Bailouts

Send The Right Message to Good Folks Underwater

Posted on Thursday, July 2, 2009

Here in Florida, a place synonymous with bad real estate and mortgage decision-making that has consequently seen steep declines in home value, I've been noticing yet another troubling trend.
Owners of homes worth less than their mortgage loan balance--those so called "underwater," "negative equity" or "upside down" homes--are walking away from their properties. These are people not unlike the radiologist who recently called me inquiring about ways he might be able to avoid paying his $2 million mortgage when his home is now only worth $1.5 million, even though he earns over $500,000 a year and can easily afford to make his mortgage payments. These homeowners are still employed, still able to make the payments on their homes, but have realized that, from a financial standpoint, it's simply not worth it for them to stay put. Walking away is a logical and deliberate wealth preservation strategy. The threat of negative impact on the doctor's credit score pales in comparison to the loss of half a million bucks. Twenty million Americans feel this crunch. The trend is beginning to spread into our commercial real estate market--dozens of shopping centers, office buildings and industrial property owners have called me inquiring about strategies to convince their lenders to reduce the principal balances on their underwater properties--and that should make it a top priority in Washington. It is possible that, with time, prices will recover and the loan-to-value ratio will return to normal. But this group of underwater borrowers needs help now. If that help doesn't come soon, the rest of us will suffer from the increase in foreclosures. Even worse--if it's even possible for the situation to get worse--is the potential impact on our nation's cultural attitudes about homeownership, honoring financial obligations and government bailouts. Walking away from a mortgage loan would seem un-American, contrary to everything we have been taught about honoring our commitments. But it is hard to argue with the logic, not to mention the emotional justifications. Homeowners like our doctor look around and see their neighbors defaulting on loans they can't afford and should never have received. And they know that these bad loans, multiplied millions of times over, played a role in the loss of an estimated $3.5 trillion in equity nationwide. With some justification, they can say that their neighbors' bad decisions helped drag down the value of their own homes.
But what galls them most--and what is driving them to take steps as severe as walking away from their homes and their obligations--is that the government's solutions so far, intentionally or not, are still rewarding many borrowers who behaved far less responsibly than they did.
Making Homes Affordable (MHA), perhaps the government's most meaningful initiative to date, was originally designed to help two groups of Americans keep their property. The first beneficiaries were those who had signed on the dotted line for exotic mortgage loans with "teaser" interest rates that jumped up after a year or two and socked them with huge payments; MHA provided these homeowners with a loan modification option. These borrowers counted on being able to sell or refinance before their interest rates adjusted, a decision based on the now clearly flawed assumptions that buyers would be vying for their property, that real estate prices would continue increasing and that mortgage money would always be available. MHA also helped borrowers who found themselves with now-unaffordable mortgage loans by offering them a refinance option.A few months after it was initially launched, MHA was amended to include options that would help folks like our doctor. But the options made available to our doctor under MHA--that same initiative offering less prudent decision-makers a modification or refinance alternative to keep them in their homes--were not designed to help him keep his home. Instead, the government offered him two alternatives: walk away by way of a short sale or walk away by way of a deed in lieu of foreclosure. You see, under MHA, our doctor would only qualify for refinancing if his home was a mere 5% underwater; for example, $200,000 on a $210,000 loan. Here in South Florida, where we've seen prices drop well over 20%, 5% is an afternoon shower, not underwater as we know it.
Most of the underwater borrowers I hear from want to keep their property, and to do so they need help. Most initially inquire about principal reductions. But the truth is that if they are able to save an equivalent amount through a reduction in their interest rate--not unlike the reduction many of their less responsible neighbors are being offered--it would probably be enough incentive for them to stay. It would certainly send a more accurate message about what our nation's core financial values are and should be. If our goal is to preserve home ownership, MHA is not accomplishing it. We are still rewarding irresponsible financial behaviors instead of encouraging responsible ones.
During our grandparents' time, Americans strove to own their homes free and clear. Often times neighbors reinforced this traditional attitude with good old-fashioned "mortgage burning parties" that celebrated a friend's final mortgage payment.Today, however, homeowners with large mortgages are rewarded with large write-offs on their tax returns. Those who want to own their homes free and clear today get nothing. So I propose a tax benefit for people who strive to pay off their mortgages. I also advocate for a six-month mortgage fraud amnesty period, which would encourage those brokers and customers who knowingly participated in fraud to come clean. They would pay fines to help subsidize the tax credits for responsible homeowners. That way, we won't have to spend money on task forces to track down those who have committed mortgage fraud to bring them to justice. And, best of all, it would keep Americans in their homes.

But what galls them most--and what is driving them to take steps as severe as walking away from their homes and their obligations--is that the government's solutions so far, intentionally or not, are still rewarding many borrowers who behaved far less responsibly than they did.

