The reviews are in, and making homes affordable is not working. Banks are dragging their feet, and homeowners are living with the stress of the unknown for months if not years. Plus, short sales are a mess. The second lien holders are holding up the sale, trying to get payments off the HUD and/or simply denying homeowners from a solution to their problem. The list goes on and on.
So what needs to be done? Here we are in the 1st quarter of 2010, and foreclosure filings are still at an all time high! The government just re-launched new guidelines trying to entice banks into accepting short sales with a cash incentive to homeowners, but its likely to be just as successful as the MHA program...
The fact is, right now it makes sense for some homeowners to let their property go. Especially those facing large deficits in their loan to value ratios. For example, a homeowner in Orlando may owe $300K for a home that would not appraise for more than $150K today. If there was ever a time to let the home go to foreclosure or short sale, it would be now. Get rid of the negative cash flow and avoid 30+ years of payments and move on with a new financial strategy. I am not saying this as a "how-to" or advice as to what homeowner's should do, but more as a head's up to the industry as a whole. How can we fix real estate when factors like this are leading the wave?
Answer: there is no simple answer. Good borrowers will continue to weigh the pro's and con's, and as values continue to struggle in finding a bottom, more homes will enter the foreclosure process. In most scenarios, it makes more financial sense. Plus, due to the bail-outs, it is socially more acceptable today to allow your home to enter foreclosure than ever before.
The main problem is the artificial inflation homes experienced in the last decade, and the fact that banks/investors loaned money on this artificial equity. Who should suffer more, the investor or the homeowner? The debate could go either way. After all, the mortgage note is simply a contract for the homeowner to turnover the deed if they default on the payments... but banks don't want the negative equity property.
Unfortunately, those that continue to hold properties that were financed at the peak (100% LTV) will most likely have 5+ years of wait time before they see values reach loan amounts. Some areas are better and worse than others, but patience will be required for most of the people looking to hold through these tough times.
My advice: residential loans should follow similar underwriting to commercial loans, by taking out the emotional side of valuing a home. Look at "what the home would rent for" and the mortgage should be at or near that level. When you allow emotional valuations to resume, as a bank, you have to assume the risk of default and be willing to accept the loss.
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