Yesterday I wrote about The Big Surprise in which I attempted to make a case for some pre-emptive action by lenders to head off further defaults, specifically voluntary or strategic defaults. Banks have not publicized anything that indicates that they plan to make any changes in the current way they do business -- they are ignoring the issue. The anti business, especially anti-bank government is content to wait and watch the problem they foresee as exclusively a bank problem deteriorate.
There are some things that could be done to reduce the number of defaults, and I'll suggest a few. Please add to the list if you have any proposed solutions.
- Prosecute to the fullest extent of the law. Most businesses and attorneys general will only pursue the most egregious cases and let the small stuff fall by the wayside. A harsher stance that would not tolerate fraud and recoverable default would slow down some of the walkaways. Banks don't like to enforce things that cost more than probable recovery, but there may be some deterrent derived from full enforcement of all legal remedies. I don't think this will happen, and I'm not sold on the idea that it would make much difference.
- Allow move-up buyers to port debt to another home. The issue here is not whether to allow negative equity. It already exists. There are some homeowners who would like to move and have the means to increase their monthly payments significantly. If banks were to consider a well-qualified mortgagor to move their debt to a new home, the banks could actually improve their position. Along with a porting agreement could be a stipulation that the homeowner make a substantially higher monthly contribution to the existing principal until the loan to value ratio reaches 80%. Assuming that the move up buyer is buying a home with the same or greater value, the immediate result would be either the same loan to value ratio or better. The bank gets a better LTV and a higher monthly debt service. In the meantime, the higher contribution to principal reduction keeps the homeowner from going further underwater. The homeowner also gets a home that is more suitable to circumstances and less prone to the ick factor that could contribute to voluntary default thoughts by the homeowner.
- Propose underwater workouts for homeowners who aren't thinking of moving soon. This seems like another no-brainer for lenders, and it deserves a look. Start proposing loan modifications for homeowners who are underwater but not in trouble. The simplest formula would allow a homeowner to voluntarily increase monthly contribution to principal in exchange for a lower interest rate from the lender. If I agree to increase my monthly payment by 10%, the bank will agree to decrease the interest charged by 10%. The numbers could be higher or lower depending on the homeowner's comfort level for payments. The agreement could run until the loan to value reaches 80%, or for a period of time, say one, two, three years to be renewed by mutual agreement. So, a homeowner with a principal and interest payment of $2,000 would agree to pay $2,200 on their 6% loan in exchange for an interest rate reduction of .6% to a rate of 5.4%. There would be noticeable progress toward getting back to even relatively quickly.
One or more of these could be implemented with what I feel would be noticeable progress toward getting a substantial number of homeowners back into the housing market, some immediately and some a few years down the road. Anything that can be done to reduce the number of defaults will help get the industry on the road to recovery.