By Daniel A. Stafford
The simplest answer is to move stressed home owners "down market."
Joe Doe owns a $400k house. His payments are $2800.00 per month
including tax and insurance escrow, as he only has five percent equity
in the house. Joe Doe has an ARM that is going to start floating its
interest rate against a foreign exchange rate in six months. Joe's house
is now worth $375k due to the current market down turn.
To most people's way of thinking, Joe Doe is in deep hooey. The poor guy
is going to lose that house in seven or eight months after he can no
longer make the higher payments, refinance, or sell his house.
Additionally, Joe's bank is going to have to pay foreclosure proceeding
costs on the property, property taxes on it once it's vacant, and
maintenance service fees on the vacancy, and it will be reduced in value
if poor stressed out Joe loses it and takes a sledge hammer to various
Joe's bank already owns a ton of foreclosed houses, there is a glut of
non-foreclosed houses on the market, and the bank can't sell the
damaged, possibly vandalized, older, dated house in the current
way-over-the-top buyer's market, to put it mildly. Additionally, Joe's
credit is now fried and it will be years before he can buy another home,
If only Joe's payment had stayed lower where he could afford it, none of
this would have happened. No Joe move in the middle of the night, no
wrecked credit. The bank would still be getting its payments instead of
being pushed closer to insolvency. The neighborhood would have had one
less vacant house for crack-heads and "midnight recyclers" to play with.
One question: why didn't the bank move Joe into a foreclosed house of
comparable size that they already owned before all this happened? One
that Joe, who still has his job, can actually afford the payments on
with much less stress.
Think about it. Instead of paying out taxes and maintenance costs on TWO
foreclosed homes, they only have to pay out on ONE.
Additionally, the bank is in better financial condition as a result, and
more able to make loans on the houses that are vacated through this
process to get them off their "REO" (Real Estate Owned) ledger.
Additionally, Joe will be too busy moving into the house that is saving
his butt and budget to mess with any hammers.
Granted, this is no perfect solution, nor one that would help everyone.
Yet it sure would go a long, long way toward mitigating a big chunk of
this crisis. Joe could even earn a little equity in his new pad by
updating it a bit or doing necessary repairs.
There are an awful lot of Janes and Joes out there right now, and an
awful lot of shaky-quaky banks.
Co-Chair, Progressive Democrats of Illinois