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