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This is why I blog!! (Please help me spread the word)

Something happened today that embodies the very reason why I blog. Back on August 13th, I wrote a post in my blog concerning the subprime mortgage crisis that discussed the involvement of several political figures in offering a solution to this problem. You can read the original story here:

Subprime Mortgage Mess: Everyone Jumping In

Well, today someone commented on my blog. It was a homeowner facing the dreadful reset of their ARM mortgage combined with a value decline in real estate prices that is keeping her from refinancing her home. She offers a solution that I think is brilliant and would save many homes throughout the US. She does not know how to spread the word so this idea could be considered as a possible solution for the current crisis. And I am writing this post today to help her spread the word and to ask you, my fellow colleagues to spread the word even more. This is her original comment from my blog:

Concerned Mortgage holder

I have an adjustable rate interest only loan that is due to reset next July. It is in my husbands name only. The house is in both our names. We got this house with 100% financing. We are making the payments fine. Our hope was as was most people’s 2 years ago is that the value of the house would go up and we could get better financing in the when the 2 year prepay was up. Because of the 2 year pre-pay and the value of the house stagnating, we can not refi before the prepay penalty is up. Now we are in the position that our house is financed at 100% of value or less and might not be able to get the house refinanced. In the town we live in it is a small town and there is an abundance of houses on the market. My husband and I do not want to loose our house when the loan resets but we may have to walk away. The things we have in our favor is I am not on the loan and I have excellent credit. We could rent a house like ours for about 800 a month less than what we are paying. So with my credit and my income we could get a rental and not be homeless easier than we could re-finance our house. We do not have the money to pay our house down to 80% of value or even 95% of value in order to refinance when the time comes. I believe there are a lot of people who are in my position. We could pay the mortgage payment for our entire house if we could refinance it. The problem is the value of the house has probably dropped since we bought it and one cannot get financing for 100% much less more than 100% of value. I believe the market will eventually turn around and my home will be worth what I paid for it and someday even more. My husband and I just want to stay in our house and eventually pay it off. Because of the problems with the market that my not happen.

What I propose is that the note holders extend the fixed rate term of the note for 5 to 10 years or so until the market is better or they could just change the terms of the loan and make it into a to a fixed rate. They will loose the interest that they may have made on the note when the note adjusted if the people who owe on the note kept paying there payment. However, if the people on the note just rent a home before there credit gets bad and move out and send the keys to the bank who is servicing the loan., effectively defaulting on the note. The note holder will loose a lot of money. They still have to foreclose on the house and then they have to sell the house in a very down market. This is happening all over the United States Today.

This scenario could all be stopped by extending the current payment arrangements until the market picks up enough for the people to refinance their house or the income goes up enough to pay the adjustable rate after it adjusts. The note holder would earn the current interest on their money and not have to foreclose on the house in a market where so many homes are being repossessed and cannot be sold. This would bail out both the buyer and the note holder from a bad situation.

In the event of a foreclosure the second note holders are the ones that will be hurt most but the first holders are not in that great of shape given how the prices are going down in some parts of the country. A piece of something is better than 100% of nothing.

The problem with the FHA bill that congress just passed is that it doesn’t address the needs of the people whose home is worth less than they owe on it. Those are in the position to continue making the current payments as they are, even though they owe more than the house is currently worth. If those people do not have enough in savings to pay the difference between what FHA will loan on their home and what they owe on the house currently they will loose their homes.

I think my proposal is a good proposal however I have no idea how to pitch it, and to whom can I pitch this idea. I would go to the banks but most of the banks that you pay your payment to only service the loans they do not own the loans. Does anybody know where I can go to spread my idea so it will be taken under consideration? I have talked to a few people in the mortgage market industry and they think it is a good idea. Can someone help me? I can be contacted by e-mail at astrial@earthlink.net.

Thank you for any and all help.

Bridget

Please help me spread the word by flagging this post to be featured. Active Rain, no points for this one please!

This is why I blog: For that slim chance of actually helping someone like Bridget!

Posted by Erion Shehaj - Houston Real Estate Broker on 10/04/2007 01:53 PM

Comments (18)

subprime problem, concerned mortgage holder, solution, mortgage meltdown

18 Comments on This is why I blog!! (Please help me spread the word)

OCT

2007

Erion, this is my exact argument from day 1. I've probably blogged those exact same words - the problem would go away if investors would simply extend the original terms of the note. It's a simple logical solution to an otherwise untenable problem.

Many here on AR disagree with me and it's hard to sell. Start with her state legislatures, send the idea to the newspaper and push it forward.

good luck

Hi Erion,

I agree... it is a simple solution that can help many people. Thank You!!!!!!!!!!!

