Friday, May 28, 2010

The Future of Distressed Homeowner Programs

Should this home be 'saved'?
I read a wake up article today by a mortgage market advisor  Mark Hanson, who suggested that unless foreclosures double from the April 2010 record, the 'shadow inventory' of homes on the market --it will take at least 8-10 years to clear the sales backlog of homes for sale. Wow.

Which suggests, by deduction, that our national housing markets will be affected by these lower priced distressed homes lagging if not languishing on the market beside new and non distressed homes, affecting their values for years. OK so that's the downside. But for every dark cloud there is a silver lining...right? What is the real effect of foreclosures in your local market? Are people who don't need to sell helping stabilize their local economies by staying put regardless of their paper 'losses' in value?

Mr. Hanson goes on to suggest:  "Massive-scale home retention (mortgage mod) programs have truly helped only a small slice but primarily served to slow up the pace at which foreclosures have occurred over the past year. This has created a giant bubble of distressed homeowners in the pipeline that over time will be liquidated. "

Apparently Mr. Hanson feels many of those homes in distress mode will eventually be foreclosed because it is apparent that the buyers were unqualified to buy those homes (or have experienced financial barriers to keeping them). So if that is the case, are banks ready to accept their part in over-lending and start writing off seconds and writing down principal balances willingly? So far the assistance offered has leaned toward banks and not borrowers. Many of us in the front lines would like to see the balance shifted toward a more fair and equitable assistance for homeowners caught in the middle.

Fortunately, some programs on the horizon, notably the new Principle Write-down Program takes effect in June...just three days away. It's too early to tell how investors will apply the new guidelines and if this will actually lower many loan balances. The biggest proponents are making news about Principle Write-downs as a good thing but what most people don't know is that their losses will be 'asssisted off their books' with more incentives. Paid for by tax dollars. A borrower has to make perfect payments for at least five years to qualify for these incentives --so if they suffer other financial setbacks they could still loose.

I am happy to see someone who can't afford their loan get a better deal if it means less pain all around. In effect, keeping someone in their home who can't really afford may be lashing that person to a financial ball and chain. If a bank writes down the balance on an existing loan, this is essentially devaluating that home for that homeowner. Althought the lower loan balance is not immediately obvious until someone tries to sell that lower liened home and that person can afford to take a lower sale price. Isn't that what foreclosures accomplish just faster? Lowering the property values by flooding the market with cheaper goods? It is confusing to me why taxpayers would be expected to pay for these losses to banks...while quite directly absorbing these losses of our neighbor's foreclosed homes devaluing our own home next door. It's a double whammy for solid citizens to be asked to help our neighbors while also watching our home values decline.

Recently I spoke with a bankruptcy attorney who wondered aloud if homeowners in financial distress realized that loan modification is not a silver bullet. There are no guarantees. Your lender could put you through a trial mod and still reject you at the end if your situation has changed. You see, these programs have a certain life, and an end to the funding programs. Which could mean that months and months of effort might result in those losses still happening via foreclosure, short sale or deed in lieu.

Most people are really concerned about the effects of walking away or suffering a foreclosure when--and I have recently formed this opinion--the effects of a long drawn out short sale may cause as much, if not more damage, to your psyche and your credit score than making an earlier decision to take the loss via foreclosures or deed in lieu.  Heresy, I know. Realtors who handle short sales would be spared those sales. Never mind the cost to the borrowers of a year on the market and all that uncertainty and lost sleep. Would it be better to settle up and clear you mind of the financial burden and move to a place you can actually afford? Folks need to weight this up carefully. ('Deed in lieu' by the way is agreeing with your lender to simply hand the keys back and avoid the legal public foreclosure process.)

I am reminded of my photo safari in Kenya: driving across the Masai Mara we came upon a group of baboons migrating in a long line. Following them was a young cheetah and the male baboons were displaying quite an angry 'go away' stance on an anthill to scare him away, beating their chests and screaming at him. According to my driver, the cheetah probably didn't know that picking a fight with a baboon would be a bloody hard fight and at the end of it they don't make a very good meal.

There is a certain tendency of pros who assist home owners in distress to want to 'fix it' and make the pain go away. Or to fight the fight because people feel so wronged. But some things just can't be fixed. Certainly there are tools to assist a home owner-within reason. The point of modifying your loan may be to buy time, while accepting that you may eventually need to get out from under this level of debt.There is nothing like being decisive, making a tough decision and not fighting that fight for a bad meal.

To each their own decisions. All the best with yours.

© 2011 susan templeton
*Susan Templeton is not a loan modification advocate