An excellent OpEd piece in Friday’s
NYT, "Why Own When You Can Lease?" by investment banker Daniel Alpert, articulated quite well something that I have been thinking long and hard
about since early last Fall, when the economic collapse became very real, very
quickly, for us all.
Alpert says that mortgage lenders
need to do something more meaningful and creative about working with
"underwater homeowners." He says
there that, if they don’t, then Congress should make them. Alpert posits that this is the only way
to stop the cascading foreclosures, empty homes which tug down the real estate
market for all of our homes, in combination with serious intransigence on the
part of home mortgage lenders, is to get rational about letting distressed
homeowners continue to live in, and lease, the homes they are losing. Alpert makes a lot of sense; lenders
should listen.
The insidious thing about the
securitization of home loans, gathering them up into a big pool and selling the
pools to investors, is that an individual homeowner who is having trouble
making his or her mortgage payment often cannot find anybody to talk to on
behalf of the lender. The actual
mortgage may have been long ago sold into a securitized pool and it may now be
held by some pension administrators in Iceland. You cannot just figure out the international calling prefix
for Iceland, pick up the phone, and call them about renegotiating your mortgage
to an amount that you can keep paying now that your employer has ‘down-sized,’
or cut back your hours, or laid you off.
A cottage industry of Home Loan
Facilitator/Negotiators has sprung up.
You see them ad nauseum making
all kinds of promises to you on late-night and daytime TV, advertising that
they, and only they, have the key to contacting your lender and talking some
sense into them. Maybe, maybe not.
I have seen figures indicating that
home foreclosures by lenders are far from cheap – some statistics place the
cost per home in the $30,000 to $60,000 range, without an intervening
bankruptcy. When the home goes to
sale, the lender credit bids with nobody bidding against them because the loan
amount has slid beneath the waters of fair market value, leaving hardly a stain
in the water. Then, the lender has
an REO (lender-talk for "Real Estate Owned") on their hands – a home they
loaned too much on for today’s values, usually in sore need of tender loving,
and expensive, remedial care. And,
after paying for repairs, re-painting and sprucing the home up, it can then sit
vacant for 12 to 18 months, waiting for somebody to buy or lease it; the lender
is now saddled with the carrying costs.
Meanwhile, the rest of the neighborhood around that home suffers from
one or many vacant homes, tugging down values all over. That’s if the story has a good
ending. If not, the lender does
not do the repairs, the home is gutted by transients, people hunting for
copper, electrical fixtures, and anything else that can be torn out and
re-sold, lawns get jungle-y, and it becomes an eyesore, even further dragging
down the fair market value of the neighborhood. Go for a ride to the Inland Empire and you will see whole
neighborhoods like this, which have more vacancies than owner-occupied houses
right now.
Alpert’s piece further observes
that the Federal BailOuts of the banks may have inadvertently made matters
worse by taking away some of the lenders’ desperation to reach a rational
solution with the homeowner, resulting in making the lenders with new
staying-power (your tax dollars and mine in their coffers) even less likely to want to negotiate
something that the homeowner can both live with and live in – namely, his or
her home.
There is just no rational reason
for the current situation. The
sane solution, whether Congress makes the banks do it (controversial, to say
the least), or whether the lenders wake up, take a dose of sanity, and realize
it themselves, is to work something out before
the homeowner craps out on his or her mortgage, destroying their credit,
forcing the lender to go through the months’ long foreclosure process, and
firmly fixing everybody into their unworkable positions with no hope of
rational resolution.
Many homes lost to foreclosure
could have been leased to the homeowners with a bit of intelligence applied to
analyzing their situation and working it out. After we hit historic low interest rates in ‘04/’05, we had
some 18 or 19 straight hikes on those variable rate loans, some others re-set
at amounts that homeowners could not pay.
OK, some borrower/homeowners were complete dopes and never should have
taken the loans in the first place (think NINJA loans), but, others were just
overtaken by events. But, more
jobs are being lost every month and more homeowners cannot pay their mortgages
without those jobs. This cycle is
continuing.
Lenders have dug a rut for
themselves by not talking with distressed homeowners. That rut has lowered your home’s value and mine too. It will keep doing that until lenders
take a dose of sanity, step back, and get creative about keeping decent, but
"underwater," homeowners right where they are (and should be right now, for all
of our own good), in their homes, paying rent, and keeping this dicey situation
retaining some potential of righting itself, once home values stop their
downward plunge.