It is now evident that the Federal plan to help people stay in their homes is not working as efficiently as was expected. Most lenders deny loan modifications and proceed through foreclosure only to turn around and sell the homes for a third or less of the mortgage balance. This not only destroys the nucleus of our families, but also accelerates the depreciation of our homes and tears the fabric of our neighborhoods.
From 2000 to 2005 most of the loans issued for purchases or refinancing were purchased by Fannie Mae. A lot of them were sub prime loans. Because of the inflated property values at the time, most homes in today’s market are not worth what they were worth during the 2000-2005 period. In other words, their owners are upside down. Therefore they are not able to refinance. Our Foreclosure rate continues to rise daily because the home owners whose rates are adjusting upward are falling behind in payments because they cannot afford the new higher payments.
There is an easy and logical way to help stem the hemorrhage. In Congress, I will push for a bill that encourages the lenders to refinance the homes of people in foreclosure or at risk of foreclosure without the necessity of a current appraisal for a period of 3 years. They should reduce the loan amount to its value prior to the foreclosure of the loan that needs refinancing.
In order to protect the lenders from the obvious loss, I would propose a 5 year prepayment penalty to discourage the homeowner who gets a new lower mortgage balance from selling the property before 5 years. If a homeowner attempts to sell during the moratorium, the homeowner will face a monetary penalty and the forgiven amount will be tacked back onto the mortgage.
The lender will be protected, as it will recoup the loss incurred in lowering the principal and interest during the first five years of the new loan and the homeowner will get to stay in the home with an affordable mortgage, thus freeing up resources that can be used to be spent in their neighborhoods. It’s a win-win situation. The homeowners stay in their homes, the banks have performing loans, the neighborhoods are stabilized and the property values stop declining. Because most Lenders are introducing FHA alternatives in response to the crisis, we need programs that provide options to non-FHA borrowers to refinance their loans as well, as there more conventional loans needing refinancing then FHA loans.
The next issue that needs to be addressed is the FICO Credit score mechanism. The FICO scoring model simply does not tell the whole story. It is a mathematical formula being applied in a human situation. Every person in foreclosure or at risk of foreclosure has a low credit score because of late payments and the actual foreclosure filing.
That is another reason why most lenders turn down their modification applications. Here, again, I would propose that the refinancing lender not use the FICO scores for the same 3 year period while the homeowner tries to refinance. In a few years, that homeowner’s credit will have improved and the lending institutions will have solidified their portfolios.
