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Help solve the housing crisis

By Judy Martel · Bankrate.com
Wednesday, August 10, 2011
Posted: 3 pm ET

Have a few ideas about how to solve the housing crisis you're just dying to share with the people in charge? Step right up: The Federal Housing Finance Agency, or FHFA, is seeking input on creative solutions to get foreclosed homes off the market and has joined with the U.S. Department of Housing and Urban Development, or HUD, to issue a request for information.

The glut of foreclosed single-family homes owned by Fannie Mae, Freddie Mac and the Federal Housing Administration account for up to a third of the homes sold each month and is dragging down home prices, raising the concern that more homeowners in distressed markets will be forced to foreclose. For this reason, the FHFA is seeking input on how to reduce the number of foreclosed properties and stabilize the market.

 The FHFA has published the following objectives:

  • Reduce the number of homes owned by Fannie Mae, Freddie Mac and FHA in a cost-effective manner.
  • Reduce average loan loss severities to Fannie, Freddie and FHA relative to individual distressed property sales.
  • Address property repair and rehabilitation needs.
  • Respond to economic and real estate conditions in specific geographies.
  • Assist in neighborhood and home price stabilization efforts.
  • Suggest analytic approaches to determine the appropriate disposition strategy for individual properties, whether sale, rental, or, in certain instances, demolition.

Selling the homes to investors who will rent them is one solution that has been floated, but other solutions are also encouraged, such as ways to turn renters into owners and how to make the rental market more affordable. Responses are due by Sept. 15.

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13 Comments
MM
August 13, 2011 at 11:05 pm

Heres an article worth taking a look at:

“Ocwen Financial expanding program for underwater borrowers”

The Ocwen Financial program restores some equity in the borrowers' property, which helps motivate them to stay current on their modified loan payments and avoid foreclosure.

August 07, 2011|By Kenneth R. Harney

If you give millions of seriously underwater homeowners a new equity position in their properties by reducing their principal mortgage debt, will they keep paying on their loans and avoid foreclosure?
Call it a pipe dream or a significant model for other lenders and investors, but one company says it has found an important combination: Modify underwater borrowers' loans so that their payments are reduced to a manageable amount and cut their principal debt over time, but make the deal dependent on their scrupulous on-time monthly payments of the new amount plus sharing of a portion of any future profit they make on the house sale.

In practice, the plan works like this: Say you've been underwater on your loan. You can't handle the payments and you're heading down the conveyor belt to near-inevitable default and foreclosure. Now the company servicing your mortgage makes you this multipart offer: First we will reduce your loan balance to a level where you will have 5% positive equity in the house. That is, rather than the original amount that has you drowning, we will set your debt at 5% below the appraised value of the house.
Next we'll modify the mortgage so your monthly payments reflect the reduced underlying principal balance. Then, in annual increments over the next three years, we will write off the amounts of the original debt balance that we reduced. In exchange, we will expect that you do two things: Stay current on your loan payments, and agree to let us share 25% of any future gain you make on the house at resale.
That's the deal Ocwen Financial Corp., one of the largest servicers of distressed home mortgages in the country, began offering more than 3,000 underwater borrowers in a test that began a year ago. The results to date: 79% of the customers offered the program in the test signed up, and the re-default rate has been just 2.6% — far below the 40% to 50% rates within similar time periods seen in some federally sponsored loan modification efforts.
Ocwen, which services 460,000 loans and is acquiring a portfolio of 250,000 more next month from Goldman Sachs' Litton Loan Servicing unit, said the test was so promising that it's now taking the program national. It already has regulatory green lights in 33 states, including California, and expects more to give approval in the months ahead.
Ocwen Chief Executive Ron Faris says the key to the program is that the shared appreciation approach allows for a restoration of equity for borrowers, which is "psychologically important" and greatly affects their motivation to keep current on the modified payment terms. It gives them a stake again and gives them some hope.
"Our analytics tell us that an underwater loan is one and a half to two times more likely to re-default than one with at least some positive equity," he said.
The shared appreciation and principal reduction concept also works for the bond investors who actually own the mortgages, Faris said. The loans keep performing — unlike many other modification plans — and there's the possibility of a little sweetener at the end in the form of a portion of any appreciation that occurs beyond the revised appraised value on the house.
Paul Koches, Ocwen executive vice president and general counsel, says there is no set cutoff level of negative equity beyond which the program cannot go. So even if your current loan-to-value ratio is 150% — which puts you deeply underwater — the program may include you.

