We have been raised to believe in home ownership as part and parcel of the American Dream. Buying the place that keeps a roof over our heads has been a practical investment as well as a profitable venture for decades. Homeowners have been willing to take on the risk of a mortgage for current comfort as well as to create a nest egg for retirement, building wealth in home equity.
Basking in the pride of home ownership has been our heritage as Americans. In the past, we were rightfully forward thinking to aspire to home ownership. We were correct to buy as much home as we could afford as well as to trade up at reasonable increments to maximize our growing equity position. At retirement, we owned that home free and clear, or knew to plan to downsize. If we were prudent investors, we had enough equity to live our Golden Years with a roof over our heads, without a monthly outflow of precious fixed income toward a mortgage.
Traditionally, bankers have profited as we realized our American Dream. During the first years of timely payments, most homeowners had paid down little principle. We relied on our economy to work to increase the value of our home in conjunction with our consistent maintenance and modest improvements. Those with a roof over our head agreed to pay interest knowing our biggest gains would be realized toward the end of our contract, in conjunction with our approaching retirement. As this arrangement was deemed mutually beneficial to both banker and borrower, a mortgage has been as much a social contract as a financial instrument.
Unfortunately, some time in 2004, society started to lose sight of the beauty of this mutually beneficial agreement. Banks relaxed time honored lending standards. The media in conjunction with the financial and housing sectors encouraged everyone to attempt to fulfill their American Dream of home ownership. Some on both sides dealt with each other less than honestly and fairly.
Balance was disrupted by a rapidly growing demand for housing with a limited supply of homes. In result, home prices rose dramatically to unsustainable levels. Unwitting homeowners found instant wealth in equity ripened before its time, and mindlessly borrowed against their distant retirement with home equity lines of credit.
Yes, the collapse was foreseeable to those working in the real estate industry. The media daily chanted their mantra for the imminent bursting of the real estate bubble. All that remained was for the vultures to sweep in for the last remaining bits of financial gain. In the end, financial instruments were drafted for those that would soon be unwilling or unable to meet their obligations. Many were seduced to overspend by members of the housing and banking industry. Too many people no longer understood or cared about the spirit of the enduring social contract implied for those taking on the goal of home ownership.
In result, the economy has become unbalanced. Owners who negotiated in good faith with adequate assets, stable job history, and acceptable debt to income ratios are unable to afford their mortgage. In the face of an unsustainable economy, millions of primary jobs have been lost. Good jobs that people relied upon to keep a roof over their family’s heads.
There are now many creditworthy people with the most honorable of intentions whose work and investment toward the American Dream are threatened by an economic imbalance caused by the greed of the few. This greed went unchecked for too long, and the dollars and jobs lost affect the entire country. Our economy is broken and there is no simple fix.
Prior to 2006, not many could foresee that home ownership would become the burden that it is today. Who knew that the banks that stood to profit the most from interest paid would not facilitate a restructuring in the face of economic hardship? Unfortunately, the financial sector is now refusing to honor their end of the social contract. This should not be acceptable business practice within a civilized society such as the United States of America.
This economic downturn has stripped too many of us of the equity gained through the interest paid. For the most unfortunate, the job that provided the ability to pay is gone along with the taxable income that once received the benefit from interest paid. All up, the same roof on top of four walls has become a heavy burden, a jail of economic confinement threatening to collapse and crush them in the process.
Regardless of the fact that the loan's originator no longer owns the note that they wrote, some branch of the financial sector needs to take responsibility for an instrument signed in good faith. Home ownership needs be restored to its rightful place as a financial commitment by both lender and borrower to their mutual building of wealth for the future.
The only way that this can happen is for the banks to work with the homeowners. There are so many options to restructure these instruments that it is shameful that so little is being done. President Obama will announce on Wednesday, February 18th, this administration’s plans to stem the tide of home foreclosures. In the meantime, the banks have agreed to stop working on home foreclosures.
