by Ben Nicolas
on Wednesday, March 18th, 2009 at 8:03pm.
Just wanted to start this thread to get some ideas out there. I think too much negative energy is being spent on figuring out who to blame for our Economic problems and not enough positive focus on coming up with creative solutions. These rough draft ideas are my humble attempt to put something out there to change that...
Principal Reduction: Homeowners want it, Banks don't. I believe there is a way to give principal reduction that would be less pain for banks than continuing with their current loss mitigation strategies.
In many areas of the country there is big gap between current market value and amount owed against the property. A foreclosure forces a lender to realize the loss immediately on books. Why not reduce principal but create a silent 2nd or 3rd that would remain on title until the homeowner eventually was able to sell the property. This would provide relief for people that really need help and legitimately want to stay in their house but are having a rough time financially. Property owners who can afford their payments but stop paying on purpose to get a better deal would not benefit from this because whatever was temporarily forgiven would eventually have to be repaid. This would allow banks to keep the amount of principal they originally lent as an eventual receivable on their books, and hopefully help with bank illiquidity due to assets worth nothing because of debt currently not being serviced at all.
Same thing with loan modifications if you want to save your house but just need some help reduce the payment to point where piti is 50% of income and whatever payment reduction is put on back of loan so that if homeowner stays in property long enough the investor may be made whole.
Verify all income documentation on loan mods. After all the fraud lenders were burned with over the last 5-10 years why would they not do this? Have they not yet learned that allowing borrowers to qualify with no income documentation leads to problems? Its amazing to me that lenders complain that the loans that they have modified are not performing well. Now I believe they should allow non-traditional income sources when doing this but if a property owner can't prove income of any sort they aren't going to be able to keep the property. By not doing this and allowing loan mod companies to submit whatever their creativity can come up with, the mortgage industry has allowed the birth of a reckless loan mod industry that's attracted some of the most dangerous ex-sub-prime slingers from the days of anything goes underwriting mentalities.
There are plenty of former mortgage industry workers that are looking for work now and could help do this.