continue to accumulate additional distressed properties in numbers that will demand no less than another 3-5 years to work through. Wall Street may very well be able to survive, and indeed prosper through that timeline, but those of us down here, can not.
* i.E., for a modification resulting in a $300,000 write down, the tax credit
For the loss would be $375,000.
** Detailed verification and disclosures to be documented