Friday, January 07, 2011

Details on how the Van Niel mortgage proposal would work.

Here's how the Van Niel mortgage proposal would work.

Banks with borrowers who are underwater but current on their loans should offer the following deal to those borrowers:

(1)  The bank reduces the interest rate on the mortgage to a lower rate (at a rate at least equal to what the folks who have defaulted are being offered, thanks to the bailout). 

(2)  The bank agrees that, for every "X" years that the borrowers remain current on their loans and live in the house (no "spec" properties--just actual homestead-type homes), the bank will reduce the outstanding principal amount of the loan by "Y" dollars. 

(3)  The borrowers, in exchange for the principal reduction and reduced interest rate mortgage agree that if, they sell the house within "Z" years, they will give any profits made on that sale to the bank.  (The potential profit gives the bank an incentive to "deal"-- if house prices improve, it might recoup at least a portion of its lost interest on the reduced interest mortgage and principal reduction.)

Example:  House is bought for $300,000; it has a $210,000 mortgage @ 6% for 30 years; borrowers put 30% down on the house.  House is now worth $125,000, and the balance due on the mortgage is $200,000.  (Welcome to Las Vegas.)

Bank agrees to reduce the interest rate by 1% (revised rate is 5%) AND to reduce the principal on the note by $5,000 per year for 5 years.  At closing,  the house is valued at $125,000 and the mortgage is $195,000 @ 5% for 30 years.

After year 1, mortgage is paid down to $192,123.04 (less $5,000 = $187,123.04).

After year 2, mortgage is paid down to $184,177.59 (less $5,000 = $179,177.59).

After year 3, mortgage is paid down to $176,165.50 (less $5,000 = $171,165.50).

After year 4, mortgage is paid down to $168,089.17 (less $5,000 = $163,089.17).

If the borrower sells the house in the first five years for any reason, the bank gets any profit made by the sale.  At end of a 5-year period, the house may still be worth $125,000 (maybe the value increases--or maybe the borrower is in Las Vegas, so the "floor" on house prices keeps falling--sigh), but the principal on the mortgage has been reduced to a much more manageable  $163,089.17.   

The homeowner is significantly closer to breaking even, and has much less incentive to hand the keys back to the bank and simply walk away. 

One more advantage:  the bank doesn't have to write down the value of the home in one big lump--unlike a foreclosure or short sale. 

Using future bailout money, if any, to buy down the mortgages of underwater homeowners who are current on their mortgages is as least as productive a use of the money as is giving the bailout money to delinquent NINJA homeowners who have no chance of keeping their houses in the long run.

Over time, everyone wins: the banks won't own the underwater houses because the homeowners will have an incentive to stay in the houses (without feeling like dummies for honoring their obligations) and housing prices won't continue to plummet because there will be fewer neighborhoods with massive foreclosures.

And now you know that part of the reason that I married Jeff Van Niel is that he's very, very smart.


Corinne Cordon said...

Hi Nancy. John suggested I read your Van Neil Blog after he saw the blog and letter campaigns I am writing on section 1431 of the Dodd-Frank Act. This section of the Act will deny "home owners", also known as "owner-occupants" the right to utilize or access private money to buy homes. This is a huge right that is being taken from the American citizen. Not every family fits into the conventional loan box, which is getting smaller and smaller every minute. If you want to see a post I wrote on this, type in "Dodd-Frank sucks" (which I am changing as soon as I come up with another short word that adequately describes what this section of the Act does. But in the meantime - to improve on the Van Neil proposal, the current rate being offered is 3.25% on new loans. Use this rate instead of 5% as it makes a significant difference to the principal reduction. It also makes most payments totally manageable, no matter what the principal is.

