Octavion - Good post, I know a few people already in this position.  If banks ultimately get hosed on defaults what are the chances they will be open to "make a deal" and negotiate a better loan or even forgive part of the principle in order to keep people in their homes and at least receive some continual payments?

This post has good insight. There is no silver bullet on this issue. However, if house prices decrease to 1998 levels, it will bring back affordability. So, in my humble opinion, the price of housing is a big factor in this mess.

In many articles I read, writers usually mention “underwater” homeowners are unable to refinance so they end up in foreclosure. I just don't quite understand why when refinance fails, one has to be foreclosed. When those homeowners bought the house, don't they commit to pay the mortgage for 30 years? If they got teaser rates, don't they already prepare to shoulder the rise in payment when the interest rate rises?

It is understandable that those who lost their job will probably face foreclosure, but I don't think all the foreclosures are caused by job loss or divorce. That leads me to believe many homeowners were gambling that prices would increase forever — and did not even think about their repayment ability. Now, while the government is helping those who suffer job losses or divorce, those who were irresponsible are rewarded as well.

We should let the market works its way through the correction. Those who cannot afford a home, should rent. There’s no shame in renting. There are many homeowners waiting for prices to fall to a reasonable range.

Today, I read a post about a home for sale in the Inland Empire. It is a short sale but the asking price is still at 2005 level. People just don't want to admit the party is over.

Responsible Homeowner

Brian,

Thanks for the comments.

I think banks are getting to the point where they are ready to negotiate now. Some lenders have too many foreclosures, so they don't want any more. It's better for lenders to lower the interest rate or modify the terms of the mortgage in order to keep the borrower in the house.

I think we will see a lot of that in 2009.

Octavio

Responsible Homeowner,

Thanks for sharing your thoughts.

I agree with you. We need to bring back affordability to the housing market. In some bubble states — California, Florida, Nevada and Arizona — prices are still too high.

And I agree with you on the point that way too many American homeowners “gambled” on housing, betting the prices would ALWAYS go up.

Finally, I am with you 100 percent on allowing the market to work its way through the correction.

No more bailouts!

Octavio

Talking about bank rework the loan, it is just a joke. A lot of homeowners in default now are not yet seeing the highest interest yet. Helping them to rewrite the loan into a fix rate loan at 6% which may be the same or higher that the teaser rate that they are defaulting now, I doubt many of them can afford it. Government still don't recognize the root of the problem.Many of these defaulting homeowner DO NOT have enough income to support the conventional loan payment. That is the reason they got into the exotic loan at the first place. Unless the bank is willing to decrease the principal as many as 30% or more, by no ways the loan modification will work because by doing so, bank will go bankrupt. Loan modification is just prolonging the inevitable and drags the pain longer, though it may help a few.

I hope we tax payer don't have to hand money to those defaulting homeowner sso they can pay the mortgage, because I need money to pay my mortgage TOO, although I'm still paying on time.

Sigh..

One way to minimize the financial losses for Lenders is that many today are now modifying “fixed foreclosure rules” in favor of acquiring the property early – by accepting a “deed in lieu” of foreclosure by working with the Creditor, saving up to $40,000+ in legal fees, long waits for legal proceedings to reach a default verdict due to massive court clogging, and listing the properties for sale as a “bank owned property” rather than a foreclosure, thus avoiding the stigma of a foreclosure sale where the bottom feeder buyers are continually knocking down the values “on the cheap” ranging anywhere from 20-85% off the value to acquire a foreclosed property.

Lenders are up to their necks in legal fees with continual mounting foreclosures, and literally drowning in a sea of lawsuits largely due to inflexibility and the standard fixed foreclosure procedures. Creative lenders are finding other methods to solve the situation, and enormous expense.

As the recession deepens in 2009, Lenders are finding the “deed in lieu” a viable alternative to going through the legal process to gain quick access to the property for disposal. However, many Creditors are coming up with creative propositions to the Lender to facilitate the expedited deed, rather than the Creditor remaining in the property for months on end before court decision, and essentially living rent free.

One method is a forgiveness of loan debt, by the Lender, coupled with a promise not to pursue a deficiency judgment, in affidavit format, an exchange which often yields the facilitated “deed in lieu” from the Creditor, who then must vacate the property, usually within 30 days or less, upon acceptance of the deed. Note: Lenders cannot make any deed in lieu offer, due to legal ramifications, which involves the parole evidence rule (meaning the avoidance of coercion). The deed in lieu negotiations must be presented in writing by the Creditor. Then, the negotiations can begin legally. Many Creditors are unaware of this method, yet the Lender is unable to offer that suggestion due to the parole evidence rule. It is the savvy Creditor who investigates all possible resources and makes a formal written offer to the bank, which then in turn, opens the path.

Lenders are finding that early entry of a realtor listing of the property saves upwards of $40-50,000 to the Lender, when other factors such as property maintenance, real estate taxes, HOA fees, insurance etc. are added to the legal costs, by selling the property early.

In news just appearing from Fed. Reserve Chairman Ben Bernanke, who stated last week that the Fed will likely buy up mortgages directly from the Lender, is another quick method of property disposal, by the lender, which the Fed would implement early next year. Many Lenders will be quick to take advantage of that kind of offer, which has best bets for lower discounts on the buyouts of the mortgages, rather than waiting as time goes by wherein the Fed will be continually offering a lesser percentage as they accumulate untold properties into the hundreds of thousands, or millions.

Such a method can be attractive to a Creditor as well, who would preserve whatever credit standing with the credit reporting agencies, nor have to be concerned with any possible deficiency judgments that could follow a foreclosure decision, once the property is sold... This presents a win-win situation for both Lender and Creditor. Although some Creditors may not make this offer, and would rather just remain in the property rent free to save up on money to later move into an apartment. The tilt is more in the bank’s favor, as the Creditor would be vacating the property within 2-4 weeks once the deal is agreed upon.

There is a waiting period in many states, already exceeding a year before having the action brought before the judge. As time goes by next year, this waiting period is expected to become even longer as foreclosures mount, and particularly in mid-January and beyond, when many ARM’s reset to higher monthly payments for millions more homeowners with mortgages.

Among the hardest hit foreclosure states in ratios of mortgages held to foreclosures: Florida, 30.7%, California 30.3%, Nevada 29.7%. Followed next by Michigan, Ohio, and Illinois. This also translates to much longer court dates for disposition of the foreclosure.

Meanwhile, several economists are stating that some 800-1000 U.S. banks will fail due to these overwhelming foreclosures next year. Already in 2008, some 311 banks have imploded, or been taken over by larger banks.

Many are attempting to secure funds from the Congressional “bail out funds” which already has surpassed the initial $700 billion, and is now approaching $1.2 trillion.

In the past two days, several money organizations are also lining up to be declared a “bank holding company,” among them American Express, and GMAC Financial Corp. More are expected in the coming days and weeks ahead. This will put a tighter squeeze on the bail out funds available.

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