Making Homes Affordable (MHA), perhaps the government's most meaningful initiative to date, was originally designed to help two groups of Americans keep their property. The first beneficiaries were those who had signed on the dotted line for exotic mortgage loans with "teaser" interest rates that jumped up after a year or two and socked them with huge payments; MHA provided these homeowners with a loan modification option. These borrowers counted on being able to sell or refinance before their interest rates adjusted, a decision based on the now clearly flawed assumptions that buyers would be vying for their property, that real estate prices would continue increasing and that mortgage money would always be available. MHA also helped borrowers who found themselves with now-unaffordable mortgage loans by offering them a refinance option.

A few months after it was initially launched, MHA was amended to include options that would help folks like our doctor. But the options made available to our doctor under MHA--that same initiative offering less prudent decision-makers a modification or refinance alternative to keep them in their homes--were not designed to help him keep his home. Instead, the government offered him two alternatives: walk away by way of a short sale or walk away by way of a deed in lieu of foreclosure. You see, under MHA, our doctor would only qualify for refinancing if his home was a mere 5% underwater; for example, $200,000 on a $210,000 loan. Here in South Florida, where we've seen prices drop well over 20%, 5% is an afternoon shower, not underwater as we know it.

Most of the underwater borrowers I hear from want to keep their property, and to do so they need help. Most initially inquire about principal reductions. But the truth is that if they are able to save an equivalent amount through a reduction in their interest rate--not unlike the reduction many of their less responsible neighbors are being offered--it would probably be enough incentive for them to stay. It would certainly send a more accurate message about what our nation's core financial values are and should be.

If our goal is to preserve home ownership, MHA is not accomplishing it. We are still rewarding irresponsible financial behaviors instead of encouraging responsible ones.

During our grandparents' time, Americans strove to own their homes free and clear. Often times neighbors reinforced this traditional attitude with good old-fashioned "mortgage burning parties" that celebrated a friend's final mortgage payment.

Today, however, homeowners with large mortgages are rewarded with large write-offs on their tax returns. Those who want to own their homes free and clear today get nothing. So I propose a tax benefit for people who strive to pay off their mortgages. I also advocate for a six-month mortgage fraud amnesty period, which would encourage those brokers and customers who knowingly participated in fraud to come clean. They would pay fines to help subsidize the tax credits for responsible homeowners. That way, we won't have to spend money on task forces to track down those who have committed mortgage fraud to bring them to justice. And, best of all, it would keep Americans in their homes.But what galls them most--and what is driving them to take steps as severe as walking away from their homes and their obligations--is that the government's solutions so far, intentionally or not, are still rewarding many borrowers who behaved far less responsibly than they did.
Making Homes Affordable (MHA), perhaps the government's most meaningful initiative to date, was originally designed to help two groups of Americans keep their property. The first beneficiaries were those who had signed on the dotted line for exotic mortgage loans with "teaser" interest rates that jumped up after a year or two and socked them with huge payments; MHA provided these homeowners with a loan modification option. These borrowers counted on being able to sell or refinance before their interest rates adjusted, a decision based on the now clearly flawed assumptions that buyers would be vying for their property, that real estate prices would continue increasing and that mortgage money would always be available. MHA also helped borrowers who found themselves with now-unaffordable mortgage loans by offering them a refinance option.A few months after it was initially launched, MHA was amended to include options that would help folks like our doctor. But the options made available to our doctor under MHA--that same initiative offering less prudent decision-makers a modification or refinance alternative to keep them in their homes--were not designed to help him keep his home. Instead, the government offered him two alternatives: walk away by way of a short sale or walk away by way of a deed in lieu of foreclosure. You see, under MHA, our doctor would only qualify for refinancing if his home was a mere 5% underwater; for example, $200,000 on a $210,000 loan. Here in South Florida, where we've seen prices drop well over 20%, 5% is an afternoon shower, not underwater as we know it.
Most of the underwater borrowers I hear from want to keep their property, and to do so they need help. Most initially inquire about principal reductions. But the truth is that if they are able to save an equivalent amount through a reduction in their interest rate--not unlike the reduction many of their less responsible neighbors are being offered--it would probably be enough incentive for them to stay. It would certainly send a more accurate message about what our nation's core financial values are and should be. f our goal is to preserve home ownership, MHA is not accomplishing it. We are still rewarding irresponsible financial behaviors instead of encouraging responsible ones.
During our grandparents' time, Americans strove to own their homes free and clear. Often times neighbors reinforced this traditional attitude with good old-fashioned "mortgage burning parties" that celebrated a friend's final mortgage payment.
Today, however, homeowners with large mortgages are rewarded with large write-offs on their tax returns. Those who want to own their homes free and clear today get nothing. So I propose a tax benefit for people who strive to pay off their mortgages. I also advocate for a six-month mortgage fraud amnesty period, which would encourage those brokers and customers who knowingly participated in fraud to come clean. They would pay fines to help subsidize the tax credits for responsible homeowners. That way, we won't have to spend money on task forces to track down those who have committed mortgage fraud to bring them to justice. And, best of all, it would keep Americans in their homes.





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