Skip to comments.Off Grid Solutions | Mortgage in-kind Exchange
Posted on 06/12/2011 5:12:06 PM PDT by NaturalBornConservative
By: Larry Walker, Jr.
The first step in any recovery is acknowledging the problem. The second step is having faith that a power greater than oneself can restore sanity. Joe purchased his home four years ago for $300,000. He currently has an outstanding mortgage balance of $270,000. The appraised value of his home has fallen to $150,000. If he sells it for $150,000 today, he will eat a loss of $150,000 which is not deductible for tax purposes. Joe can afford his mortgage payments and has not missed any. Since he doesnt qualify for a loan modification, what options does he have?
For one, he can continue to pay off the $270,000 debt, plus interest, on a home which has lost 50% of its value, thus incurring more than a $150,000 loss spread over time. Or if he finds this distasteful, he can simply walk away from the home and let the bank and the wizards of DC deal with it. Other than that he really doesnt have many options. I say he doesnt have many options, because I know some folks who have already walked away from their homes, renting them out to others while they rent elsewhere, with the idea of dumping them for a loss if things dont improve in a couple of years.
Does it make sense for Joe to sit there, stuck in a home that he cant sell or refinance; making a payment every month on what he knows is a bad investment? Would you invest $300,000 in something that you thought would be worth half in the future? Although housing prices may increase over time, they didnt get to where they were overnight, and life is finite. Joe is 50 years old and doesnt have another 30 years to waste. So what can the government or private sector do for Joe?
Solution: The Mortgage in-kind Exchange
One of the things eating away at Joe everyday is that he sees House B, a bank owned foreclosure which had an original cost of $600,000, still has an appraised value of $300,000, but has a selling price of just $150,000. Joe would love to purchase House B but he is not able to get out of his current mortgage without incurring a $150,000 loss. Joe would have to come up with a $120,000 payment to get out of his present mortgage, plus make a down payment on the bank owned home, which would make him even worse off.
A Mortgage in-kind Exchange is a unique idea that would allow Joe to sell his home for a loss and rollover the remaining $120,000 loan balance into a more valuable home. It would allow Joe to purchase House B for $150,000 with a $270,000 mortgage. House B would have an appraised value of $300,000 and a mortgage debt of $270,000, thus making Joe whole.
How it works Joe is allowed to hold an option to purchase House B for a small earnest money deposit of $1,000 which will take the home off the market for up to a year giving him time to sell his old home. If the old home doesnt sell within a year, Joe may either extend the option by making another deposit, or forfeit.
Benefits and costs - Joe would be better off by being allowed to purchase a more valuable home for the same amount owed on his underwater home. The banks would be better off because they will have reduced their REO inventories without incurring as big of a loss. The economy will improve by allowing faithful homeowners a chance to improve their personal debt-to-equity ratios. Housing prices will improve by removing homes selling for less than fair value from the market. The cost to taxpayers would be zero.
The banks can get involved by matching up faithful homeowners with qualified properties. The government can get involved by getting out of the way, and encouraging the free market to push solutions rewarding those who deserve it the most.
Related: Upside Down In America
In the scenario presented above, one of the lending banks would have to realize a loss to complete the transaction. Assuming the same bank holds BOTH properties, they'd still have to realize a loss on one of them.
The reason we're seeing all these banks sit on these properties is because they can't AFFORD to take the loss on short sales. It depletes their capital reserves and puts them AT RISK.
Unfortunately, I don't think there is a good solution to this problem, I really don't.
I have been thinking about this mess a lot too. I took a $300,000 hit on my house. My parents who paid cash took about a 40% loss, yet all solutions come up with negating the loss for some while others still suffer a loss. Both my parents and I did all the right things and lived within our means. I do feel sorry for those who were unlucky and bought at the peak, but within their means. Others can go to you know where.
Question about short sales. Can you offer less than the asking price on a short sale? I am sure you can, but what is the chance of the bank accepting it? Does the current mortgage holder have to pick up the difference or does it just result in a loss to the bank?
You are very correct in that the banks and homeowners don’t want to drop the prices of the homes. Many are still thinking there is a way to keep the market propped up. No one wants to accept a loss.
A Realtor in my office just closed a short-sale transaction with Chase. Seller had not paid mortgage payments in almost two years. Not sure what the outstanding mortgage was but it was “forgiven” and seller was released from ever having to pay this back, PLUS (are you all sitting down?) Chase Bank cut a check to the seller for $10,000. This is a true event which happened last month.
Digging in deeper is not the answer.
I can’t say I have any real good solutions for people that are so upside-dwon in their current mortgages.
For those of you NOT in mortgages right now, I think the best advice is if you have enough money saved up now, to buy a depressed value house outright and not deal with a mortgage at all. For those not with enough money yet, save a year or two, or 3 or 4, and buy your house outright. You will save so much money in interest it’s not even funny, and you’ll never have to worry about interest rates.
I have an elderly neighbor in my condo building (age 70+). He can easily afford to pay off his mortgage. However he stopped paying his condo dues about a year and a half ago. I asked him why. His story:
“I am underwater on my mortgage by several hundred thousand dollars. Housing prices are unlikely to recover in my lifetime. I have plenty of money and will not need to borrow in my lifetime. I therefore don’t care if my credit rating gets trashed. Throwing money into an underwater mortgage is a waste and takes away from my estate. So, I went to the bank and made a deal with them. I stopped paying my mortgage and my condo fees. I continue to pay the taxes, the utilities, and continue to maintain the interior of the unit. The bank doesn’t have to write the loan down, pay the taxes, or maintain the property. My cash flow is substantially reduced.”
