Single-Minded Obsession on Home Ownership

This article from the LA Times confused me greatly:

Advocates for borrowers took such comments to mean that the banks would prioritize debt write-downs on first mortgages, which banks resisted before the [$25 billion] settlement. Now, with nearly all the promised relief handed out, it is clear that the banks had other ideas.

The vast majority of the aid to borrowers, it turns out, came in the form of short sales and forgiveness of second mortgages. Just 20% of the aid doled out under the national settlement went to forgiveness of first-mortgage principal, the kind of help most likely to keep troubled borrowers in their homes. In terms of borrowers helped, just 15% of the total received first-mortgage forgiveness.

The five banks collectively delivered twice as much aid using short sales, in which owners sell their homes for less than the amount owed and move out, with the shortfall forgiven.

In all, the lenders sought credit for nearly $21 billion related to short sales and $15 billion related to second mortgages. That compares with $10.4 billion in write-downs on first mortgages.

Critics on the Left (example) are calling this a failure of the program, that most of the relief went to short-sales and 2nd mortgage forgiveness rather than first mortgage forgiveness.  The original article has this quote:

"It just shows you that the banks are running the government," Marks said. "There's virtually no benefit to borrowers, and yet you give the banks credit for short sales and getting second liens wiped out — something they were going to have to do anyway."

Hmm, well I am not the biggest fan of bankers in the world, but short sales and second lien forgiveness are principle forgiveness as well, just of a different form.  If they wanted a settlement that was first-lien forgiveness only, they should have specified that.

In fact, both short sales and second lien forgiveness have tremendous value to individuals if one considers individual well-being one's goal rather than just this obsessive fixation on home ownership.  

For many people, the worst part of their negative equity is that it created a barrier to their moving.  Perhaps they could find a job in another part of the state or country, or they wanted to move into a home or apartment with less expensive payments but were stuck in their current home because they could not afford to bring tens of thousands of dollars to closing.  In such cases, a short sale is exactly what the homeowner needs and facilitating and expediting this likely helped a ton of people  (It is also an example of just how unique our mortgage rules are in the US -- in almost any other country in the world, the amount of the negative equity in a short sale would get hung on the seller as a lien that must be paid off over time.  Only in the US do buyers routinely walk away clean from such situations).  Given that first mortgage loan forgiveness more often than not does not save the loan (ie it eventually ends in foreclosure anyway), short sales are the one approach that lets lenders get away clean for a fresh start.

As for second mortgages, I can tell you from personal experience that it is virtually impossible in the current environment to restructure or refinance a first mortgage with a second lien on the house -- even in my case where everything is performing and the underlying home value is well above the total of the two liens.  Seriously, what is the point in reducing principle in the first mortgage if there is a second mortgage there, particularly when the second mortgage is likely far more expensive?  For people with a second mortgage, forgiveness of that is probably the first and best gift they could get.  They may end up still losing their home, but they can't even begin to discuss a restructure or refinance without that other mortgage going away.

  • JR

    I will say that this exactly what has changed our situation. When we purchased our home (in California), it was two months before everything went down the pipes. $430,000 was the purchase price and we went in with $200,000 down. When the smoke cleared, we were in a house worth $210,000 plus an $80,000 second (home equity). After two years without regular work and doing everything to save the house (7 times went through the refinance and HARP dance with no results - if I never understood bank incompetence before, I did at the end of that fun) we threw in the towel and went into foreclosure, but our bankruptcy filing put that on hold. Once we went bankrupt, lo and behold, the bank was able to work with us, even though we weren't legally bound to pay or stay.

    A month or two ago, I got a letter in the mail saying that the lien on the house through the home equity line was going to be released. We are now prepping our house for sale, as this will make it possible for us to get out with something in our pockets, which we could not without this happening. I consider it a significant value. In my mind, the house is a liability at this point and I fully expect another sharp downturn in the market. I hope we are able to get out before it occurs.

  • MingoV

    The LA Times' distortion makes it seem as if the federal aid program was giving the banks a break. But, it didn't help the banks at all. The financial aid to homeowners with mortgages rarely let them keep their houses. They were able to hang on only for a few months before foreclosures. That was not an advantage to the banks that would have preferred to close the books earlier, and it was not an advantage to the homeowners. The money would have been better used as moving allowances for those who lost their homes and were relocating to get jobs (or better jobs).

  • norse

    Not to be unsympathetic, but: this is exemplary of market distortion in the US. Folks who made real bad calls in buying overpriced properties got rescued. Banks who made real bad deals on risk got rescued. Folks who stayed away and saved up got screwed. Morale of the story: always bet on inflation and the housing market, especially if it seems ludicrous.