In the current housing environment, banks and lenders face a tremendous backlog of foreclosures and short selling has become one of the fastest growing segments. But why are short sales only available to other people and not the homeowners themselves?
[In Pictures: 8 Painless Ways to Save Money]
Mortgage lenders insist that offering any kind of short sale opportunity to the current homeowner only encourages people to default. They are correct, in a way, but the current house market makes the answer more complicated. Here are some ways that banks can help homeowners start affording their homes again:
Cut the Principal Balance
Did you know that many mortgage companies, including GMAC Mortgage, have been settling second mortgages for as low as 8 cents on the dollar over the past couple years just to get the note off the books?
Yes, if you had a second mortgage for $200,000 and were a few months late, you very well could have received a letter to settle your entire $200,000 balance for less than $16,000.
While one would not expect an 8 percent settlement on a first mortgage if a lender can wipe out almost an entire second mortgage, surely they can modify a first mortgage by 20 or 30 percent (equity which is already lost and never going to be realized in a foreclosure or short sale).
[Visit the U.S. News My Money blog for the best money advice from around the web.]
Loan Forgiveness, Lower Payments
We all know people should be held responsible for a loan they signed for in principal but let’s be real. Many didn’t know what they were signing and banks should have known where many of these loans would ultimately end up.
Sure, you have real estate investors who deserve to lose and people who played the system, but wouldn’t it be easier and more beneficial to the country as a whole to offer homeowners an option to keep their home with a reduced principal balance and lower payments? After all, no one wants this nation to become a vast land of people looking for apartment rentals.
Surely banks are insured for losses and if current coverage does not include voluntary write-downs, why can’t they just create an insurance company, write a unique set of policies and then cover themselves for losses written off to current homeowners? Surely, there are people talented enough on Wall Street to make this happen and still make a profit.
Many people will not support Joe and Jill’s quest to get a loan modification made by a private company, however they will support tax dollars paying for the overtime of government employees dealing with this mess? That doesn’t make sense. We are getting burned either way.
Alan Dunn is a serial entrepreneur, mortgage broker, and publisher of various consumer education websites, including a site with tips on how to save money and a destination for drivers with a wealth of information on car insurance companies to help people understand the details of auto insurance coverage.