Earlier this morning I wrote a post called, "A Hand Up Vs. A Hand Out" that dealt with the current foreclosure mess and what would be the best way to deal with it.  I got some very good comments that I was going to comment on, but decided that it would be better to put it in the form of a follow up post.  So, here it is.  This is a very important issue, or at least should be if you're involved in the real estate field, so I hope that people pick up on it and we can work together to come up with a workable solution.

Rob Wesler pointed out that there is a lot more trouble coming down the pike and I agree with him.  As he pointed out, lenders were funding these high LTV 2/28's and 3/27's pretty much up to just a few months ago.  This is one reason that I think that we need to look at reality as it is, not as we would want it to be.  The reality is that this is a huge problem.  Big enough to where the effects are spilling over on to people who didn't take out one of these mortgages.

I recently took a home that I own off of the market because I couldn't sell it for $15,000 less than what the comparable said that it should sell at.  My next door neighbor removed his home from the market and canceled a contingency contract that he had on another home for the same reason.  

James Gordon  left, what I took as a tongue in cheek, comment when he asked, "Bob why don't we all ask for a check from the government because of the value we lost in our homes?"  Melissa Grant dittoed his question.  And while I understand the sentiment here, in that nobody likes the idea of the government doling out money indiscriminately in order to make up for somebody's bad behavior or maybe just bad luck, I think that it's a legitimate role of government to step in and help in these particular circumstances.

I base my believe upon the preamble to the United States Constitution which states,

"We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

In stepping up to the plate to deal with this issue, I believe that the government will be insuring domestic tranquility and promoting the general welfare of the people.   

Real Estate makes up a huge percentage of the Gross Domestic Product, not to mention the other positives that home ownership provides to individuals, families, communities and the country as a whole.  So, while I understand James and Melissa's concern, I don't see any reason that a program designed to assist those facing foreclosure to work themselves out of their difficulties and to provide stability to the real estate market by controlling the influx of distressed properties on to the market would be considered a "hand out" as opposed to a "hand up"!

Gary Miljour , who hails from that den of liberalism and compassion known as Maricopa county Arizona, expressed his moral reservations of people not taking responsibility for their own actions.  To this, I understand and agree with him 100%.  There were a lot of people who got into this mess for no other reasons that greed and lack of forethought!  That said, there were also a lot of people who had no reason to suspect that anything funny was going on in how Wall Street securitized these mortgages.  

I can think of one couple in particular that I put on a 2/28, 100% LTV mortgage.  He had never had a late payment in his life and only had 2 charge cards, both of which only had low credit limits.  Both of the cards carried balances on them that were close to his limit (something like $300.00 and $500.00).  The end result was that his credit score was only in the high 500's.

The wife had several years before gone through a divorce and had clicked several 30 and 60 day late payments as her and the ex husband duked it out as to who was going to be responsible for paying these debts.  The divorce had been final for over 4 years and all of these cards had been paid in full.  Her sin was that she had not attempted to reestablish credit since then.  

Both spouses worked (ratios were good) and they had an excellent rental history.  She was pregnant at the time and instead of using their limited savings (they had about $10,000 saved up) they decided to keep their money in their pocket to cover the time that she was going to miss from work when she had the baby and to fix up a nursery in the home after they closed on it.

We sat down and went over their options and decided that a 2/28, 100% LTV loan with no pre-payment penalty was their best option.  She agreed to open a couple of charge card accounts in order to reestablish her credit and he agreed to start paying his charge cards off on a monthly basis (he had no idea that he was doing anything "wrong" by carrying a balance on his cards.  As a matter of fact, he thought that he was being responsible by only having cards with low credit limits and by making his payments every month - go figure?).  

My point is that these folks don't deserve to lose their home when they can't refinance because the value of their home has temporarily (my prediction there) gone down, putting them in a negative equity position.  I don't remember the adjustment that they are going to face, but I'm sure that it's not going to be pretty!

Yeah, some sleeze balls are going to sneak in here and figure out how to game the system, but we can work to keep that to a minimum and in the mean time help a lot of good people, ourselves included, out in the process.  In short, we can promote the general welfare and insure domestic tranquility and that is a legitimate role for government!  

Bob Mitchell

ValueList Real Estate Services, Inc. 

PS. Broker Bryant also commented with a suggestion that maybe FHA could step in and help with a program that would screen for people who refinanced and took all of their equity out within the last three years.  To me this is a tough one, I can definately see Bryant's point here, but I wouldn't want to make that a die hard rule of the program because some people might have had legitimate reasons for cashing out their equity such as college tuition, medical bills, etc..  I would think that any program would have to have a set of rules in place to make sure that we weren't subsidizing bad behavior such as providing deposit insurance for a federal bank that according to it's parent company is there to support it in it's time of trouble...bet you can't guess which large mortgage company I'm talking about!