Notice he stopped paying the condo fees. Why? Condo association fees in our state are subordinate to taxes and the mortgage. While the condo association can put a lien on the property it cannot foreclose. Also, in a foreclosure, the condo association cannot collect more than 3 months back dues and the back dues will be paid by the new owner upon foreclosure, not the current owner. My neighbor doesn’t pay his association dues because there is nothing the association can do to legally compel him to do so unless the bank forecloses. Plus, the state law will not allow the association to cut off the water and cable TV the association pays for all units nor will it allow the association to prevent him from using the common areas and pool.
My neighbor enjoys a wonderful place to live at a tremendously reduced cost thanks to his neighbors who still pay their association fees and the shareholders of the bank. He will likely die in a few years at which time the bank will foreclose, getting nothing from his estate other than the keys to the property. The association will receive 3 months rent. His heirs will enjoy the money he did not have to spend on his mortgage and condo association payments nor will they have to use his assets to make good on the mortgage.
My neighbor was a successful small businessman who lived the American dream, building a business and selling it for several million dollars. He has no moral qualms about what he is doing. In his mind he negotiated a good deal with the bank and is doing nothing illegal. He feels no guilt about not paying for the upkeep of the property or use of the common areas. In his mind, as long as he is complying with the law he has no moral obligation to the neighbors who are subsidizing his lifestyle.
America is dying due to the entitlement mentality. Unfortunately it isn’t only the welfare queens, the union members and the government workers who have this sense of entitlement. The moral compass of the country is gone when small businessmen are as intent on gaming the system as the non-producers.
I too am dealing with this mess.
The banks are refusing to negotiate, they won’t even work with you on refinancing. I have a condo I wanted to refinance to pay off my HELOC...On a condo in FL they want 40% down now. I am in a limbo state as probably many people are...Do I walk away? do I cash out my Ira ( which took a huge hit also in this whole mess)? Do I file bankruptcy( in 3 more years half the country will have filed bankruptcy )?
I did all the right things too ( the HELOC was for basics when my income dropped drastically for a year several years ago), I read all the stuff about Mutual funds, blah, blah.
If I ever see suzie Ormon in an airport I will B slap her!
there are no easy answers. Just like with Obozo, all the answers are rotten.
the only people that aren’t stressed are those on welfare.
You can always offer less than the asking price on a short sale, the bank can always refuse it, and they usually do. What I've seen happen time and time again is that the bank will "accept" an offer on a short sale, and then hold the earnest money for 3-6 months, only to find a reason not to sell the property to the potential buyer, and then return the earnest money.
In these cases, what the banks are doing is taking the buyers money, buying short term Treasuries typically paying 3/4% interest, booking that "profit" and then returning the earnest money. You may think that 3/4% isn't alot of money for banks to do this, but when they have a seemingly unlimited supply of homes with interested buyers, it translates into a huge, untapped revenue stream for the right banks that can scale up to automate the process and drive a nice revenue stream from it.
Believe it or not, this is exactly what's happening. I won't say the names of the banks doing this (to shield FR from any potential liability) but if you look at the biggest TARP recipients and the "too big to fail" banks you'll have a real good idea who they are.
Does the current mortgage holder have to pick up the difference or does it just result in a loss to the bank?
Loss to the bank, and the bank can issue a 1099 to the mortgage holder for the difference as it's technically considered income under IRS rules.
You are very correct in that the banks and homeowners dont want to drop the prices of the homes. Many are still thinking there is a way to keep the market propped up. No one wants to accept a loss.
It's not keeping the market propped up, it's keeping the BANKS propped up. They're keeping the full value of those homes on their books, it's an accounting trick to make their balance sheets (assets v. liabilities) look better. Sooner or later, they're going to have to take the loss and that's when the banking industry in this country is in real trouble -- as if it isn't already.
I don’t know. It seems that the loss was recognized when the sale took place, so if they already sold, they lost faith and are out of luck. It’s like selling stocks at a loss; it’s not really a loss until you sell. Perhaps there would be a way to grandfather some of them in with an the option to buy, based on their previous credit rating, the reason they walked away, and whether or not they still owe a balance.
I don’t know what advantage the banks would have by writing down the principal on existing loans. That wouldn’t solve the current inventory problem and wouldn’t help stabilize home prices. There would still be a bunch of REO’s being unloaded below value. Right now, any new buyers coming in have an advantage over existing homeowners, as they can buy houses with up to 50% equity leaving everyone else upside down. The idea is to get these undervalued homes off the market by offering them to faithful customers first.
How the heck did the seller get ten grand? A short sale means it is sold for less than the current mortgage. Good is bad, bad is good, the whole world is messed up. Good grief.
Any more deals like that?
Do not buy yet.
Things have quite a way to fall.
Its a good time to be renting if you do not own already.
I have a (now ex) friend who stopped paying his mortgage 4 years ago. He's still living in the house (still calls it HIS) and pays only the utility bills. Doesn't even pay the taxes on the house.
He works a full time job, drives nicer vehicles than I do, takes nice vacations several times a year, has a large screen TV in every damn' room in his house, the house is twice the size of mine.
With friends like that .......
umm, pardon FReeping me, but whether it "makes sense" after the fact or not is quite irrelevant. Joe ought to meet his obligations. Since when was that optional? Just couldnt get past this part of the article; it's bound to be shot through with more foolish premises after a beginning like this.
Thanks for the info on what the banks do with the earnest money. When I am ready to act, I’ll take that into consideration and request a short escrow period.
Any more deals like that?
I have a box full of rent receipts for a couple hundred grand. I am not not stressed..
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