The Mortgage Crisis
The following is a guest column by Indianapolis attorney Mike Norris.
More consumers are losing their homes than ever before, and more lenders are foreclosing their mortgages than ever before. Both sides are losing faith in the American mortgage lending system, even though one wants payments; the other is willing to pay. One wants the house; the other doesn’t want the house.
There are five variables with which we can tinker: term, interest rate, payment, starting balance, and ending balance. The important issue to most consumers is: “the payment is too high”. For that reason, extending the loan term, or lowering the interest rate, or adjusting the loan balance become powerful tools in a loan workout.
In an example, Harry Homeowner has bought a home for $200,000, with a loan of $190,000 at 7% requiring a payment of $1,264.07 per month. After 24 months of payments, Harry Homeowner loses his job as a mortgage broker. Harry Homeowner realizes he still owes $186,000.40 of the original balance. In the middle of his job search, no mortgage payments are made for two years. With 7% interest, after two years of payments and two years of no payments, Harry’s loan balance is now $213,864.38.
Adjust Term & Rate:
- A possible adjustment can be made if the loan balance is considered (after two years of nonpayment) to have grown at only 5% interest per year, with a current balance due of $205,519.53. Assuming the lender is willing to accept this sum over 40 years at the original 7% interest (even though $16,000 more is owed than the original balance), Harry Homeowner has a new house payment of $1,277.16, just $13 more than he was paying originally.
Keep the Original Terms
- In another example, what if both homeowner and lender were hoodwinked? If the home value has gone down, and now the home is worth only $160,000, what if the owner is “upside down”, with a loan balance of $186,000? Is there any need to call the loan due, because of the negative equity? Absolutely not. As long as the homeowner can make the payments, he should be encouraged to do so.
“Back End” Payment Shortfalls
- With an adjustable rate mortgage on a home with lots of equity, what if the mortgage rate goes up? Perhaps some part of interest can go unpaid, added to the “back end” of the loan. This is the theory of the FHA “reverse mortgages” given to those over 65: they actually pay no payments at all!
What if Loss on Transaction is Too Great?
- If indeed the federal government intends to be a “backstop against losses” for lenders who hold “toxic assets” among $4.5 trillion of mortgages, are we not wise to make those assets less toxic? Any deal to keep homeowners paying and living in the home is good for us as taxpayers. Make the homeowner pay to stay, on whatever level is possible. Be flexible with that homeowner and the eviction process. Every penny of rent/mortgage payment tendered goes straight to the bottom line and paying expenses.
Knowledge is power. The math allows very flexible solutions to end the mortgage crisis immediately, if we work together. Due to the depth of the current crisis, the time to act, in strict accordance with the math, is now. As every executive knows, the ineffective bring problems to the table; winners bring solutions to the table. Let’s get ‘er done.
For more information contact: Michael J. Norris Attorney at Law, mike@mikenorrislaw.com, (317) 266-8888.
