If you've been watching the "ABC" soup financial shows, you know that experts are thinking that this bailout is just the tip of the iceberg! Here is a heart warming article in regards to the major players and how much they currently are in the hole. 549 BILLION WRITEDOWN
$700 Billion is a band-aid at this point. We may need double that amount to ride out the rest of the storm. We haven't even cycled through most of the "stated" and "Option-ARM" programs. Hopefully these borrowers value their credit scores more then the subprime crowd, but there is no guarantee that home borrowers in California and Florida are not going to bail on their option-arm loan.
I can see why the House Republicans are nervous about applying a band aid, but I'm wondering now if the Demcrats were not right in one respect. There should have been some type of legislation for the actual homeowners, especially in the key write down states (Florida, Arizona, California, Nevada). Along with lender writedowns should have been a clause to allow borrowers to petition to rewrite their loan terms, especially if the borrower has income or FICO qualifications that would approve the loan at the reduced market value.
Here's the problem as I see it. You take a borrower living in San Diego. He buy's a house at the height of the market for $1 million. He get's one of these "stated/stated" loans with very little down. He and his wife make about 120k-140k combined income each year. They've been able to barely make their payments each month. Now the market tanks, and their $1 million three bedroom/2 bath home is now worth $550k. They realize that they have to move because he get's another job somewhere else. In a normal market they would put the house up for sale and sell the house. The problem is the market has collapsed, so they then call the bank and see if they'd be willing to allow a short sale.
This conversation than ensues, "Hmmm...we'll if your actually in foreclosure then we'll consider it", states the bank. Interesting, so you have to be already in default before the bank will even consider a short sale. So now what options does the homeowner have at this point.
Let's rent it out!!! Nope, not a great idea, because you'll get far less then the mortgage payment, and then it's going to be even harder to sell with a renter. Plus the emotional hassle of selling or renting on top of the belief that you'll take it in the shorts is psychologically too much for some homeowners. So what do they do?
They give the banker their KEY! In other words they give up! This is why the problem won't get any better unless there is some serious consideration to "Re-aging" the loans. A homeowner in this type of situation is going to bail before dealing with the cold hard reality of their purchasing decision. Bank's can do one of two things, ride out the foreclosure (spending thousands in legal fee's), or they can swallow the bitter pill now and write a new loan for that homeowner, or allow short sales before their clients goes into credit default on the home.
Your already seeing borrowers quietly attempt this move already. Recent changes to FHA rules are going to slow this strategy down, but borrowers are fleeing higher end mortgages already for smaller mortgages. Once they sign the new mortgage they let the bigger mortgage fall into foreclosure. So it's going to happen like it or not, and why congress didn't include some type of legislation to help lenders and borrowers is beyond me!
Let's face the fact's everyone. If we're going to bailout one group, then principally we should bail out another or we should let the whole system burn down and rebuild. But this bailout of the banks isn't going to be the ultimate answer. The government and these Wall Street guy's are still missing the heart of the problem. It's the real estate values DUMMY's!
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