I brought it up a while back that I thought principal forgiveness would be the next step in trying to reduce foreclosure numbers, and sure enough, Bank of America has jumped on board. At the time, I received a lot of negative comments which primarily stated that it would never happen because the banks would not take those losses and because the contractual language of the structured securities that held these loans would not allow for it. What many do not seem to realize is that there are very few options for the banks to stem foreclosure losses. Many individuals have found themselves in financial situations where the most economical decision is to strategically walk away from their houses and the mortgage loans shackled around their ankles. Banks have been paying money to individuals who reside in defaulted residences because in nearly every circumstance, forced foreclosure can be the most devastating loss of all. Bank of America sees the writing on the wall:
“The bank (Bank of America), the largest mortgage servicer in the country, said Wednesday it will forgive up to 30 percent of some customers’ total mortgage balance. The homeowners must be at least 60 days delinquent on their loans and owe more than 120 percent of their homes’ value.”
Bottom line, this is a case of moral hazard that I have been cautioning against. Any time that individuals or corporations are saved from their poor decisions, it sets a precedent for all future decisions made by corporations and individuals. To understand this logic you only need to consider one man’s plight: what about the hardworking american who makes $45,000 per year, supports his family and makes every payment on his mortgage while losing his pension plan, losing vast quantities of money in his retirement plan, and has watched the value of his home decline by 30% which has placed him 20% in the hole. How is he going to feel when his neighbor receives a 30% reduction in his mortgage because he stopped making his payments? Under these circumstances, did the hardworking american make the correct decisions for himself and the financial health of his family? He might have taken the ethical high ground, but next time he will likely think twice. Meanwhile, the neighbor who got bailed out will continue to make financially reckless decisions because he never was forced to feel the pain of his mistakes.
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I remain skeptical regarding how much this will help anyone. For example, someone who is unemployed and can’t pay their $2500 per month mortgage gets their principal balance reduced by 30%. Then what? Their mortgage is refinanced reflecting the new principal and their monthly payment drops to $2000 per month. Maybe it drops to $1500 per month. Whatever the numbers are, you can’t get blood from a stone.
You are correct, but when at first you do not succeed, try, try and try again…
Just look to loan modifications as an example: “The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months.” – Bloomberg
OK, loan modifications are not working and reducing principal balance does not seem promising. When you’re long and wrong you can either hit a bid or be patient (stubborn). As far as residential real estate goes, I think now is a time to be patient. How about Mortgage Amnesty Program. Homeowners who are in trouble can apply for a 6 month mortgage vacation with no payments and then try to resume payments at the end of that period. People who are under water stay in their home and get a chance to come up for air. Maybe they’ll find a job, maybe they’ll find a buyer for their house. With a 6 month mortgage vacation, hope springs eternal!
It’s the same idea with pension funding relief. They’ll be targeting the plans that “need help the most”. In other words, we reward incompetence (or corruption).