Home : Blogs : Janet Guilbault California Mortgage Banker/Broker : California Mortgage Advisor

The Top Ten Worms That Crawled Out of the "Debt Forgiveness" Can

Please study the headline of this post carefully.

Since "WE" are funding a bailout of toxic mortgages, "WE" (taxpayers) should be very careful in demanding a solution that wipes out debt (forgives principal) instead of restructuring the loan (lengthening loan, reducing the rate, etc).

I agree with Lenn Harley's premise that rising payments on adjustable rate mortgages increases the risk a homeowner will walk away, creating another foreclosure, and the continuation of the mortgage crisis.

But wiping out $150,000 of a $375,000 loan increases the risk of something much bigger: that we as a nation come to view debt as something disposable.

Here are some potential worms:

Nation decides as a whole to abandon that quaint old fashioned notion: "HONOR YOUR COMMITMENTS"
Banks decide to exit the mortgage business. Why loan money if people don't believe they need to pay you back?
Taxes go so high (to fund bailout) that paying the adjusted mortgage payment would have been cheaper each month than the damn taxes.
Your teenager flunks math and expects a bailout from the teacher.
Bankruptcy? Costs a lot. Getting free money to pay down your house? Priceless.
A guy gets a bailout because his debt to income is too high. His income simply will not cover his house payment AND.... a boat and a car payment, sending his kids to private schools, and the timeshare he bought last year.
Feds won't let the banks exit the RISKY mortgage business. So banks continue to make loans. To everyone with an 800 score and above, and who have a 50% down payment
People who were "saved" from foreclosure by the bailout walk away from their house anyway, because what they really wanted was a funded exit strategy.
Your best friend tells you this and it makes you mad: "My bailout is bigger than yours".
Every person who buys a house from this day forward must also buy foreclosure insurance from the government. Rates go to 5% but the insurance adds $500 a month to every payement. Government immediately spends foreclosure insurance money to bail out social security.

Written by Janet Guilbault, Mortgage Lending Specialist Based Out of the San Francisco Bay Area

Posted by Janet Guilbault California Mortgage Banker/Broker on 11/24/2008 10:02 AM

Comments (10)

Mortgage Mess in the Mortgage / Finance Channel

monday musings, mortgage crisis, mortgage mess, bailout

Post is included in group: Realtors®
Post is included in group: Mortgages
Post is included in group: Mortgage Blogs
Post is included in group: LOANS

10 Comments on The Top Ten Worms That Crawled Out of the "Debt Forgiveness" Can

NOV

2008

I find myself laughing, but it's a nervous laugh. Especially number 6... I think everyone getting any kind of bail out has to cancel their cable TV and give up their Starbucks habit. We (the taxpayers) are going about this all wrong.

Janet ~ We definitely need to be careful with what we wish for don't we. Walking away from your home may mean you pay for it in other ways, higher taxes, angry friends and neighbors, and so on. Your" top ten worms..." should make us all pause and think into the future a bit more.

With every financial crisis, the initial remedies are always wrong because they were initiated with the nature of the previous crisis (French post WW1...the Maginot Line). We won't truly know what is necessary to fix the problem until we really understand the problem...and to this point, no one, not one idiot in Washington OR Wall Street that has any power to do anything about it understands the problem.

Q3 of 2009 we'll have a pretty good bead on what the remedies need to be that actually address the root of the issue rather than the symptoms!

Actually, my scenario is based on a true family to whom I sold a home in Olney, MD in 2005. A lovely couple with 2 children who made enough to qualify because they were debt free.

The examples in your post are not remotely similar to anyone I know or have sold homes.

The reason I'm advocating write-downs of mortgage balances to market value is because anything less and the 95% of home owners who are now making payments will be in jeopardy of default with the slightest emergency, job loss, medical emergency or anything.

The fact is, banks are not modifying loans by reduced interest rates or anything else to help home owners who are current. These are the folks I'm concerned about. I'm not that concerned about the home owners who spend more than they should, live on credit, take expensive vacations, buy expensive cars and clothes, etc.

I'm concerned about the family who did everything right and have, in the past 2 years, lost the value in their home and their future for many years. Neither the banks, FHA, Fannie or anyone else will help them.

I don't know the folks you've described.

Only a national write-down of mortgage balances to market value will help. It's kind of like starting all over. The consumer didn't keep rates low. The consumer didn't invest the sub-prime. The consumer didn't invent the MBSs. The consumer just wants a home for their family and watch their home build a nest egg for their retirement.

Those are the folks I'm concerned about. Those are my buyers.

What's the answer Janet? Do you have a gut feeling on what 2009 will bring to us? I am just hoping for more activity in sales and NO MORE FORECLOSURES.

Lenn: I am concerned about the people you describe as well. But once you start handing out money, everyone expects their cut.

There is an enormous expense for the banks just in paying people to separate the people you describe, and those that will come out of the woodwork when banks start handing out money.

Banks have the ability to help people without forgiving the debt they owe on their house.

We can't bleed the banks. If we do, there will be no more home loans. Now that's when you'll see values plummet. But all those people who are making payments won't be able to sell, because the buyers won't have the ability to get a loan.

While I understand Lenn's idea, I do think that it is a slippery slope. Personally I'd rather see 40 year mortgages to get those payments down rather than reducing the amount they owe. At some point we need to be responsible for our choices.

Besides 40 year loans, there are other creative options. I will discuss these in my next post.

I have spent a career with clients who almost always want me to figure out a way to "make the payment lower" LOL

Real estate financing has multiple ways to get creative. But sometime soon, we should start concentrating on a whole new way of doing loans, so that this never happens again. Tightening guidelines only will not work. Some of the people who are in trouble started out very well qualified, as Lenn pointed out.

We expect the car companies to make cars that people will buy before we bail them out. We expect nothing from banks. We just give them the money and hope for the best????

Adjustable rate loans aren't all bad - one of my clients just received their annual notice and the rate went DOWN from 5%+ to 3.75%.

NOV

2008

Anyone with half a brain knows that anytime the government says they're going to bail you out, it means the tax payers are going to cover it. And I resent that. I bought my house 10 years ago, I didn't refinance it, I didn't take out a line of credit, and I bought with a fixed rate, and put 30% down. I did things the way they should be done. And as a result, I can still afford my house. So I resent having to pay for anyone else's mess!

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?