Solutions to the current "Housing Crisis" by Nick Burrafato, Broker

 December 17, 2008

RATES AREN'T THE PROBLEM...CONSUMER CONFIDENCE ISN'T THE PROBLEM...ACCESS TO MORTGAGE MONEY ISN'T THE PROBLEM!!!

I feel that the inability of homeowners to "sell" their homes is the major problem.  We don't have a "rate" problem we have a "negative equity" problem.

Here is an example of the problem:

In 2005 John Smith buys a house for $500,000 he puts down 20% and finances 80% which is $400,000...

Fast forward 3 years to 2008... 

If John's house reduced in value by 25% which is very typical in Florida and may be on the low side, his house is now worth $375,000.

If John were lucky enough to sell his house he has $25,000 in negative equity as he has paid little or nothing down on his mortgage and he has to pay nearly 8% in closing costs and real estate commissions.

$25,000 + 8% of $375,000 = $55,000 in "negative equity".  John is upside down in his home...

Now here's the scary part, John is in the minority! 

I estimate less than 5% of people from 2005-2008 put down 20% or more in my market...Most people in John's situation would be $90,000+ or more upside down in this situation.

 The reality is, People need to move:

1. They loose their job
2. They get divorced
3. They need larger homes due to increased size in family
4. They need to scale down because of economic conditions
5. They get a job transfer

There are so many reasons that people have to sell...Many of which don't want to take part in the Short-Sale situation or become a foreclosure but there may not be another option.  This scenario is not a teaser rate or hybrid mortgage problem; it's simple math of depreciation.

I have a solution and I think everyone can win!

If John is $55,000 upside down and can't afford to sell his home, I think the bank is in a position to help him. By helping John sell his home he will be able to take that job transfer and buy another house wherever he is going which means the sale of two homes and has a major positive chain reaction throughout our economy.

 Here's what I think the bank can do: 

• Detach the "negative equity" from the house and place it on John.
• Give him a personal note for the money and maybe even offer him a discount of 20% for entering the program as opposed to just walking away from the house!
• John can now pay the money back over a period of time & rate that he and the bank agree on.
• John can now move, take that new job or scale down for economic reasons
• John should be given a chance to buy another home as long as he is current on his obligation to the bank.
• If John defaults, he should not be granted another mortgage until he becomes current.
• I also think there should be a "profitability clause" which I define as the following:  If John does buy another home and decides to sell that home for a profit, a percentage of that profit or all of that profit should go toward the balance John owns the bank for his original obligation, up to the amount he owes.
• Everybody wins!

Sure there are some people who will never give the bank a dime but let's face it, those are the very same people who were going to walk away in the beginning!

You can't throw money at a problem but you can seek alternative solutions.