Mortgage News Daily received an email this week from a reader with an intriguing idea for, if not solving, at least lessening the foreclosure crisis. What we loved about it was its simplicity.
The reader said that she works with a real estate attorney in Florida, one of the three states most heavily impacted by foreclosures. She said that her workload has shifted from helping her employer prepare and complete some 40 real estate closings a month to working with families facing foreclosure. She asks a very simple question:
"Has anyone ever suggested that we cap the interest rate on all those ARMs, regardless of the credit or income of the borrowers?"
The cost to the banks modifying these loans with the methods they are currently using, she says, has got to be astronomical. Consider the man hours necessary to answer the phones, gather the information the borrowers must provide and then reviewing these documents which appears to take at least 30-60 days. Now consider the cost and the effects of writing all borrowers that are 30 days delinquent that their original interest rate, whether 4 percent, 5 percent or even 6 percent and tell them that their original rate is now their current rate.
There have been several rate freezes proposed in the last 8 months, but most were so constrained by eligibility, time limits, and so forth as to be massively unhelpful.
There are a lot of holes in this idea, but at its heart there are components that might work. The problems?
First of all, the 30 days delinquent requirement almost guarantees that thousands of paid-to-date adjustable rate mortgages will immediately become 30 days delinquent, so scratch that part of her suggestion. Better to base eligibility on the date of the loan (when did teaser rates first kick in?) or the size of the contractual rate jump.
There would have to be a mandate from somebody - Congress, the Federal Reserve, Treasury, to fix those rates and the immediate objection is going to be that the government is interfering with the property rights of the lenders and/or investors who own the loans or that those investors will be reluctant to cooperate because it cuts their profit margin.
That ship has sailed.
Both because of the losses they are suffering and because lenders have been all too eager for the government to feel their pain - and do something about it - it is time to take definitive action that will solve the problems of more than a handful of borrowers, and solve those problems instantly.
Then there are those standing on the sidelines who will mightily resent borrowers getting any break in rates and terms. No matter that every foreclosure in their community is costing them in property values and probably tax revenue. Their refrain remains, "these people bought houses they couldn't afford; they don't deserve a bailout." It is time to get over what an earlier generation would call a "dog in the manager" attitude.
This suggestion is akin to a solution proposed by Congress in which the Federal Housing Administration would be empowered to guarantee loans that have been written down by the original lenders to reflect current home prices, but her plan could be implemented with no new bureaucracy and very little in the way of expense and manpower.
Congress's bill would require an appraisal of the property and does nothing to lessen the workload of the lender or servicing staff charged with collecting and reviewing the information which their bosses view as necessary to processing workouts or restructures. Worse, it would require a potentially catastrophic investment of federal money should FHA have to make good on substantial numbers of loan guarantees.
The idea requires willingness on the part of the lender/investor and a postage stamp.
One can imagine countless variations on the plan. The rate freeze/reversal could be temporary - perhaps limited to two years - or apply only to those whose new rate would be in excess of a given number - perhaps 7 percent. Borrowers might be offered a carrot - if they get caught up on their arrearage and then continue to pay on time under the new loan terms they might be put on an expedited list by the lender for a permanent workout, which the servicer could have the luxury of time to effectuate or to sell or refinance the house at today's relatively low rates without government assistance.
If lenders and servicers decide to continue on their present course of waiting for the government to bail them out or doing workouts according to their current formula, the number of foreclosures will continue to rise. And what is the cost of those foreclosures? It is probably a more staggering figure than you had thought. We will detail those expenses, not only to the lender but to the affected homeowner, local government, and the neighborhood in another article this week.
What do you think? Could a plan this simple work? Why or why not? Please share your thoughts below.
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