Foreclosure Reality

There is no question that you have heard about the widespread foreclosure problem in United States. Furthermore, there is constant talk of an economic slowdown. Many people are financially squeezed because of heavy loads of debt. Many of these “many people” have taken out “bad” mortgages and have made poor real estate investments decisions. They took out loans that, on paper, were unaffordable. They obtained 100% or 106% financed loans, where they put down $10,000 to buy a $700,000 house. There are loans that people refinanced once or twice a year, for several years and took out hundreds of thousands. Property owners obtained “negative-am” loans that caused the principle balance to increase each time they made a payment. There are loans where the payment can go up $200 or more EVERY MONTH. Oh yeah, let’s not forget my favorite: Stated Income Loan where you get to “state your income” and that’s all the lender needs. The conversation went something like this:

“Uh, Mr. Lender do you need a copy of my tax returns, pay stubs, or any other proof of income” said Mr. Property Buyer.

“Mr. Property Buyer, don’t worry about those documents. This is a STATED INCOME loan remember. All you got to do is tell me how much you make. We will believe you. So how much do you make”. says Mr. Lender with a wink.  

A little confused, Mr. Property Buyer asks “Well, um, how much do I need to make to get a loan with you Mr. Lender?”

“Well Mr. Property Buyer, you need to make $1,000,000”

“OK, I make $1,000,000” Mr. Property Buyer says with a look in his eye.

“Oh, you say you make $1,000,000 a year, Great, let me just write this down on your mortgage application. We’re done. I’ll get you a loan in two weeks.” Says Mr. Lender.

“Thanks” says Mr. Property Buyer

Yes. It’s all true and it doesn’t end there. Most properties in foreclosure are worth less than the mortgage owed to the lender. That’s right. Property values have dropped so much that people have ZERO equity in their homes. This means property owners are trapped. They can’t pay. They can’t refinance. They can’t sell. The boom days are over. The end of the “property cash machine” has arrived.

So what is the solution? I say The real solution is to lower everyone’s mortgage payment so it’s affordable. Everyone’s mortgage payments are too high. So…lower the payments.

Of course, lenders are not excited about this option. I don’t blame them. Lenders are losing more than past due mortgage payments, lenders are losing BILLIONS & BILLIONS because:

LENDERS used PEOPLE’s PROPERTIES & MORTGAGE PAYMENTS as COLLATERAL for TRILLIONS of DOLLARS in SECURITIZED INSTRUMENTS which were created and sold by THE BIGGEST INVESTMENT BANKS to SUPER WEALTHY INVESTORS. Yes, it’s a big mess. So remember, when Mr. Property Owner is in foreclosure then Mr. Wealthy Investor losses a BILLION DOLLARS. Mr. Wealthy Investor is really mad at Mr. Lender. Get the drift. But I diverge.

As stated, the solution to the foreclosure problem is to lower everyone’s mortgage payments. Or GIVE PEOPLE MORE INCOME which we will not happen any time soon. So believe me when I say, “we will soon see lenders agreeing to lower mortgage payments.”

Now what about all of this negative equity? Basically, many property owners are “upside down”. They own a house worth $500,000 with a $600,000 mortgage. Negative equity shouldn’t matter if the homeowner is only concerned about shelter and stability for his family. However, negative equity is a NIGHTMARE to all of those investors, players, and property owners who wanted to make money on the property as if it were a casino. Negative equity means that these folks are just going to walk away from the property and mail the keys to the lender. In other words, these property owners will be sending “jingle mail.”

Do the investors, players and property owners who were in it for the cash, deserve lower mortgage payments? Why not. At the end of the day lower payments are the most cost effective solution for all of the parties in the equation.

For homeowners who want to live in their house, lower payments allows them to keep a roof over the head of their family. They will continue to be productive and not fear being thrown out on the street or having to make an unplanned move. They will continue to take pride in their home because they own it. And even though they may have negative equity, the market may change 5 years from now.

For lenders, even with the lower payments, they will continue to get cash flow. Cash flow is better than NO CASH FLOW. Plus, lenders don’t have to foreclose and take the property, which, by the way, is the last thing a lender wants to do. Even though the SUPER WEALTHY INVESTORS are steaming mad, at least the INVESTORS will get something. A partial return on investment is better than NO RETURN ON INVESTMENT.

For the small investor, players and property owners who were in it for the money, even though they will not make as much as originally planned, lower payments will give them the incentive to keep and maintain the property. This is better than walking away from a property. When a property owner walks away from a property just because it is more cost effective to them, it becomes very costly to the community where the property is located. Once the property is abandoned it becomes unsafe and unclean. It brings down property values because it's an eyesore. It contributes to the reduction of the quality of life in a community. Not a good scenario.

So what do you think. Can I get a cheer for Lowering Mortgage Payments?