As lenders continue to resist mortgage principal reduction, homeowners are beginning to ask why they cannot be given the same debt forgiveness extended to big corporations such as General Motors (GM) and Chrysler. In an editorial citing the 2009 bankruptcy of the two companies, the New York Times delves into the inconsistent behavior of lenders when it comes to cramdowns.
Lenders’ willingness to compromise depends on exactly who is asking for a break. When GM and Chrysler filed for Chapter 11 bankruptcy, billions of dollars of debt and liabilities were wiped off their plates. Homeowners and individuals also have the option of claiming bankruptcy, but they will not be welcomed back into the open arms of lenders as quickly as those corporations.
So the question being asked is this: Why are banks so willing to forgive the debt of large corporations, but completely refuse to work on the compromise with homeowners? The New York Times suggests appointing officers to evaluate the specific circumstances surrounding each mortgage default and make a smart decision that helps everyone. Homeowners would get another opportunity for a refinance or cramdown, and lenders would benefit from another chance to get a new loan instead of another home to add to their shadow inventory.
first tuesday take: The reason why lenders refuse to cut homeowners a break, but willingly forgive billions of dollars of debt from big corporations is simple: politics. Unfortunately, lenders are doing what they do best by extending mercy to business giants, which ultimately protects them from the political cold-shoulder. In the long run, it is more lucrative to stay in the good graces of politicians and business executives, and that makes forgiving their debt an easy decision. However, agreeing to a cramdown for one homeowner means agreeing to a cramdown for all homeowners, and that is just too much lost profit. [For more information regarding cramdowns, see the January 2010 first tuesday article, Cramdowns, cramdowns, cramdowns!]
The government has emphasized the importance of homeownership as a moral issue for decades. Lenders have jumped on the bandwagon by excusing their unwillingness to forgive principal with the notion that homeowners are morally obligated to pay back what they owe. However, the grey area of a seemingly black and white issue becomes evident during economic peaks and valleys. If lenders knowingly originated thousands of subprime, Alt-A or adjustable rate mortgages (ARMs) during the Millennium Boom (2004 to 2007) — risky mortgages with high interest rates, balloon payments and great disregard for a homeowner’s risk of default — are they not then morally responsible for the thousands of resulting foreclosures? By originating those loans in the first place, lenders essentially catalyzed the foreclosure crisis themselves. Why, then, is all the blame directed at the homeowner?
Eventually, they will be stuck with no choice but to agree to loan modification and principal reduction, since roughly 250,000 foreclosures are started throughout the nation each month. Until then, it’s not difficult to figure out why lenders favor those with wealth and power.
Re: “What’s good for G.M. is good for homeowners” from the NY Times
@Mae,
Can I ask why you need to refinance? I’m curious because the media has put quite a spin on adjustable rate mortgages and the general consensus seems to be that you have to get out of an ARM at all costs. I’ve seen people killing themselves to try and get refinances or modifications on an ARM when their payments/rates would actually go DOWN if they’d just let them adjust. I’ve been in the business since the early 90’s and it’s always either been a fixed market or an ARM market. I can tell you that, unless you have a subprime ARM, those adjustables are just about the best loans you can ask for right now! Most of them are tied to indexes of less than 1% so I’m just wondering if you’ve looked into how yours works? I don’t know that I’ll see if you respond to this, but I’ll try and check back.
I am one of those responsible tax payers who for almost 6 years paid faithfully on my adjustable mortgage, but, now no one will give me a loan on my 3 acres and two homes on same parcel (one being a modular) because of Fannie Mae and Freddie Mac not guaranteeing modular homes so lenders won’t loan on them. Now, I am forced to what? I can’t get a loan, I can’t sell for even a break even amount, so a short sale? foreclosure? Why won’t the lender work with me? Chase took my loan from Washington Mutual in the first place and Washington Mutual had no problem giving me this loan–now Chase won’t deal with me? Whose not beiong moral in this situation and thousands of others like me? Chase Bank, that’s who.This has caused me to loss close to $300,000, does anyone care? Yes, these lenders caused this mess as they knew what loans they were writing and pushing through and covering up along the way until the dominos started to fall. There are many guilty ones involved, but, I as a homeowner am not one of them as many others are not. We deserve better from these lenders who are forcing us out of our homes.
More insipid opinion in the guise of reporting. The reason the corporations obtained relief is because they filed BANKRUPTCY!!! When an individual files BANKRUPTCY – they obtain similiar relief !!!
There is no willingness to forgive debt in BANKRUPTCY – the Judge decides!!!
If there was willingness to forgive debt, they would not file BANKRUPTCY !!!!
In contast to the false assertion made by the author – not all the blame is directed at the homeowner, and those homeowners that received 120% loans on inflated price homes will lose very little money – compared to the banks.
The taxpaying responsible citizens are the only people who have a right to be upset – we get to pay to clean up the messes created by people who think like this author.
Principal reduction is the only real solution to the monumental mortgage, now real estate, meltdown. (Problem: What to do about all the cash-out?) Purchase loans need help and, with the single action rule in California, it isn’t foreclosure. Does anybody know, really, the advantage to servicers and investors of foreclosure over principal reduction? Politics and good-old-boys aside, there has to be a financial benefit. Is it TARP, or pooling and servicing agreements, or investment tranches, or what?
Thank you for this editorial. I worked loans for years and after things starting melting down I did a study of my own. I found after reviewing hundreds of default information, that here in San Diego, Buyers with hispanic names or foriegn names were given much different loans than someone with a name like myself.
Their loans were the most explosive loans I had seen used. No one could survive these kinds of loans with caps at 15% … it was crazy what I discovered. The lenders knew what they were doing.. they knew they would get these homes back. Its not rocket science,, they can’t say they did not plan this. Its Criminal and they should all do jail time. debi toner montage real estate co.
Moral of the story, kids, it doesn’t pay to be honest and upright. I currently would be better off if I were renting. For whatever reason, I can’t pull the trigger to do a strategic foreclosure. If I were a better man and had a little bit of cheater in me, I’d walk away from my home and start from scratch.