Tuesday, September 7, 2010

Fixing underwater property values

The Obama administration is pitching a new plan to help homeowners who owe more than their homes are worth.

Starting today, the Federal Housing Administration will allow lenders to give these “under water” borrowers refinanced loans if the lender agrees to forgive at least 10 percent of the original mortgage amount.

It sounds like a good idea, but there are several problems.

One is these aid plans do not have a high success rate. The rules and restrictions make them too complicated and the rewards are slight.

But it is a good idea to help homeowners who aren't being foreclosed, but are "underwater."

Unlike those facing foreclosure, all those who keep paying have not received any offers of help. To get help, they had to stop making their payment.

But this is still a patch, not a real solution.

Here is why:

A young man recently contacted me and told me his story. He has worked all his life since high school, had a chance five years ago to buy a condo in Sterling Heights and he did. He paid about $65,000 for the two-bedroom, two bath unit in a nice condo complex. This month, a new guy moved in and told him he had just bought the neighboring unit for $23,500.

The man, of course, feels like a chump.

Should he mail the keys to his mortgage company? He is still working and can buy a similar place to the one he owns, and pay a lot less money. Why should he stay?

People have told him that if he did walk away, he would lose his good credit. But he recently applied for a loan and was turned down, so what is his good credit worth?

I think this man is typical of many homeowners out there. They have a home, but they feel like they have been cheated. Homes were supposed to increase in value, instead values are going down.

What's more, taking the responsibility to save up to make the down payment, and then making the payments every month was supposed to be the right thing to do. But, suddenly no one cares if those homeowners did the right thing.

Also, most of these government aid ideas are based on forcing the banks to assume the reduced value of the home and give the homeowners a break on their payments. That does not sound like such a good deal for the banks -- unless the deal would include a provision that if the value of the homes go up, the higher value belongs to the bank. And without the banks realizing anything from the deal, they are not enthusiastic. That explains much of the lack of success.

What it boils down to is that there are no quick fixes to a massive correction in the value of property. And the government might offer a 10 percent adjustment to the value, but when the property has dropped by more than half, jingle keys are still the better deal -- and that reality is going to drive the true value of property.


Post a Comment

Subscribe to Post Comments [Atom]

<< Home