Uncle Sam and prudent tax payers offering $150,000+ to anyone that quits making their payments

Uncle Sam and prudent tax payers offering $150,000+ to anyone that quits making their payments

If I told you that the government wanted to give you $150,000 and all you needed to do was quit making your mortgage payment, be willing to have bad credit for a period of 3-7 years would you accept the money? If you say no, you may be in the minority soon. As a result of current legislation and the prodding of the government loan modification is as out of control as exotic mortgages were 3 years ago.

While allowing modifications of loans at current market rate on 30 year fixed loans makes sense the modifications that are occurring in droves in no way resemble this type of prudent modification. Instead, many of the modifications are reducing principle by hundreds of thousands of dollars and offering exceptional terms that are only available to those that were imprudent when they purchased and stopped paying their mortgage. This is exacerbating the problem and could easily increase the amount of bad loans exponentially. Let me offer a real life example;

A friend of mine purchased a new home near the peak for around $450,000. At the same time many others in his neighborhood purchased as well. My friend and his neighbor were both paying their mortgage. However, his neighbor called his mortgage company requesting a loan modification. The mortgage company explained that he is not in default and therefore they will not complete a loan modification. My friend’s neighbor decided to quit paying his mortgage while he continued to make payments on his four-wheeler, quad, and other toys and make trips to the desert weekly. He called the mortgage company back a couple of months later and received a principle reduction of circa $100,000. My friend, makes excellent money, did not lose his job, and expresses to his neighbor that he is upset that his home is worth $100,000 less than he paid for it, however, his neighbor explains that he received a $100,000 principle write down by not paying his mortgage and negotiating a loan modification. Speaking to my friend a few weeks ago he explained this to me and said he that he is considering getting a modification as well. Who can blame him? This is only one example of what this type of legislation is creating.


I could tell you ½ dozen similar stories each more egregious and unbelievable than the last. Whether it be the real estate agent in San Diego that purchased her home for $200,000, pulled $400,000 equity out, hasn’t paid her mortgage in months as is being foreclosed on but not without a fight and the support of community groups fighting to keep her in the home. Some would consider her actions bank robbery; while her supporters have a different opinion. What about the millionaire living in Newport Beach that a friend of mine whose company completed 400 loan modifications last month told me about? The millionaire stopped paying his mortgage because he wanted a modification, saw others doing it, and could use the extra cash each month. What about the homeowner in Costa Mesa that realized they could not afford a $642,000 mortgage and opted for the short sale? Instead of a short sale Countrywide rejected a short sale offer of $450,000 and elected to reduce their principle to $382,000. There are hundreds of stories like this and their will be hundreds of thousands more if something is not done about this issue.

Loan modification of this kind is a moral hazard, exacerbates the problem, and has the potential to be a larger disaster than the original exotic loan problem it’s trying to solve. Something must be done to stop these types of modifications quickly or this country will likely feel the effects for generations. There is no easy solution to the current problem, however, legislation that encourages the type of loan modifications explained above and legislation that delays the foreclosure process are not the answer and only make the problem worse. Most would agree that the problem started with housing and that the problem needs to end with housing. The debate is how the problem should be solved. Current legislation seeks to reduce foreclosures and supply instead of addressing affordability and demand. Affordability needs to reach sustainable levels in order for a stabilization of the housing market. The quicker affordability is reached the quicker we can start to recover. Politicians are currently trying to swim up stream fighting hard against lowering prices while their legislation is only making the current stronger and the problem worse. If we really want to move forward legislation needs to pass that will allow everyone that currently owns a home or has good credit the opportunity to refinance into or take a new loan at 5% fixed and fully amortized for 30 years. Of course this will not help many people that purchased more home than they could afford and they will face foreclosure, an assistance program to help these people find a rental, learn about credit, repair their credit, and prepare them to purchase a home responsibly in the future should be provided.Current legislation is attempting to solve the problem by decreasing supply and slowing the rate of decline. Basic economics indicates that until affordability reaches a sustainable level, prices will continue to decline. Current legislation and bank strategy will temporarily slow the rate of decline, cause the problem to last longer, and cost our country more.

Of course the solution offered in this editorial will increase supply in the short term, drive prices down to affordable levels, and thus has not been considered viable. Supply will increase until demand catches up which will occur once homes reach the proper level of affordability. Using this method we will reach proper affordability levels quicker and begin to recover quicker. Nevertheless, if the pain becomes too great and the government insists on providing assistance to dull the pain it should come in the form of legislation that increases demand rather than by attempting to artificially decrease supply. Legislation that increases demand encourages people to stay in their homes, and helps to solve this problem quicker has been sent to numerous politicians and is looking for support. The bill will allow prospective homeowners to put money into a designated HEA (Home equity account) and if used within the 360 day period will allow them to write the money off for income tax purposes, similar to a SEP IRA, if used for the down payment or closing costs on a primary residence. In addition, this legislation will allow current homeowners that have less than 10%-30% equity to place money into an HEA account designated for homes they purchased after January 1, 2002 and before Jan 1, 2009 or 180 days after this legislation takes affect, whichever is later. Finally, it allows current homeowners that participate in this program and remain current on their mortgage to go back as far as 2002 and claim an income tax deduction on any money paid toward the principle of their home including their original down payment. To participate in this program homeowner must be in or re-finance into a fully amortized fixed rate 1st mortgage. The legislation should take affect immediately upon passing and be limited to 360 days with options for extensions. The writer of this legislation believes that housing is already over subsidized and also proposed a future cap on mortgage interest write off, however, it has not been determined if this will be included in the bill.Although this is only a brief summary of the legislation you can learn more about the legislation and current housing issues and contribute to the discussion by visiting http://www.orangecountycaliforniarealestate.blogspot.com/.