Guest article: A fix for negative equity: the “principal-only” plan
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The hundreds of millions of dollars being spent on principal reduction for “underwater” home owners is a poorly designed program which arbitrarily rewards some delinquent borrowers and punishes others who have struggled to remain current in their obligations. It will have some limited success in allowing owners to remain in their properties, but at a great cost to taxpayers and banks. And, it is unnecessary as a better plan that would require no new capital could be enacted. It would require banks to honestly evaluate the value of their assets and have a proactive approach to maximize this knowledge, characteristics which thus far they have failed to exhibit.
Borrowers and lenders are on the same side of the equation. When property values maintain or increase, both parties benefit; lenders are more secure and borrowers/owners have motivation to protect their equity. The bane of both parties is foreclosure. When this occurs, not only do both lose, but other owners and lenders in the area suffer. Foreclosures lead to further disintegration in values, borrower disincentives and additional foreclosures. A primary goal of any plan must be foreclosure avoidance.
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About The Author
Guest Author Glenn Egelko
has run a private trust deed lending fund since 1983 with results that far exceed traditional lenders.
![iStock_000006162498Medium1[1]](http://firsttuesdayjournal.com/wp-content/uploads/iStock_000006162498Medium11-106x75.jpg)
Great idea, but just like every other game plan out there, it will only work for home owners who fit the mold. Every plan so far has a loop hole, allowing the Investor/Note holder to call the shots to accept or not. The same goes for this plan as well.
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Reality check: borrowers and lenders are not sitting on the same side of the bargaining table. And this “plan” is just another cram-down in a new costume. The reason that borrowers can and do walk away from their contract obligation to the lenders is that most States do not allow the lenders to seek and obtain any Deficiency Judgments for the unpaid debt. So, once the borrower has no equity left to lose, they just skip out. The fact that they signed a contract in which they agreed to payoff the loan is of absolutely no concern to them. Many such borrowers could and would keep paying their loan–even in this down economy–IF they still had some home equity to lose.
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It seems the first positive solution to this problem for so many homeowners. I think it could work as I don’t believe as does one of the comments stated that a borrower who goes to the trouble of obtaining such a device would walk away after getting financial relief. Ex. I have a family member who’s home fits this solution. He who would jump at the chance to get out from being underwater. He has maintained his home with pride and is nearing retirement age. He does not want to move after all the sweat equity he put into maintaining his home and making it a place he feels comfortable. I believe there are many more people like this than those who would skip out after they have nothing to lose. Those borrowers have for the most part already skipped!
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make this available for all underwater homeowners. balance the playing field.
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This would work and be a good incentive in some instances, but here in California I have assisted sellers with short sales and one of my seller’s home was worth $215,000 and she owed $420,000 and another owed $320,00 and the condo was worth $120,000. I think the pay back down to %90 would have taken way too long to create any kind of incentive.
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This would only work if you’re not that much underwater..like your example sited. Most homewowners are way down too deep to be saved. On top of that they might have a 2nd Note that they are paying too. Let’s not forget about their JOB…do they still have it ? Refinance then is out if they don’t have a job.
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I agree with the above comments – This plan would only work for homeowners who are not too much underwater. Moroever, it doesn’t address those who have HELOCs that are the cause of being underwater. The ultimate (and probably only way) to resolve the “underwater” issue is for lenders to fess up and re-value their assets at current market values. But they continue to play games with their books and attempt to punish homeowners who default even though lenders like BofA walk away from bad real estate investments all the time.
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I found this plan too complicated. Why not just reduce the property to market value and finance it as a new contract. This will give a good insentive to remain making payments.
I modified my loan and at the end of the contract, I will still owe a baloon payment of over two thirds of the present mortgage. Some deal. Big help.
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That will be wondelful; everybody will benefit is a win for house owners that have only one loan; however still what to do with the second loan specialy if is insecure.
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Repeal H.R 5660 : Designed to Transfer California Wealth From the California Home Ownerto Lenders
Investors/ Using these Finacial Documents Credit Default Swap, CDO,Rigged Libor Interest Rate ARM Riders on All California Residential Property Home Owners For 30 years
Hybird /Sub Prime ARMs Underwriiting Weaknessess Based on Foreclosure or Liquidation Value
Remeber: Ronald Regan the Savings and Loan Businesses Gone For Ever.
Remenber The Resolution Trust Organization .
California Residential Home Owners Should Start A Sate Wide Campaign:
Remove All Hybird Adjustable Rate Mortgages/Sub Prime Loans Adjustable Rate Riders With A Libor Interest Rate FROM ALL CALIFORNIA RESIDENTAIL PROPERTY
California was the Sixth Largest Economy In Tax Year 2000
Enron Attacted California Electrical and Natral Gas
Enron Loop Hole Allows the Manupulation of Oil and Gasoline Prices
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I agree with some of the previous comments. It is not for everyone but will help some. I like the comment that will lower the principle to current value and start from there. You use an example that is very minimal in being upside down.
Where values have dipped 40-50 % like California. I also did a modification and now have a ballon of 2/3 of the value after 30 years.
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A simple and more effective solution is to modify the loan, extend the term to 40, 50 60 years with predetermined variable interest rate depending upon the negative valuation. This would reduce the mortgage, keep homeowners in their homes and allow the valuation to rise again over time.
It’s akin to owning stock whose value has been depressed, yet until it’s sold, then a negative or positive would result, like a buy and hold strategy. Depending on the cost of money, the valuation could rise significantly, couldn’t it, so it’s just a matter of buying time for the economy to roar again?
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Maybe I am not understanding this plan, but one problem that I see right off is the fact that banks simply do not want to accept a lower valued asset on their books in place of a higher valued asset, however false that higher value may be. Hence the difficulties with getting short sales through. By making short sales difficult they are insuring that only the brave even try. Why make it easy? Then everyone will want to do it. And if everyone does it the banks will really have problems. Keeping control of the number of short sales also keeps the value of the banks from plummeting. That is their only concern I can assure you. Right or wrong they answer to their shareholders, not to their borrowers.
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