Wednesday, April 4, 2012
Problem: Principal Write-Down or Principle Write-Down?
In late March, there was an analysis and recommendations in the American Banker which comprised the most succinct commentary on the current mortgage/foreclosure Bank-Owned real-estate problem and how to begin to solve it. I went through the Maryland S&L crisis running failed institutions. The last thing I wanted in any of them was more real estate. It's just a messy way to waste resources.
Perhaps the most important portion of the author’s comments is "if mortgage lenders and servicers undertake the challenge of developing teams of highly trained loss-mitigating experts, each able to professionally and sensitively work through an increasingly complex range of loan modification, restructuring, or short sale options with troubled borrowers, then real progress can be made." To this point, not one mortgage company with whom I have dealt, Bank of America, JPMorgan Chase, Wells Fargo, Ally Bank, HSBC/HFC/Beneficial, and the OCWENs, GreenTrees etc has such a unit in place. The Call Centers read from a script and require the patience of a saint to negotiate. There is no Unit of specialists! Mention workout and you get transferred for 30 minutes+
One of the major program additions, as proposed by the most recent housing stimulus is the concept of allowing principal reductions. The issue is not new, nor are the arguments against it. 1 ½ years ago I began researching and discussing the Home Equity Fractional Interest ("HEFI") program as a way to get houses back above water without sacrificing the possibility of recovering what the market won't support today. Kevin Hardin, and his company Equi Debt Solutions (http://www.equidebtsolutions.com) had produced a slide show (http://www.slideshare.net/equidebt/h-option) describing how the program works. Basically, the Mortgage Company agrees to a reduction of the principal balance, but in exchange gets a second mortgage. This allows the mortgage company and the homeowner to share in any appreciation of the property. Once the write down is recovered, due to a sale or maybe (in the distant future) a refinance, the homeowner and the Mortgage Company split the excess 50/50 or by whatever other agreement they reach at the time the transaction originally takes place. Although the program was accepted at the federal level, it withered on the vine and not one of the above-cited entities has ever discussed it with me or anyone else I know.
Banks can maintain their moral high-ground and insist borrowers pay; either with cash or their house. Their bottom line - don’t worry - "we already have a reserve for the loss". Let us agree that we had the perfect storm scenario and no one is to blame. Let's fix the problem not nip at its heels like a Yorkie puppy.
Author's Copyright by Richard I Iaacoff, Esq, April 2012