Portable Debt

Industry Observer

There are about a half generation of homeowners who are underwater today, and some are looking at options.  The group can be separated into people who are comfortably meeting their payments and those who are having some trouble, maybe serious trouble.  Those two groups can be further divided into those who love their homes and want to stay there, and those whose homes fail to fill their reasonable wants and needs -- they hate the place and want to live somewhere else.

Banks love underwater homeowners who are easily making payments and love their homes.  They aren't going anywhere, and the loans could run their full thirty year terms.  All the banks have to do is not change their address without notice, and the money will arrive on schedule. 

Then there are the others, people who love their homes but can't afford to live there, and they are a challenge for banks.  Fortunately, there are some government programs to help the homeowners with the least serious problems.  Maybe there's a way to modify the loan terms to make things work out.  Maybe not.

The most serious problem is the group of homeowners who really don't like where they live.  They have several choices.  They can tough it out for the long run and remain substantially unhappy, failing to address the growing needs of their families.  They could also choose self help and either try to convince the bank that they should be allowed a short sale, or perhaps they could just leave and never look back.  Those are about all the possibilities.

Banks will lose little if they modify the terms of a loan.  They will lose a pile if they approve a short sale, but it's a smaller pile than they will lose if they have to repossess and re-sell the home.  There is one alternative that has been ignored, portable debt.

Banks could consider requests from owners who could afford a higher payment in a home more suitable for them and their families to transfer debt from one home to another.  Assuming that the owner paid closing and selling costs and had some type of minimal down payment, the bank would substantially have a new loan with the same debt as the old one.  There are a few differences, mostly in the bank's favor.  First, the owners now have a home that they like, and they are far less likely to walk away in the future.  Second, the bank owns a new loan with a better (well, less bad) LTV than the previous loan. 

Overall, portable debt would benefit lenders, homeowners, neighborhoods, and the housing industry.  Why is there no portable debt option for responsible homeowners?

Posted by

 Mike Carlier  Lakeville, MN





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Randi Brammer
Randi Brammer, Acctg. - Hinckley, MN
Accountant & Tax Preparer

Those are the people with some pride many times.  Also they understand the long term and short term ramifications of walking away.

Feb 16, 2012 07:47 AM #1
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Mike Carlier

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