>Do Greedy Banks Stand In The Way of Solving Our Problems?
by Don White
In two weeks a quarter of American homeowners will be “upside down” or “underwater”. In other words, they owe more than their homes are worth — in some cases much more.
Right now it’s about 8.3 million households … with another 10.5 million getting close to the negative equity edge — meaning they’ll be upside down if prices fall an additional 5 percent or less which I predict before we reach the bottom.
But I stress, no one can predict the bottom of the housing market. If banks continue to refuse to work with potential buyers of foreclosed homes, it could take a lot longer for sanity to return to the marketplace. My suggestion to Obama is that he use his “bully pulpit” – really in the case of bailed out banks it’s far more than that – and make banks loosen up a bit. After all, it’s taxpayer money they’re working with, not theirs. If it’s our money, let’s be wise and get these repossessed homes off the market for twenty cents on the dollar (but only one house per buyer) so that the regular new and used house market can set their own pace and price.
It is only until banks smarten up that we end this free-fall madness we’re in. This, in turn, would hasten the financial turnaround. But the problem requires some real leadership from Obama. Then he needs to work on the “underwater” problem.
It’s now a staggering 19.8 percent of ALL U.S. homes with mortgages that are underwater, according to the research firm FirstAmerican CoreLogic. And if you include those homes that are near negative equity, you get a whopping 25 percent of mortgaged U.S. homes. One in four!
As you might expect, the numbers are much worse in some states, too:
- Some 59 percent of Nevada borrowers are either already underwater or close to it …
- 48 percent of Michigan homeowners with mortgages are suffering the same fate …
- As are 37 percent in Arizona, 35 percent in Florida, and 34 percent in California!
Obama and his team still aren’t attacking this problem head on. And the latest plan is going to exclude a sizable chunk of homeowners.
Yet once again, the Obama plan does not attack this problem head on. The Fannie-Freddie refinance part of the program only allows people to refinance if they are in the 80 percent to 105 percent loan-to-value “bucket.” Given the magnitude of the price declines I spelled out earlier, that’s going to exclude a sizable chunk of homeowners.
The modification portion of the program will also follow what’s known as a “waterfall” structure. It spells out the steps a servicer has to go through, one by one, to get the borrower’s monthly payments down to 31% of their income.
The first step? Lower the interest rate to as little as 2 percent.
If that doesn’t work, you move on to the second step: Extend the amortization or term of the loan to as long as 40 years.
Third? Forbear principal. That means you would no longer have to pay interest on a portion of the loan principal, but it wouldn’t be eliminated. You would still have to pay it back as a balloon payment when you sell the home or refinance.