Next the sentence that states that the bank would be taking less of a hit at the end of the 5 years is slightly erroneous in the logic as, in the example, most of the principal reduction was given by the lender anyways. This proposal simply delays (or spreads out) his loss. Since "value" is an arbitrary (imaginary) number based on people's belief and it is the "payment" that actually matters to most borrowers, the banks wouldn't need to give a principal reduction at all if the borrower can make the payment. The main time value becomes important is when a borrower sells the property or attempts to get cash out. When the borrower first purchased the property, he was absolutely satisfied with what the price was and what his payment was. What changed? Nothing. Only a perception in the borrower's mind that his house wasn't worth "enough" anymore. Borrowers with loans didn't "pay" for their property. They agreed to a payment and the lender paid for the property, right? If interest rates were at 10% right now, most people would be happy with their 3.25% interest rate and the amount of their payment. I'll bet they would stay were they are. More in the next post because I ran out of room.

Nevada Trust Deeds said...

Next, we take care of the people who truly can't keep their house or make any payment because they lost a high paying job, or they became sick, or whatever the case was. They are in the minority. The majority of people looking for a loan modification are those who are not happy with an imaginary number that says their house is worth x instead y!  They want to take advantage of the "good deal" next door or the bigger house for half the price. They know that real estate equity will bring wealth to them in the future and since they lost their "imaginary future wealth", they want out. I deal with them all of the time. Morally it is wrong. Were you happy when you bought the house? Did you not promise to make that payment for the next 30 years? So why do you need a principal reduction? Why does the lender have to take a loss because an "imaginary" number says that you are under water?  Take that imaginary number out of the equation and deal only with "what payment can you afford?". Just for the next 3-6 years and watch what happens. And hope the borrowers stop lying about their assets and their income. This is the biggest whining scam the American people have perpetrated on themselves: the innocent victims can't get loan modifications because the lenders are being overwhelmed with the people who want a better deal, and it's our retirement accounts that funded these loans!  

These comments have been written by a person in the trenches; a person who sees the destruction being aimed at lenders, when if it wasn't for the lender, you wouldn't have been able to get that dream house you wanted.  This has been written by a loan officer who refused to write a pay option arm, and who begged borrowers not to get into them and, after spending hours and hours of her time explaining the risks of these types of loans to pigheaded borrowers, they went to another lender and got one anyways. And finally, I wrote this comment while my husband was driving through all of the potholes he could find, so please excuse any errors.

MyTwoCents said...

nancy - brilliant idea but the banks do not want it. I have extensive experience in this area (I am not one of the commercial lawyers who just started doing loan mods)

What alot of people have failed to uncover / take the time to actually learn is that the banks want the houses to foreclose. The houses with the worst loans (arms, interest only arms etc) have been overinsured against foreclosure. This means that if the house actually forecloses, the Banks actually get more money than if the house was paid for the next 30 years. This wasn't done through typical "insurance" because as we all know, insurance is federally regulated. This was performed through a series of credit default swaps between the largest banks. So summarily, the banks want you to foreclose.

Next problem is assuming that your house is one of the ones that is not over-insured (not all of them are, mostly just the ones with predatory loans), chances are, the bank doesn't "own" your note anymore. Majority of notes are owned by private investors. This investor can be anything from a local private school to some old rich white guy. All modifications have to be approved by the investor. The banks have no control over this

MyTwoCents said...

@ Nevada Trusts

you are missing the larger picture. Sure the homeowner bought the property, they signed the contract/mortgage, agreed to pay x, and now they are whining. However, without even arguing the complicated theories, lets first take it back to simple contract law. The bank/lender was fully aware that the purpose of the contract was to purchase a home that would gain in equity. It was an investment. Sure investments fail everyday and people aren't generally allowed to back out of them. BUT, the other party to the contract is generally not allowed to purposefully frustrate the purpose of the contract

If I bought the house as an investment (as everyone else also did) and the banks frustrated my ability to make money on that investment, they have materially frustrated the purpose of the contract.

The banks were fully aware that the economic crash was coming in 2007. Documents released by Countrywide proved the predatory lending activities were going to lead to the crash in the real estate market. The banks were aware of the crash. The banks were the ones causing the imminent crash. The banks frustrated the purpose of the contract