I agree that the problem may be reduced if the fixed rate were extended but in most they can't be...While Bridget's loan servicer may be Countrywide or WAMU or whoever she makes her payment to, they don't have the abililty to modify the loan because it isn't actually owned by them. It's was long ago sold off as a mortgage backed security and may be owned by a foreign entity.

It is unfortunate that this person is in this position. I feel that it was a bad decision to put this person in a adjustable rate mortgage. I feel that it is the fault of the borrower and the broker. Not the servicer or the lender. The lender offered the loan with the risk that the may default. The buyer more than likely wanted the lowest rate. Unfortunately to get the lowest rate,they took on the possibility that the rates may go up and they may default. This is not the lenders fault. The buyer made a decision to take a deal realizing or not the consequences.

Shaun

The risk analysis you offered is correct in a business as usual setting! Except that this is not a "business as usual" type of situation. The lender did take on the possibility that the buyer may default, but I assure you that they did not take on the possibility that so many buyers would default that it would affect not only the real estate market but the overall economy. I think we are at the point that a solution needs to be found so that the cuts from this mess are not so deep that the market bleeds to death. And the solution Bridget is offering does good not only for the borrowers but also for the lenders. Because last time I checked, making less money always beats losing your shirt!

Erion,

I think the borrowers who are in high LTV Option ARM's are at even greater risk than those borrowers in a traditional hybrid ARM such as a 2 or 5yr ARM...In a few parts of the country these borrowers now owe 110-125% of the homes value... The only reason the borrowers were able to afford the home was because they could make the minimum payment, which we all know creats negative equity if practiced long enough. Do you suggest that borrowers with Option ARM's continue making the minimum payment until the values come back around (which in the case of an Optiona ARM, it will never happen) OR just regular ARM's?

For every action there is a reaction. If they bought a home with 100% financing and the loan officer /mortgage broker didn't think about what could happen. That is something that the loan officer will have to think about when they go to sleep tonight. If it was and option arm and they paid the lowest payment, I don't think they should have qualified for the home in the first place. Either way , it is not a good situation.

John

I am not referring to folks with "minimum payment" loans. These are people that can afford the full mortgage payment (principal and interest) at the fixed rate for the the two or three years that the rate stays fixed. However, they are terrified that once the rate resets they will not longer be able to make that payment. These are the folks that can be helped if their lenders show some flexibility on the terms. I don't advocate helping people that wanted to live in the big house even though they could not afford it. However, when you have a case of property values declining, you cannot refinance even if your credit is spotless.

It seems to me like Bridget had an interest only loan, which is significantly different than an option ARM, in that it does not cause negative amortization. The way I am reading the solution proposed by her is that the lender should extend the fixed portion of the rate enough time to allow the market values to stabilize. That does not mean that she should keep paying only the interest portion of her mortgage (I don't think that would be fair). However, there is a huge difference between making a slightly higher payment due to the added principal and making a huge payment because the rate is now 4% higher.

It is a sad situation that we will unfortunately see a lot more of. Some Mortgage lenders are already contacting the people that they may be able to help. I hope they are able to modify their deal.

Good Luck.

MortgageNewsDaily.com is soliciting consumer feedback - I'd try that!

Erion, how sad! I'm naive on that type of loan. What a shame that they were even allowed to present that type of loan, it is a loan looking for trouble. Her idea is EXCELLENT! I would think banks would want to jump all over it rather than take the forclosures. I've done a couple short sales with banks and they have been fairly accomodating; rather than take the foreclosure (although it should be called long sale) so this would even be better for them I would think.

I read a couple of comments, and I agree with John, the lender has long ago sold the loan in most probability. I wish them much luck.

If their loan is an 80/20 they may be able to get the fha refi on the first lien if the 2nd lien will resubordinate. <= why wouldn't they at the thought of oreclosure. Because the 2nd lien holder gets the scraps after the 1st lien holder sells it off.

1st thing: Try to work something out with lender.

2nd thing: Look into the FHA deal.

Tom,

If it is an 80/20 that IS an excellent option...I wish there was some way to give you points just because you gave an excellent option that nobody (including me) thought of...

Great point about blogging. I didn't realize how powerful it could be. Thanks for the info.

OCT

2007

This is a great idea. Sounds like it may be easier said than done but would definately help a lot of people!

OCT

2007

Once bitten twice shy -100% financing sounds great (we have always financed our real estate purchases 100%) but we have also seen the down side where as in many cases today property values dropped and the financing became higher than the value of the property. Unfortunately many folks do not take this possibility into account when buying with 100% financing.

While I emphasize with the buyer and the mortgage company I do not believe you should legislate a resolution as one solution does not fit all situations. It should be up to the individuals involved to work out a resolution that fits their own given circumstances. (some private investors may not be in a position to work out a deal)

If you find your self in this position talk to the mortgage company before doing any thing drastic like walking away, you may be surprised.

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