Tuesday, December 09, 2008

The Problem Really Is With Borrowers

How is it that so many borrowers who had their mortgages modified under the federal program to help homeowners are back in default on their mortgages?
However, data which is to be issued by the OCC and the Office of Thrift Supervision (OTS) next week could throw cold water on a push by some U.S. policymakers for loan modifications as the key remedy for the ailing U.S. financial and economic crisis.

Dugan said recent data showed that after three months, nearly 36 percent of borrowers who received restructured mortgages in the first quarter re-defaulted.

The rate of re-default jumped to about 53 percent after six months and 58 percent after eight months, Dugan said, without providing an explanation for the trend.

Regulators speaking at an OTS-housing forum did not provide any explanations for the causes behind the data.

"We don't know the answers yet, but these are the types of questions that we have begun asking our servicers in detail," Dugan said.
Can it be that these people should never have been homeowners in the first place? Maybe the problem really is home owners who should not be owning a home in the first place? What happened to income verification?

Homeownership is not a right, but a privilege that is earned through good credit and a solid employment history that shows the capacity to repay the obligations.

Many people thought that they could buy homes for little or no money down and with lax paperwork standards for income verification, lenders opened themselves up to massive liabilities. They're tightening the standards across the board, but the subprime mess will continue until the banks and the government finally put the charade to a stop.

Banks cannot afford to lend to those who have no capacity to repay loans. It doesn't matter that these people are now in homes. Foreclosure is a harsh mistress, but it's one that is guaranteed to do one thing - make homes more affordable because the banks will want to recoup a portion of their investment.

It's possible that some of these people lost jobs and can no longer afford their homes, but so far the numbers don't tell that tale.

Don Surber has it right with his prescription for the situation:
First, President Bush should go on national television and admit he was wrong when he said home ownership is a right.

Second, stop pretending that this freeloading is because of predatory bankers.

Banks are supposed to be predators. Otherwise they are not banks. It is sort of like trying to invent vegetarian sharks.

Third, and most importantly, let the banks and the borrowers work this out. That means foreclosures are possible. That means more likely the banks re-arrange these loans.
Every time the government intervenes, it further distorts the markets and makes the problem worse. Prices become more affordable when market bubbles collapse. It goes back to basic economics of supply and demand. Demand for the homes dries up as subprime borrowers are no longer finding easy credit, which means prices slump. Once they reach a level of support - namely the natural and normal turnover of housing stock due to moves, marriages, divorces, and estate sales, the prices will stabilize in a mature housing market (where there is little to no new housing being built).

It's bad if you're trying to sell, but if you're in the market to buy a home, a down market is your friend. Try buying into a strong real estate market - prices are out of touch with what the value of the homes are.

It's a situation I've remarked upon in the past based on my experience trying to buy a home in Bergen County for three years. I was trying to buy a home into the teeth of a bull market. Prices were rising faster than salaries and even 3BR Cape Cods in need of massive repair were going for well over $400,000. That's just flat out obscene, and yet there were bidding wars on those kinds of properties. Waiting things out meant we were able to buy a bigger home at a more affordable price. Our home has gone down in value, which could be a problem if we're trying to refinance, but someone buying a home now will find better values - more affordable homes because the market isn't inflated by subprime borrowing and easy credit.

Meanwhile, I have no sympathy for the likes of Fantasia Barino, who's now being touted as some kind of poster child for the real estate crisis. She's facing foreclosure on a $1.3 million home. It's her second home.
Barrino’s $1.3 million home in Charlotte, NC, has been foreclosed on, according to the blog, realestalker. The magazine says unless the eight-time-Grammy-nominated singer can make necessary payments, the 6,232-square-foot home will be auctioned off on January 12. According to property records, Barrino purchased the six-bedroom mansion in March 2007. The New York Post reports that records show she took a $1 million mortgage on the property from Bank of America.

"The Color Purple" Broadway star has a second house in Charlotte, which is reportedly not in financial trouble.
I'm sorry, but we hear sob stories about how people who win the lottery go bankrupt all the time, regardless of the economic climate. We also hear about movie stars and famous people go bankrupt, get into serious financial trouble, and lose everything they accumulated. Gary Coleman ring a bell? Michael Jackson? MC Hammer? Mike Tyson? Or anyone on this list.

Many people simply have no clue as to how to maintain their finances and will spend like it's going out of style and can't afford the payments when the bill comes due. It doesn't matter if you're a famous singer or a struggling family trying to stay afloat.

If you've bought a home you cannot afford, it doesn't matter if the home was $100,000 or $1 million. It's still unaffordable to you.

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