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A Loan Modification Plan That Might Actually Work for Homeowners AND Lenders?

by Richard Warren on February 15, 2010 · 8 comments

  

Unless you’ve been living under a rock the last few years, you are well aware of the foreclosure crisis in this nation. Politicians have been creating plans that have been mostly ineffective. Loan modification companies have been popping up all over the place and bankruptcy lawyers are having a field day. Banks have created plans that are mostly window dressing so that they can take credit for doing something.

The current administration in Washington created the Making Home Affordable program. The idea is to allow people to refinance into more affordable loans or to receive a modification from their lender through the Home Affordable Modification Program (HAMP). HAMP allows a 90-day test modification. Unfortunately, according to a NY Times report (article), only about 12% of those become permanent. Not exactly a rousing success.

Reluctant Banks

Banks are in a difficult position here. Yes, a good deal of the problem is one of their own making. The problem they face is setting a precedent that is unsustainable. Current modifications have been to loan rates and repayment time. There have many calls for banks to reduce the balance of principal owed. If they were to do that, where does it stop?

Many homeowners who are upside-down, they owe more than the home is worth, are still current on their mortgages. If banks started lowering principal balances, wouldn’t those who are current want it as well? It also shifts the market risk away from borrowers and onto banks. Why would a buyer be concerned about the price of a home if a bank has to reduce the loan balance if the value of the house falls?

A Different Approach

I have seen a possible solution that would help keep homeowners in their home, reduce the amount of foreclosures, and help banks maintain their profitability. Would it work for everyone? No, but it’s a start. It would change the adversarial relationship between borrower and bank into one of a partnership. The concept is fairly simple and based on something that has long been done in the world of real estate – Equity Sharing.

It won’t work if a borrower has totally lost their ability to pay because of a job loss or other catastrophic event. If the homeowner can still pay it just might. The idea is that the loan balance is reset to reflect the current market value and the loan is modified to a realistic rate and term. The lender would then take an equity position in the property.

The lender avoids the expense of a foreclosure and the borrower gets to stay in their home. When the home is eventually sold or after an agreed upon period of time, the borrower and lender split the accumulated equity. It’s a win-win in many ways.

Are there problems with this approach? Sure. But the upside is probably better than whatever negatives may exist. Based on how effective other programs have been it is probably worth a shot.

The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks. – Lord Acton (British Historian)

Image via Flickr

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{ 8 comments… read them below or add one }

Aaron Pfeffer February 15, 2010 at 5:16 pm

Isn’t this essentially what the FHA did when they rolled out their program a few years back to take a pro-rate portion of the proceeds is a borrower sold within a five year period?

Reply

Richard Warren February 15, 2010 at 5:44 pm

This is different from the FHA program. The idea is for lenders to take an equity interest in a property as an alternative to foreclosure. The FHA program was more of a penalty for someone who sold quickly.

Reply

Rick Heggem February 17, 2010 at 12:27 pm

Good post, Richard –

We certainly agree with your sentiments. We’re creating a private market solution to address the very subject you address. Love to get your feedback if you care to pay us a visit.

Cheers!
~ Rick

Reply

Rick Heggem February 21, 2010 at 11:35 pm

I supposed that the PRIMARQ website URL would display, but apparently not. In case you would care to weigh in on our version of the same solution… http://www.primarq.com.

Cheers!

Reply

Joshua Dorkin February 17, 2010 at 2:03 pm

Hey Rich –
I wonder if anyone in Washington will take notice of this post like they did the one from a year or two ago . . .

Reply

mike h February 21, 2010 at 7:12 pm

My understanding is that, if I have private mortgage insurance and default on the loan, The P.M.I. insures the bank of my loan ballance to be payed back to the bank.
I see why the banks would rather foreclose than work with home owners.

Reply

karen walls February 21, 2010 at 8:55 pm

I love this idea, I have been trying to push this theory to no avail. I’d like to add this blog post to my website with your authorship as it is very informative which I plan to inform the public of choices and what to fight congress for!! Thanks great post and idea! Great idea to present to HUD!

Reply

Joshua Dorkin February 21, 2010 at 10:51 pm

Please feel free to link to the post, Karen, and even cite it, but we can’t give you permission to replicate the post in its entirety. Thanks!

Reply

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