Lenders didn’t try hard enough, early enough
There are all sorts of perceptions about what should have been done — and when — regarding national defaults and foreclosures. While all parties where complicit in helping to create the problem (some consumers overstretched their financial limits to purchase homes and some lenders allowed/misled them to do so), the effort to solve the problem before it steamrolled downhill was not equally shared.
In addition, nothing was done to assist homeowners who were underwater (owed more than their home was worth) yet continued to make timely payments. For the most part, lenders — or the institution that owned the loan — were willing to help only when they feared they would be facing a negative equity situation and eventually receive less than what the home is worth.
It a nutshell, lenders were reactive and not proactive. It did not go over well with the general population given the recent bank bailout.
We had our own story about a lender’s unwillingness to budge. We were three years into an adjustable-rate mortgage that had its interest rate fixed for the first 10 years. The loan carried a prepayment penalty if we refinanced within the first five years of its term. The prepayment addendum, known in the loan industry as a “soft” prepay because no penalty is assessed if the couple sells the home, stipulates that a refinance could cost an amount equal to six months of interest payments.
Our lender, with whom we held three checking and savings accounts, said there was no way that the investor that bought the mortgage (Bank of New York) would be willing to waive the prepayment penalty. The reason given was that there was no incentive to do so — the home had plenty of equity, and if we defaulted, the bank could sell the home and be repaid all of the outstanding mortgage, plus fees and expenses.
What was the lender doing to ensure a future customer? In light of the national lending environment, why not go out of your way now to help your chances later?
There were opportunities to stop the bleeding sooner. For example, the National Association of Realtors (NAR), the largest trade group in the world with greater than 1 million members, offered a solution to the housing dilemma. In 2009, NAR presented Congress with a “Four-Point Housing Stimulus Plan” to help stabilize the housing and mortgage markets. The crux of the package suggested using $130 billion of the $700 federal billion bailout funds on housing, specifically earmarked for an interest-rate buy-down and more tax credits.
That buy-down would be 1 percentage point on fixed-rate loans for all buyers. The reduction reportedly would have resulted in approximately 840,000 additional home sales and reduced the inventory of homes by as much as 20 percent.
The incentives that became reality were an $8,000 first-time homebuyer tax credit and an existing homeowner tax credit of $6,500. Those helped people buy, but it did nothing for homeowners who wanted to stay put.
As in our nephew’s situation, the key was helping earlier in the game.
Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk-show host.
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