Mortgage Loan Modifications Are Key to Ending the 'Toilet Bowl Syndrome' in Home Values

As I write this on September 17th, 2008. Bear Sterns,loan categories EACH dwarf the subprime category
Lehman Brothers, Merill Lynch, Fannie Mae, and Freddiethat was the initial problem. Subprime foreclosure
Mac have all failed in one way or another; the largestactivity has peaked, but the former two categories
insurance company in the world, AIG, just received anhave experienced sharp increases in the first half of
$85 Billion "loan" from the government to avert a2008.
certain bankruptcy; Gold just had it's biggest one dayAnd all this is BEFORE the NegAm loan "recasts"
price increase ever; and the yield on 3 month Treasurywhich will add as much as 5-8 billion in problem loans
Bills has gone almost to zero.every month between now and late 2010.
This IS a financial panic in the classical sense of theThere are no "move up" buyers because
word. This will be written about by historians.homeowners have no equity to use for a down
But let's take a breath and remember that this haspayment, and the universe of potential CAPABLE "first
happened before and the sun still came up the nexttime"buyers is MUCH smaller than in the past due to
day. This too shall pass, and hopefully we will learnthe long overdue tightening of mortgage guidelines
something.(which is a VERY GOOD development).
But the immediate task at hand it to stop the bleeding.THE SOLUTIONThere is only one solution, and it is a
It's time to start focusing on solutions that will work,good one because it is the only solution in which
rather than worrying about who's to blame or throwingeveryone "wins".
taxpayer dollars down endless rat holes. It's time forBy FAR, the best solution to the foreclosure crisis, and
EFFECTIVE ACTION.the best way to stabilize home values, is to keep
The downward spiral of home values is the rootfamilies in their homes and convert the delinquent loans
cause of the current financial crisis. Home values areto performing loans via LOAN MODIFICATIONS.
the collateral securing all those exotic debt instrumentsA loan modification is a unilateral change in the terms
that we hear about every day, and that collateral isof the Note by the owner of the Note. The purpose of
eroding with every new foreclosure sale or short sale.a long modification is to reduce the payment to a level
Once home values are stabilized we will be at thethat the homeowner can afford to pay on an ongoing
beginning of the end of the crisis. As it stands, we'rebasis.
still closer to the beginning of the beginning.Loan modifications are the best solution for a number
The home value decline is about to reach aof specific reasons:
self-feeding stage if it hasn't already gotten there. At1) Loan mods keep families in homes and reduce the
some point, homeowners will "walk away" rather thanfinancial pressure that tears families apart.
continuing to make payments on an asset that has a2) Loan mods are the LEAST COST SOLUTION to
negative equity that is measured in the hundreds ofthe investors who own the notes secured by the
thousands of dollars. And every time one family doesdistressed mortgages. The Net Present Value(NPV) of
that, it makes it that much more acceptable for othera loan modification is MUCH higher than the NPV of
families to do that. We dare not let this get to "theShort Sale or foreclosure. (Merrill Lynch took a 78%
tipping point".write down on their subprime portfolio this summer
Any solution to this crisis MUST begin with awhen they sold it to Loan Star. If they had taken the
stabilization of home values. We are not anywheretime to contact the home owners, figure out what they
near that right now based on current numbers.could afford, and modified those loans, they might have
I speak from 24 years experience in the real estatetaken a 20-30% writedown, but it wouldn't have been
finance industry.anywhere close to 78%)
California is a good statistical sample of the problem3) Loan mods are the ONLY solution that keeps the
because it represents 30% of the units and 45% ofhouse off the market and out of that inventory
the dollars in the distressed loan universe.overhang. Every loan mod done is one house closer to
In California as of July 2008 the numbers are....ending the decline in home values that is the root
* 75% of Notices of Default are not being cured andcause of this crisis.
are going to foreclosure auction.4) Loan modifications are a MARKET SOLUTION...
* 96-97% of those are going back to the banks due tothey don't cost the taxpayers a dime.
no other bidders at the auctions.5) Loan modifications can be done QUICKLY if there is
* 169,472 NODs were filed in CA from April - July.a collective will to get them done.
Using the numbers above, this means that actual bankWinston Churchill once famously said about
foreclosures will almost certainly average a little overdemocracy that it is "the worst of all possible forms of
30,000 per month from Oct-Jan unless something isgovernment, except for any other possible form of
done. TOTAL home sales in California during thosegovernment."
months last year averaged only 23,000.Similarly, loan modifications are the best of all possible
The unsold bank inventory in California has grown bysolutions to the foreclosure crisis that is spreading to
over 48,000 since March 1. This overhang, and theevery corner of our financial landscape.
very real possibility of REOs exceeding total sales forLoan modifications will be painful for investors, and
a prolonged period will be disastrous for home values,some will say that they unfairly benefit homeowners
ensuring unrelenting price declines for the foreseeablewho got in over their heads, but they are the LEAST
future, which will put more and more homeowners in apainful solution for investors who made or purchased
"negative equity" position. Action to avoid this mustthose loans, and they are the most fair solution for
come QUICKLY.everyone who understands that a collapsed economy
As you might expect, a negative equity positioncannot support major investment in energy
significantly increases the probability of default, thus theindependence, education, infrastructure rebuilding, or
specter of a self-feeding negative spiral in homeany of the other important issues of the day.
values ... the 'Toilet Bowl Syndrome'.I pray that our leaders will "get it" on this one.
And this is only the BEGINNING. The Alt-A and Prime