Envision this scenario:
Your home is underwater and you are not making payments. You’re heading toward foreclosure. Fortunately you find an entity that will buy your home basically as a short sale – for less than you owe on the mortgage. The deal is done, and then that entity sells the property back to you at market value, holding the note on the property itself. Sounds like a dream come true, right?
Well, for some homeowners it is, but lenders are far more skeptical. The process described above is called a foreclosure-prevention buyback, and it is conducted by nonprofit lenders seeking to help distressed homeowners. However, as the process becomes more popular, lenders are getting worried that these nonprofit lenders and the “solution” they offer to homeowners will ultimately encourage homeowners who are current on underwater mortgages to default. As a result, more of these proposed transactions are being denied, and truly troubled homeowners are falling prey to the national foreclosure confusion.
Elyse Cherry, chief executive of one such lender, complains that lender skepticism and refusal to participate in foreclosure-prevention buybacks “makes no economic sense whatsoever.” She believes that there is “no evidence that people walk away [from their mortgages] when their neighbors are walking away”[1]. However, lenders argue that the entire proposition is dangerously close to short sale fraud because the transaction is not “at arms length,” a legal requirement that buyers and sellers be independent from each other in order to prevent fraud. The Department of Housing and Urban Development (HUD) prohibits short sales that conclude with the property in the hands of the original owner for the same reason, and Freddie Mac spokesman Brad German warns that “if you inspire people not to pay a mortgage they can afford to pay and go into default, then that is going to increase our losses.”
Interestingly, America’s favorite bad bank, Bank of America, is on board with the buyback program – at least to a degree. It has been working with Cherry’s organization to identify potential candidates for the program. The lender believes that by helping identify candidates, it will be more likely to prevent strategic defaults and help truly distressed homeowners.
Do you think that foreclosure-prevention buybacks should be legal? Should banks be forced to participate?
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[1] http://bostonglobe.com/business/2011/11/29/some-lenders-resist-foreclosure-prevention-buybacks/kxdz7VZ0JucKdRXa38LVhL/story.html
This is a tough question! How do you do this and be fair to all mortgage holders? It used to be a moral issue. Today it’s NOT for most people since they had no control on the underlying issues of this economic disaster. Corporations divest themselves of unproductive assets all the time. We really can’t expect somebody to keep on paying on value that doesn’t exist and most likely won’t come back for years to come.
Bank owned properties bought by investors often get sold back to owners who lost them. Short sales should have the same option but structured in a way that makes them effective for both the lender and the borrower. That means bringing the principal down to market value with built in agreements that any profit at sale is split between lender and seller. That way the payments would be on the current value and hopefully affordable if there is income with less motivation of strategic default. Somebody ought to figure out what kind of loss the country would experience if done this way. On the other hand every distressed property is finding it’s own true value either at a short sale or as an REO anyway.
You want to know why Bank of America is on board with this? A simple search of their history should provide you with the details.
Bank of America bought Charles Scwab Brokerage for north of $900 million some years ago. And then when they realized they didn’t know what they were doing in the discount stock brokerage business like they thought they did (and after they probably destroyed much of the value of the company) they sold it back to him . . . for several hundred million dollars less than what they paid him for it.
So they can appreciate what it’s like to make a mistake and not have anyone there to help them out in the end by buying the property back!
Although in the case of the brokerage deal mentioned above the numbers flowed in the opposite direction, they finally get the fact that perhaps it’s wiser to get that non-performing asset off their books as quickly as can possibly be arranged and into the hands of someone who is most likely willing to pay more for it than the average man on the street. And who is willing to pay more for a home than someone who has lived in it and knows all the oddities of it and is used to the strange things that may happen in the near future than the present homeowner?
Just a thought . . .
I am upside down on my home and if the banks would have helped homeowners sooner with help like this (foreclosure-prevention buyback) would have truly been a blessing to thousands. Come on banks; have a soul!