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The Quick-Fix to the Mortgage Problem: Readjustment
By Ramsey Judah
January 16, 2010
Values have slid to all-new lows and more people are walking away from their mortgages, even
many who can still manage to pay it. Can you blame them? A few clients have commented to me
about how frustrated they are that their huge down payments have gone to waste because of the
devaluation of their home.
Even Morgan Stanley, one of the country's largest financial institutions; if not the largest, is joining in
by giving back 5 buildings it purchased at top dollar a couple years ago in San Francisco. The
buildings are worth about half of what they were worth when the 2.5 billion dollar purchase was
made.
So how can this mess of devaluation and mortgage-gauging be fixed? By one simple word:
readjustment.
Instead of focusing on short-sales, banks should readjust the mortgages according to their current
day values. It astounds me that a bank would be willing to take a loss on a mortgage by a short sale
or foreclosure, rather than readjusting and regaining profit over time. In case banks are having a hard
time imagining this, I will paint the picture for them.
For example, let's say a $200,000 home is now only worth $100,000. If the bank sells the home at its
current value in a short sale or foreclosure, the bank would lose $100,000, not to mention all the
costs that have to go into selling the home which would most likely decrease the net profit by an extra
20%. So the losses end up being tantamount for the banking institution.
But on the other hand, if banks readjust the mortgage for the homeowner, they will end up making a
profit all the way around on a 30 year mortgage. Let's say the $200,000 mortgage gets readjusted to
$105,000 with a current rate at 5.5%. In 30 years, the bank will be able make $173,250 in interest
alone and the homeowner will be able to ensure this by making more affordable payments.
I know that banks are terrified about this because investors only see the market in black-and-white
terms. Banks would rather risk huge losses rather than build an effective system for the long term
because their sales portfolios look better to investors. But banks would not have to report the
mortgage adjustments as losses, they could just call it...(drum roll)...readjustments!
That word will make investors feel better and the banks could build a system for long term growth.
Such a system will restart the real estate market and begin to allow homes to gain value once again
rather than float around in this purgatory of a market.
This will be a greater challenge for some banks than for others because of the number of mortgage
notes they own, but if one weighs the cost-effectiveness, the potential income, and a relief for
homeowners it will be a challenge that will be met with great applause by the national and
international economies.
Ramsey Judah is a Broker with US Homes and can be reached at ramsey@ushomesrealestate.com.
By Ramsey Judah
January 16, 2010
Values have slid to all-new lows and more people are walking away from their mortgages, even
many who can still manage to pay it. Can you blame them? A few clients have commented to me
about how frustrated they are that their huge down payments have gone to waste because of the
devaluation of their home.
Even Morgan Stanley, one of the country's largest financial institutions; if not the largest, is joining in
by giving back 5 buildings it purchased at top dollar a couple years ago in San Francisco. The
buildings are worth about half of what they were worth when the 2.5 billion dollar purchase was
made.
So how can this mess of devaluation and mortgage-gauging be fixed? By one simple word:
readjustment.
Instead of focusing on short-sales, banks should readjust the mortgages according to their current
day values. It astounds me that a bank would be willing to take a loss on a mortgage by a short sale
or foreclosure, rather than readjusting and regaining profit over time. In case banks are having a hard
time imagining this, I will paint the picture for them.
For example, let's say a $200,000 home is now only worth $100,000. If the bank sells the home at its
current value in a short sale or foreclosure, the bank would lose $100,000, not to mention all the
costs that have to go into selling the home which would most likely decrease the net profit by an extra
20%. So the losses end up being tantamount for the banking institution.
But on the other hand, if banks readjust the mortgage for the homeowner, they will end up making a
profit all the way around on a 30 year mortgage. Let's say the $200,000 mortgage gets readjusted to
$105,000 with a current rate at 5.5%. In 30 years, the bank will be able make $173,250 in interest
alone and the homeowner will be able to ensure this by making more affordable payments.
I know that banks are terrified about this because investors only see the market in black-and-white
terms. Banks would rather risk huge losses rather than build an effective system for the long term
because their sales portfolios look better to investors. But banks would not have to report the
mortgage adjustments as losses, they could just call it...(drum roll)...readjustments!
That word will make investors feel better and the banks could build a system for long term growth.
Such a system will restart the real estate market and begin to allow homes to gain value once again
rather than float around in this purgatory of a market.
This will be a greater challenge for some banks than for others because of the number of mortgage
notes they own, but if one weighs the cost-effectiveness, the potential income, and a relief for
homeowners it will be a challenge that will be met with great applause by the national and
international economies.
Ramsey Judah is a Broker with US Homes and can be reached at ramsey@ushomesrealestate.com.
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