Unfortunately, America must be patient with regard to this solution. There is a single one-size-fits-most solution to the housing crisis. Regardless of the myriad conditions found among troubled home owners, it is the financial sector that must return to the process of negotiating in good faith with homeowners.
Those servicing the loans need resolve to take partial payments. Loans can be restructured to add missed payments (partial or full) to the end of the loan specifically for those that have been laid off or have lost their primary job. If the home can appraise without the balance being greater than market value, lenders must be encouraged to renegotiate that loan at a reduced interest rate or to a payment that fits normal ratios of debt to income ratios for the borrower. The TARP funds could be used to cover related costs if the financial sector was inclined to offer solutions to troubled ho,eowners.
Even though these actions will not cover all scenarios, institution of new models of loan servicing would be evidence of a return to ethical business practice. The financial sector must commit to stemming the tide of foreclosures within our troubled economy. They have been given billions of dollars to get the job done -- they need just do it!
Bankers and financial houses need to remember that homeowners are more than the loan number on their debt. Bankers need refocus on the concept of home ownership as good business practice between themselves and their customers. Putting a roof over our heads and paying for it through hard work and determination to provide for ourselves and our families has always been a time honored goal within the American Way of life.
The focus needs to shift away from greed and short term thinking, toward the renewal of the social contract assumed to exist between lender and homeowner working together toward fulfillment of the American Dream.
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Comments
As one of the affected, I salute this post. Not all of those who end up losing their homes were being greedy or living beyond their means. Illness and circumstance arise and banks become the devil incarnate.
The system must be changed.
(PS I have no ratings so would love it if you come back to thumb this for those of us drowning in the wave of home foreclosures)
In my simple scenario, much like the realtionship of banker to home owner in It's a Wonderful Life, the original social contract worked due to the relationship between the borrower and the lender, in those days the Savings and Loan unsecured by the FDIC.
The current fly in the ointment continues to be the changes to the banking system, including the securitization and bundling of mortgage loan. The original lender sells off the loan, after which it is bundled into securities that are so complex, there is no way to assign a single or simple "ownership" for the loan. Those servicing the loans have no owernship interest -- once the loan is written, there is literally NO ONE with whom a borrower can negotiate in this scenario.
By changing thte way mortgages are handled, just about ALL the human elements with their accompanying call for good conduct and financial responsiblity have been removed from the transaction.
As Eric states "A home loan that is part of a securitized debt instrument probably does not have a delegated local manager who has both the responsibility and the authority to act in ways short of foreclosure." This is correct, and as a practice it has lead to the abuses of struggling homeowners with no to champion their situation, or to help stem the tide of foreclosures. In result, TARP funds, which could have been a timely first step, have been abused due a lack of rules to govern financial institutions as well as the absence of laws and guidelines under which anything positive can be accomplished on behalf of the homeowners.
In my post, I tried to keep it simple as Stewie has noted. Eric has touched on the reason that the social contract associated with the original borrower/lender relationship no longer works. There is not a simple solution to this problem. If all I had to do was come up with guidelines to cover the most of the infinitely varying situations in which homeowners find themselves, it would be almost an impossible task to draft rules that dealt with everyone honestly and fairly. There would always be some to find the loopholes in programs to keep owners in their homes -- the situation has spun off into something too complex even for those that deal with it on a daily basis.
It is imperative that the government wrap their heads and resources into a solution for the homeowner as part of the broader working of the economy. IMHO there are the only ones held to any standard of accountablity with the resources to do anything with long term benefit.
I favor a solution that simplifies the system by assigning "authority and responsibility" as Eric has suggested. The past decades have moved us too far beyond the type of relationship that could have stemmed the foreclosure situation nine months ago. That is one of good business practice that involves personal relationships with local bankers who have a vested interest in keeping their customers happy and sound.
In my area, local banks are still holding select mortgages in house. I have assumed but do not know for sure, that borrowers under the wings of these lenders are in better shape than others. Perhaps that is my next bit of research -- what are these bankers doing for their good customers.