There's a key limitation, of course: Only Ocwen-serviced borrowers who are both underwater and unable to handle current loan payments are eligible. Since roughly 11 million owners are underwater on their loans, according to industry data, and 2 million of them are in financial distress and projected to go to foreclosure, Ocwen's program can only touch a modest fraction at best.
Some large lenders and servicers such as Bank of America and Wells Fargo have initiated principal reduction efforts for some underwater customers, but none to date has announced a shared appreciation feature.
Ocwen's program is drawing praise from consumer advocates active in foreclosure prevention. John Taylor, president and chief executive of the National Community Reinvestment Coalition, said in a statement that "we hope this innovative effort inspires other mortgage servicers to follow suit."
Is this the long-awaited solution to the housing crisis? Not likely. But if major banks and servicers come out with their own versions — and better yet, the Obama administration tells servicers to include the idea in their tool kits — then the effect could be much more powerful.

Addendum:
I would add the following provisions to the Ocwen Financial program to motivate and entice Lenders to participate.
Any lender that promotes a similar program would assign a financial planner that would work with the homeowner and analyze their unique financial situation. The Financial Planner works for the lender and gets paid from a small portion from what the Home owner saves in their newly reduced mortgage payment. The financial planners function is to :
Coming up with a workable plan based on Homeowners monthly income and expenses and create a blue print for the Homeowner to work from. This means educating and implementing a retirement savings program, rainy day fund, college fund and vacation fund.

The financial planner also makes sure a plan is put into place to pay off credit cards and possibly have their employer the (Lender/bank) consolidate the credit cards and facilitate the means to pay them off>

The whole point here is the Financial Planner is not only helping the Home Owner develop a working plan to stay on tract, pay their mortgage, pay off credit card bills, help Home owner save for retirement and free up disposable income that the Home owner can buy goods and services that will stimulate the economy. This means job creation and new Home owners. Think about this, how many unemployed financial planners could be hired across this country, become part of the solution to improving the economy and best of all stop the stampede of foreclosures.

The financial planner is also keeping the interest of the Lender in mind, almost guaranteeing that the Home owner does not default on the mortgage.

The Home owner wins, the Lender/Banks wins and the economy wins.

WILBUR HALL
August 13, 2011 at 7:56 pm

1) The banks should have a 50% off foreclosure sale.
2) The government should subsidize the banks another 20%.
3) The banks/CEOs take a 30% lost(right?).
4) The houses are occupied.
5) The taxes are being payed.
6) The people will buy things associated with home ownership.

This would save businesses and create jobs.

To these bank CEOs.....open up a HOME DEPOT and you'll recoup
the other 30%.

Mike Daum
August 13, 2011 at 6:37 pm

The end result needs to be a local real estate market where the ability to sell a property within two or three months is the norm. To accomplish that, we have to first sell or demolish all the empty homes.
Second, encourage mortgage holders through inducements and penalties to either foreclose and liquidate their distressed portfolio and properties or to negotiate a settlement with the homeowner at a reduced sum. The homeowner would be required to hold the property for 5 years before they could sell or they would face tax penalties for the reduction.
Third, a temporary freeze for three years on all tax deductions and credits on NEW home construction to discourage adding inventory to the market.
Fourth, a tax credit of up to $25'000 for individual homebuyers to buy existing homes that are at least 3 years old. The homebuyer is required to live in the property for at least 5 years.
Fifth, require all the home buyers in the program to have a minimum of 6 months expenses in the bank as a cash reserve before closing on the home. This would mean that most of the homebuyers would not fail and these properties would be off the market for 5 years.
Sixth, Suspend or reduce the program in any market that reduces it's inventory below a 30 day supply including the supply of homes that may be pending entry to the market by foreclosure or litigation. This would mean that the market is restored to normal or near normal and could function on its own or with monitoring over a probationary period. Once sufficient demand is demonstrated, new construction buyers would be eligible for mortgage interest deductions. This program would restore the residential real estate market in multiple areas prior to the end of the three year period.
Sixth, permanent financial regulation would require that borrowers meet a minimum standard to qualify for a loan, and that ANY mortgage backed securities would be required to prove by audit the current risk of loss on each individual mortgage in order to be eligible for open market trading as a security. In addition, the FED and the FDIC would have the ability to order any lending institution to increase required down payments for mortgages in markets showing rapid appreciation and speculation such as was seen in Miami, Las Vegas, Phoenix and portions of California... No new bubbles!

