Friday, September 12, 2008

Collateral Damage: Did We Just Solve the Mortgage Crisis?

While everyone is wondering how you get lipstick on a pig....has anybody else noticed how the NBC News political coverage has gone downhill since the sudden death of Tim Russert? All this craziness going on involving the sniping between the MSNBC hosts is just absurd. And kudos to the NBC bigshots who finally decided to take Keith Olbermann off the anchor chair for election news coverage! Olberman is a goofball whose most notable accomplishment was ESPN's Sports Center where co-anchor Dan Patrick knew how to draw out the good quailities of his nutty co host. The two have reunited on NBC's Sunday Night Football show where they do the highlights, as Olbermann's ego maniacal mind spins in circles wondering why he is not replacing Bob Costas as the host of The Football Show... and The Olympics,... and Deal or No Deal.... and The Price is Right... and American Idol... and American Top 40.... Who knows how long this gimmick will last? I still think NBC Sports down the road will "reunite" Mike Francesa and Mad Dog Russo on that show.

One of the things I noticed about Russert was his terrific relationship with his dad who he used to lovingly refer to as "Big Russ". It was interesting to see how Big Russ instilled a sense of hard work to help support his family by working his butt off to keep a roof over their heads. This sense of entitlement so prevalent today was never a concept for Tim Russert when he was growing up.... That ethic of hard work was passed on to Tim who earned a well deserved reputation of being one of the most prepared interviewers on TV. And its that concept of not taking reponsibility that may be a major reason for the horrific collapse of the real estate and mortgage industries.

Last week I jumped on the Republicans for absurd comments by a right wing talk show host that health care and food are a privilege and not a right. However, when it comes to home ownership.... that is a privilege and NOT a right.... and anybody who thinks that they are entitled to own a house needs a serious reality check.

The way mortgages are bought and sold is extremely complex, but for the purpose of this column, I will try to simplify it. I think the ball started rolling towards the mortgage meltdown a few years ago when Congress changed the bankruptcy laws. Of course I am extremely sympathetic to people who are hit with a hardship like an illness or a death that wipes their savings out and causes them to file for bankruptcy. However, under the old laws, a lot of people felt that they could get a mulligan when they piled up a stack of credit card debt. They would file for bankruptcy and choose the Chapter 7 option which wipes the slate clean... as opposed to the Chapter 13 option which makes the person pay his debts spread out over a period of a time through payments paid out to a bankruptcy trustee. The new laws however made it very difficult to file for 7... and a lot of people who thought they were going to get a do over got a rude awakening when they realized that the bankruptcy courts were not going to give them a magic wand. How many of these people who thought they were getting a break with a 7 and ended up in a 13, ended up falling behind on their mortgage payments because they budgeted in a Chapter 7?

As a result of all these late payments and subsequent foreclosures banks have been forced to tighten up their lending rules.... even for those with good credit. That has made it even more difficult for home buyers to secure financing. Many banks are requiring higher down payments and stricter income documentation. These tougher rules are making it harder for sellers to find qualified buyers, forcing them to settle for lower offers. This creates a ripple effect, since homes are only as valuable as the sales price of similar homes.

A few months ago, I got a call from a woman looking for information about refinancing a mortgage for her parents who refused to learn English and only spoke Spanish. My mortgage application interview consisted of me asking questions, and then waiting for her to translate the question and translate the answer back to me. The concept that people move here and don't learn English boggles my mind...especially since my father came over from Europe after spending the Holocaust in hiding, and he took great pride in becoming "Americanized", a foreign concept to those immigrants who steadfastly refuse to learn the language.

Anyway, this woman said she was calling because her mom was hoping to get a better interest rate on her mortgage.... and I told her that if her credit was good... she might be able to accomplish that. But that possibility was shortlived when she told me that her parents had recently filed for a Chapter 13. I looked back on my notes and noticed that the mother had a lot of equity in her home... I asked her to ask her mother why she filed for Chapter 13 instead of taking a cash out refi to pay off those debts. Her translated answer... "That is the way she wanted to do it".

Amazingly, this was not the first time I had heard this and I don't understand why people who have built up all this equity don't tap into it to pay down their debt instead of going through the hassle of a credit wrecking bankruptcy? Doesn't anybody have any sense of responsibility anymore... or are we just gonna sit around screwing our lives up and waiting for the government to bail us out?

This is why I think the time has come for banks to rethink how they offer mortgage loans. If somebody borrows 20 bucks.. I give them 20 bucks and they pay me back. If it's a bigger loan, the borrower offers collateral to ensure that they will lose something of value if they do not pay back the loan. Banks have this concept that using a home as collateral is going to be a good threat to keep people from not reneging on their mortgage payments. If you don't pay... we take your house. Maybe it is time for banks to rethink that idea. Nowadays, people whose homes are worth less than their mortgage balances are just walking away. Also, a lot of people bought investment properties with little or no money down... and then decided to walk away. Now the banks find that this great idea of holding the house as collateral is forcing them to turn into realtors by selling these houses... for a loss.

