Here’s a familiar scenario: Jane and John live in a nice house and pay their mortgage on time every month. Their outstanding loan amount is higher than the home’s market value, making them underwater borrowers.
They wish they could move into a bigger house in a better neighborhood, but realize they’re stuck because they can’t sell for what they owe — let alone turn a profit into a down payment.
The most responsible type of borrower today is jaded, to say the least. And they’re exactly the borrowers we should be helping. Banks need to create lending programs for perfect-credit borrowers who are underwater and held hostage by their current mortgage. Of course, it’s not as easy as all that — but it is doable — and is exactly the kind of program that the recent attorneys general national mortgage settlement should inspire.
Why not help the creditworthy homeowner by using some of the recent attorneys general mortgage servicing settlement funds to pay the difference between market value and unpaid balance for those borrowers who wish to move? • We could make the investor whole at the time of sale • We could roll the deficiency into a new, performing unsecured loan • The bank recoups the AG money over the unsecured loan amortization period • The borrower’s credit profile would be unharmed • The housing market gets moving • Increased buyer activity instills confidence in the market • The bank gains a customer for life
Let’s actively invite responsible owner-occupant homeowners into the market — and stop catering to whiners and walk-aways (where all of the focus is today).
What’s more, if banks take an active (rather than a passive) role to get the industry moving, they’ll find myriad ways to turn problems into profits.
This isn’t much different than rolling your last few car payments into a new lease. The biggest pool of potential buyers, the market’s biggest catalyst, is people who are stuck in a house they’d rather leave. They can’t or won’t take a loss and bring money to the table in order to sell — money they’d rather invest in a new home.
According to the National Association of Realtors, 63% of recent homebuyers were repeat or move-up buyers, and 60% of buyers were first-time sellers. Simply put, the largest pool of potential homebuyers consists of those who already own a house.
All of today’s existing assistance programs cater to the person who is delinquent or calculated to be at risk of imminent default. And the irony is, the root of that person’s problems is deeper than any of our programs can solve.
Forgiving principal on a loan in default won’t solve the problem. But what would a stand-up homeowner say if you removed their shackles and helped them move? I’m picturing a dance, cartwheels and exclamations of joy.
This is a giant population of people you can count on, who can pay a bigger bill, who would love to pay a larger mortgage if it meant they lived in the home of their dreams.
This is how it looks: The Big Bad Bank turns into The Big Generous Community Institution, approaches Mr. 850 Credit Score and says, “We have a once in a lifetime opportunity for you. Because you have willingness to repay, because we see how diligent you’ve been in consistently paying your mortgage, because we agree that it’s awful to be underwater, we want to make you a deal. We’ll help you get out of the house you’re in and into a new house with a new loan from our bank. We’ll help you take advantage of today’s low interest rates and depressed pricing. We want to reward good values.” Now the bank is a good guy, not the enemy. A bank for life.
It could even be more far-reaching. Banks could partner up with homebuilders and give preferential treatment to current customers who would consider new construction. Or, what if the bank took the REO and short sales already on its books and turned them from losers into special opportunities for current, paying customers?
Part of the inventory problem today is that the biggest pool of buyers is prohibited from purchasing. Let’s drive the economy with new homes, with people who want to spend money, who have good jobs and good credit. Let’s shift the large percentage of housing inventory from investors to owner-occupants — who can and will improve the neighborhoods they live in.
So far in 2012, investors have purchased more than 40% of the REO sold via OfferSubmission and more than 55% of transactions were closed with cash. These telling numbers suggest that the liquidation strategy of bank-owned properties is weighted heavily toward moving volume and less about creating value for shareholders and taxpayers alike.
Those who can turn the housing economy around are owner-occupant buyers leveraging traditional financing options — with a twist. We need to embrace the homeowners who pay their bills, and create the programs that turn this ongoing crisis into a once-in-a-lifetime opportunity.
Nonprofits — the Cuyahoga Land Bank, NeighborWorks America, Rebuilding Together, the National Association of Hispanic Real Estate Professionals, PCV|VRM Seeds of Hope and many more local organizations — are investing significant resources to improve America’s most vulnerable housing markets.