For those that believe that we cannot afford this fix, consider this. The unique American housing market not only provided 3 generations of American families the finest standard of living in the world, it also provided millions of tradesmen over the same period a sound income for their families. Homeowners that played by the rules new that their risk of financial ruin was minimized because if they lost their job or fell behind, they could usually avoid default by selling the property meaning that they met their obligation to the bank, the bank did not lose, the borrowers credit is preserved and they can try again after they get back on their feet. Currently millions of working homeowners are banking dollars and not spending because they fear if they become unemployed they cannot sell their home and will face financial ruin. They will start spending again as soon as they see the ability to sell their home! They will start improving their homes once they know they can sell if they need to. We are probably talking reducing unemployment to the 6% range again. Tax revenue to local, state and federal coffers will bring some back from the brink of bankruptcy and will stabilize the US economy with ramifications for the entire world!

Mike Daum
August 13, 2011 at 5:44 pm

The end result needs to be a local real estate market where the ability to sell a property within two or three months is the norm. To accomplish that, we have to first sell or demolish all the empty homes.
Second, encourage mortgage holders through inducements and penalties to either foreclose and liquidate their distressed portfolio and properties or to negotiate a settlement with the homeowner at a reduced sum. The homeowner would be required to hold the property for 5 years before they could sell or they would face tax penalties for the reduction.
Third, a temporary freeze for three years on all tax deductions and credits on NEW home construction to discourage adding inventory to the market.
Fourth, a tax credit of up to $25'000 for individual homebuyers to buy existing homes that are at least 3 years old. The homebuyer is required to live in the property for at least 5 years.
Fifth, require all the home buyers in the program to have a minimum of 6 months expenses in the bank as a cash reserve before closing on the home. This would mean that most of the homebuyers would not fail and these properties would be off the market for 5 years.
Suspend the program in any market that reduces it's inventory below a 45 day supply including the supply of homes that may be pending entry to the market by forelosure

Brian
August 13, 2011 at 12:22 pm

Lowering the interest rate still provides a profit for the bank. Even if it is a lower rate than the original rate anything above 0% is profit for the lender. It makes little sense for a bank to push for forclosure considering they have to pay legal fees to forclose and then they own an asset which makes them no money. Allow the owners to keep the home and the bank invest money into the legal department which can make modifying the mortgages quick and simple. They can add the charge onto the mortgage and have a cheaper payment. Another option is to allow banks lend the full ammount that the buying owes on the property. If they have a good payment history and are of little risk the bank can still make money even if that ammount was borrowed on the house. In this case the bank invests in the buyer and not in just the property. The property doesn't make the bank money, in the end a good and reliable buyer makes them a profit.

yvannka
August 12, 2011 at 6:36 pm

1. Banks not negotiating with homeowners until they stop payments, ruin their credit and no longer qualify for a loan. Its obvious they want to foreclose and resell for a profit its not a charge off on their books when the taxpayer bailout is honoring the loss.

2. Fannie Mae/Freddie Mac's absurd logic to price higher than market value to stablize or push up the values. The foreclosed homes are in dire need of repair they can never compete on the open market at a distressed price level let alone anything higher. Investors eventually pick them up for pennies and the market stays depressed.

In a nutshell the banks and investors are profiting at the expense of the unemployed homeowner, the unfortunate homeowner who bought at the height of the market or the scoundrel that cashed out and left the rest of us holding the bag.

rae
August 12, 2011 at 2:16 pm

I wish the lenders would quit advicing folks to miss payments when asking for a loan modification. This goes against all principles in buying. This has created alot more damage than good. If a homeowner is having issues, than why doesn't the lending institute grant them lower interest rates. It makes you wonder if maybe they would like to see the homeowner fail. :(

Bschuler
August 12, 2011 at 11:55 am

I think that by decreasing the supply through the use of eminent domain and demolition may work. This worked well for the airlines and restored them to profitability. http://www.ratewindow.com

dave horton
August 11, 2011 at 9:18 pm

We already tried turning renters into owners, remember, that is what has gotten us in this mess.
The best thing that can be done is for the regulators to lift the maximum number of mortgages that one can have. This level is currently four. These are the people who would invest in the homes that are sitting empty. Let the markets make the rules.

d
August 10, 2011 at 6:53 pm

In ALL judicial states have judges "dismiss with prejudice" Plaintiff BANKSTER cases CONTESTED by DEFENDANT.

This is easy, plain & simple strengthening the economy immediately.