A lot of people in America live from check to check. If they don't get a paycheck or their paycheck bounces... they're screwed. Obviously with people racking up billions of dollars in credit card debt, we are not really a society that is living within our means. It seems that the banks have been doing this too. The last day of the month rolls around.. and the banks discover that many of the mortgage checks they were counting on... never show up. And as the months of delinquent payments started to add up.... the banks were forced to shut their doors. According to the Mortgage Implode o meter Website 282 lenders have shut down since this crisis started.

Here is my plan:

Forget the idea of using the home as collateral. Instead, convert the equity in the home into collateral and turn that into cash.

The bank counts on the interest payments to make their money. If the last day of the month comes in, and the interest is not paid to them.. they lose money they were counting on... Keep in mind that a borrower has signed a legally binding contract to pay that money to the bank,. (There are always going to be extenuating circumstances where families are going through unexpected financial hardships and I am sympathetic to that.) Under my the closing of a purchase or refinance, the bank would set up an amortization chart that shows how each monthly loan payment is broken down..... and how much of that payment goes to interest. Then, before they allow the loan to be finalized, the bank would set up a home equity line of credit for the equivalent of 8 months of interest payments. So if the amortization chart shows that 8 months of interest would be $16,000... that would be the amount set aside for that line of credit. That line of credit would then be frozen, and the person borrowing the money would not be allowed to touch it for the lifetime of that loan.

As the months go on.... the borrower pays his bill on time... Lets say one month the person doesn't make his payment. The last day of the month arrives and there is no check. Instead of the bank saying..."Oh crap... Jones didn't pay us"... they tap into the line of credit and take one month of interest. The problem with banks is... they were not getting their checks, and they would get almost no warning that a payment was going to be missed. Then the last day comes along with no payment... and the bank is screwed because x amount of people didnt pay their loan payment that month! Under this plan, when the late payment ultimately comes in after the 30 day mark... the interest is repaid to the line of credit and the "missed" payment can always be tacked on at the end of the loan.

And why do I choose 8 months of interest payments? Nowadays, if you are 4 months late, the bank starts to initiate foreclosure. But the way things are going right now, the bank has already had the sting of four months of unexpected missed payments. Under this plan.. they would start the foreclosure 4 months after the 8th month... which would be after 12 months of missed payments. Now, the bank will not be caught by surprise by the non payments of the soon to be foreclosed borrower, because after 3 or 4 months of dipping into that line of credit.. somebody better be making some phone calls to explain why the loan payments have fallen this far behind. This gives both the lender and the borrower more time to open the lines of communication... and takes away the surprise from the bank which will no longer have to camp out at the mailbox on the 31st waiting for all these non arriving checks to come in.

I think if the banks had counted on a plan to get their interest payments for those missed months and had not counted on a depreciating house as collateral... many of these closed lenders might still be alive and thriving.


Pumpy is off to a 1-0 start... which is one more win than Rutgers has. This week we go to Secaucus.. the home of the Giants, and also the city where the Porn Expo show was booted out this week.... That show is now headed over to Edison in Middle sex County! The Giants are 8 1/2 point faves over St. Louis. Sayeth The Pump who predicted the Porno Show's move to Edison: "I gotta go with The Rams in honor of all the Rammin'!" (Note to self: Find a new psychic who works clean)


I recently commented that The Ledger dropped their National Baseball Sunday column. Now it occurs to me that they have also dropped Kimberly Jones NFL column AND the weekly staff football picks! What is going on with what used to be a terrific sports section? Last week we went 1-2.

Giants 8 1/2 point faves over ST. LOUIS - The Giants road winning streak continues.

New Orleans pick 'em over WASHINGTON - The Saints pick worked for Pumpy last week, so why not?

Philly 7 point doggies to DALLAS - The lesser of 2 evils. How does Tony Romo memorize a playbook yet have a relationship with that airhead girlfriend of his? She cooed to Letterman last night that she likes to look at football player's uniforms because she can see their shmeckles.


With all the hullaballo about Mad Dog Russo going over to satellite radio, here is a very amusing short segment of Dog appearing on Howard Stern's satellite show... This is the first time I have heard Howard Stern's show since his defection to satellite radio a few years ago. It is broken up into 7 segments on You Tube, but this particular segment was the most amusing!

1 comment:

Jake said...

I've heard that the beginning of the sub-prime mortgage disaster has links to the 1999 Financial Modernization act (break down rules that only banks can handle mortgages in place since 1935)...Gramm, Bliley and Leach signed off basically allowing non-banks to do mortgages and without government regulation...Couple that with Bankruptcy changes and you spell crisis