Eric, a moral re-awakening is necessary to restructure the mortgage industry with a set of well though out guidelines so that this can never happen again. Without the relationship between banker and homeowner, too much is left to chance regarding one of the most important aspects of our lives -- putting and keeping a roof over our heads.
The board then restrictions the loan with a reasonable interest rate, forgiveness of back interest and past due fees and even forgiveness of portions of the principle where warranted.
I don't want to minimize personal responsibility but these greedy financial institutions are even more to blame the the individuals who signed the mortgages. The need to share the pain and should be entitled to TARP money only proportionate to how much relief goes to the homeowner.
I'm not talking about freebies for anyone here, just restructuring these crooked loans so that the homeowner can keep his home and the lender can get paid and not have to foreclose. Everyone loses in foreclosure.
This won't solve the whole problem but it would go a long way toward that end.
I wrote the original story for our local newspaper. 55% of our local population is over 45, so I hoped to post something that might resonate with them.
So, yes, it is FAR more complex than what I wrote in a story aimed more at the masses than at OSers. What you are saying about restructuing of the interest rates is also much needed.
I have thoughts -- too many to get on paper about the restructuring talk. Consider the following:
I have three mortgages on three different proeprty classes -- primary home, second home and investment property. Each loan had a different set of criteria for which we as borrowers had to qualify. In what you suggested, I am in full agreement for the primary home.
What can be done about second homes and investment properties? These are two different types of properties, each with their own set of capital gains rules as things currently stand. Again, each has its own set of critieria for which a buyer has to qualify to get the loan in the first place. Currently, an investor need strong credit scores and 30% down or equity position to refinance. This is not possible or desirable for most investors.
This is the crux of the issue: How can there be a restructuring of loans balances that is fair and equitable to ALL home owners, not just those that are in trouble?
Perhaps I need to write a post about the situation in which I find myself with regard to loans, but that woud sharing more than I care to share just now. Suffice it to say that the only property that was purchased during the bubble was the investment property. That is the only property in which we find ourselves "upside down". It was purchased for $150,000, and is now worth about $120,000 maybe less. We owe around $110,000.
If the Fed took control and forced the banks to reduce the mortgage interest rate to 4%, the most likely first step would be for existing homeowners that are struggling. I struggle somewhat, too, nothing like those losing their homes. As a Realtor, my income has decreased as prices have gone done. I would LOVE to have the 4% interest rate rather than 5.75% on our primary home. That reduction alone would put money in my pocket to spend -- an upshot for both my family and the economy.
I would love to have 4% interest on my second home, but that would likely be offered, if at all, WAAAYYY down the timeline. In the meantime, the local taxing body is taking their time reducing our taxable values to meet market conditions. I pay at least 20% too much in taxes just now -- I will get some relief when those go down as well.
In thinking about the trickle down impact of these measures, we hit the heart of the matter: If all property values are reduced to meet current market conditions, and all property taxes are reduced as they should be by 20%, where is the money going to come from to fill that shortfall? Is there enough money in the stimulus package to help struggling states, who might then be expected to help economically challenged counties with their inherent inability to tax on levels to meet their shortages? Any decision made to adjust mortgage values trickles down to the local levels, again, and causes issues over which the Federal government does not typically take control.
Back to that investment property: Who is going to look out for the real estate investors that are struggling to fill their vacant properties as well as keep up with their payments on homes that are worth 10 to 50% less than when they purchased them? Investors were a portion of what kept that real estate market strong and fluid in the past.
Investors may choose to hold onto their money if they assess the market has not bottomed, that there is too much risk, and/or they are conserving cash to pay for mortgages against which there is no rental income. They have little opportunity to sell their investments without a huge loss -- what is going to happen to them and their much needed spending in the housing sector?
Yes, it is VERY complicated. I am forced to think about it every day of my life!