It is quite clear to most of us that the primary cause of all the foreclosures we are now experiencing is the fact that too many lenders made too many loans to too many barely qualified buyers. Obviously, it is too late for those that have already gone through foreclosure, and it might be too late for many others where the foreclosure process is well under way. But for those borrowers who are still current (or maybe only a month or two behind), there are some things the current noteholders should consider to prevent them from having to foreclose, and take back properties that we all know they do not want.
1. Waive the pre-payment penalty. "Wake up note-holders! Contact your borrowers now who have prepayment penalties in their loans and inform them that these fees will be waived if the borrower can either re-finance or sell the property."
2. Convert your Adjustable Rate Mortgages (ARM) to fixed rate loans. Many of these borrowers who are currently having problems making their monthly payments were qualified with teaser rates. Adjust the terms of their loans so they are again paying a teaser rate, also referred to as an affordable rate. Doing this for the entire term of the loan would be best for your borrowers, but even doing so for another 2 or 3 year period would help many keep their homes.
3. Lower the margin you are charging. Not all ARM's are bad loans, but ARM's with margins in the 5-12% range is a major part of the problem with these sub-prime loans. Following the lead of FHA's ARM would be a good place to start. It has limits and caps that protect the borrower from huge increases in their monthly mortgage payments.
It amazes me the investors who bought these loans, as mortgage backed securities, were naive enough to believe that their expected yields would not be offset by the losses that result when the borrower can not afford to re-pay the loan. Too many borrowers were put into situations where failure was inevitable. I would love to see these investors, who purchased these loans, re-calculate their yields now that they know the foreclosure rate. I guarantee you the yield spread premiums that they paid to the mortgage originators would have been much lower if anything at all.
These are just a few of my ideas. I am sure the Active Rain community can come up with more.
Littleton, Colorado
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