Will the banks bail out overextended homeowners?

[lendingbubblecontinues]

Just as a reminder–

The year 2001 was just 5 years ago. There is no need to equate home prices returning to where they were just 5 years ago with “Armageddon”.

There will perhaps be financial “Armageddon” for many folks dependent on residential real estate for their livelihood. Everyone from bankers, real estate agents, and appraisers to Best Buy salesmen, roofers, and granite cutters could see dramatic loss of income.

People are experiencing financial “Armageddon” today, right here in San Diego county, losing houses to foreclosure in 4S Ranch and other expensive communities. Telling us that predictions of continued dramatic drops in prices are silly, won’t stop prices from falling, if they are meant to continue falling:)

sdrealtor…what is your opinion of the NAR campaign: “It’s a great time to buy or sell a home”?

[sdrealtor]

I believe the banks were in Western PA and the loans were likely portfolio loans. The point is there will be lots of creative ways people get bailed out and there doesnt have to be one single solution. In these cases, the loss was going to happen and by re-writing the loan at a lower amount the bank came out ahead vs. foreclusre. The shareholders only care about returns and this increased the returns so I doubt they would crucify the bank for doing this.

With the democrats (or democratic party for those that prefer it stated that way) in power I’m starting to think we will probably inflate our way out of this mess.

[IONEGARM]

Inflating our way out of this mess is a perfectly valid solution, it’ll only take 10-12 years or so. Sales will continue to decline in the mean time.

p.s. UBS Chief economist disagrees with you, he says one of the reasons why the housing market traditionally doesnt fall is because the bad times have coincided with rampant inflation (thus saving home prices, not real home prices, but saving the illusion that housing doesnt fall). We do not have rampant inflation and therefore housing prices have to fall for equilibrium to be achieved. Either you have lower transactions or lower prices, simple econ 101.

[sdnativeson]

“The point is there will be lots of creative ways people get bailed out and there doesnt have to be one single solution. In these cases, the loss was going to happen and by re-writing the loan at a lower amount the bank came out ahead vs. foreclusre. The shareholders only care about returns and this increased the returns so I doubt they would crucify the bank for doing this.”

Creative ways….that really doesn’t give any real sense of comfort. One way or another it comes back to bite someone.
I imagine that a similar train of thought was running around before the S&L implosion from the non to distant past.

[gold_dredger_phd]

Where do I sign up for this deal? Can I make $200K? I want the bank to bail me out of my McMansion and I’ll gladly pay taxes on the $200K as income. Who wouldn’t want an extra $200K? I think this may be popular if there is a big rise in interest rates.

This kind of debt forgiveness may be something that is popular with voters. Who else rewards folly or failure like the government?

[(former)FormerSanDiegan]

This kind of debt forgiveness may be something that is popular with voters. Who else rewards folly or failure like the government?

Maybe someone should bring up this idea as a way of reducing the US debt. Just get the creditors to forgive a Trillion or so in debt.

[powayseller]

So you think a bank’s losses would be less if they forgive the debt, than if they foreclose and resell the house? The town must be horribly distressed, if the lender figures they lose less money by forgiving $200K than by selling the house. Maybe they are doing this in very distressed areas, where foreclosures are soaring and buyers are so scarce, the bank knows it cannot find another buyer. But with so many buyers still in San Diego, thousands every month, I can see why banks here have not done this yet.

I am curious about the reasons this bank back east chose this course. What is the difference in that state vs. ours in regard to foreclosure laws, sales level, and so on? I’m also wondering why bank debt foregiveness did not become widespread, or used at all, in our last real estate downturn.

I think the borrower’s obligation to pay taxes on $200K could be almost as bad as making the mortgage payment on that amount. At a 28% federal tax rate, the borrower is looking at owing Uncle Sam $56K this year.

This housing bubble won’t be saved by one lender forgiving a little debt on a couple borrowers. We would need Washington Mutual to forgive $1 billion of unpaid interest income, and MBS holders to forgive trillions in loans. Very doubtful.
This housing bubble is already doomed by the new lending guidelines.

It’s an interesting story, nonetheless.

[sdrealtor]

PS,
I just used completely arbitrary numbers to show an example. The prices were likely much lower but the point is the same. Foreclosure is timeconsuming, labor intensive and costly. Portfolio lenders can make out better by forgiving a portion of the loan and keeping the person in the home under the right circumstances.

[4runner]

“I think the borrower’s obligation to pay taxes on $200K could be almost as bad as making the mortgage payment on that amount. At a 28% federal tax rate, the borrower is looking at owing Uncle Sam $56K this year.”

The borrower can just take out another loan to pay off the 56k$.

[IONEGARM]

It would be a more interesting story if specifics were used, anecdotal “I heard from a friend of a friend” isnt very intersting, which bank doing exactly what, then its effect can be considered. Right now its just heresay.

[lendingbubblecontinues]

I can just hear it now:

“Okay, Mr. FB…we’re going to forgive this 200K of your mortgage so you can keep the house, but you better really, really, really promise to pay your smaller mortgage this next time…pretty please, don’t miss your payments, okay? Cross your heart?? Do you swear? C’mon really, do you really, really mean it ?!?”

[powayseller]

I agree about the hearsay comment… it might be happening, but I’ve never heard about, so I remain skeptical until we get the names of the lenders and some specifics, esp. in regard to foreclosure laws and employment and sales in that area. I could see that tough foreclosure laws favoring borrowers, or very low sales, or high unemployment, or distressed areas may do this, but then again, maybe it’s just some guy talking….

[Diego Mamani]

Two words: moral hazard. As pointed out above, if banks started doing this, lots of FBs and near FBs (many of whom already have bad credit) would simply stop paying their mortgage until they get their loan balance reduced.

Of course, this doesn’t preclude a bank, on a case by case basis, from reducing someone’s mortgage. After all, the bank already incurred a loss, and then holding (owning), conditioning, and selling the house will only result in further losses.

Obviously this won’t be industry policy. Not even a particular bank’s policy. But it may happen here and there.

[sdrealtor]

Hearsay it is! I heard it from someone that is very reliable but whom I likely wont run into for quite a while. It is just an example of one way lenders are trying to avoid even bigger losses.

[North County Jim]

It seems to me most are missing the point here. The point has nothing to do with hearsay or moral hazards.

The point is that there are bankers out there who see what’s coming and are thinking about ways to mitigate the damage.

I think it’s important to note that how the lenders decide to handle their delinquent accounts will affect the market.

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