WILL BANK WRITE DOWNS HELP SAVE HOUSING?
I find myself reviewing several articles on the above subject again today and I have to ask "will bank write downs help save housing?" And, how do I feel about that?
It seems everyone has an opinion on the subject. One school of thought is that a home purchase did not come with a guarantee of appreciation in value, so a commitment to pay should be valid even if the home is under water. Many of us have lost value in our homes.
I can understand this way of thinking. Each month as a home owner makes a payment that includes principal and interest, they get a little closer to owing the home outright.
A second school of thought is that a bank write down would indeed cut down on foreclosures, that home owners would stay and pay. I'm sure there are some home owners out there who look at the situation and decide they won't pay for a home that lost significant value. I'm not convinced they represent a high percentage of foreclosures.
From my experience foreclosures are not because borrowers are upside down and they are walking, they simply cannot get a loan modified at a market rate or they have lost jobs or have a serious illness, something that is a once in a lifetime occurance, perhaps. I wonder if the hype about writing down balances is just another stab in the dark that would not be helpful overall.
If banks were to write down balances, then how does that affect the general populace? Will those who did not need a write down think of the others as losers who could not follow through on their promise to pay, perhaps they got an undeserved break. In the long run who pays for the write down?
I know of a situation where the home has declined 50%. The home owner has a balloon mortgage that is coming due this year. The owner cannot get refinanced, even with the current mortgage holder because the value has dropped, the value cannot be proven. In this situation, why would the bank simply not refinance this home owner at the market rate on the balance owed, even if the home is only worth 60% of the face of the mortgage. In my book that beats a foreclosure. Keep this home owner on the hook for the entire balance, just make the payment fixed and as low as possible.
Bank write downs may cut back on some foreclosures, but when employment is an underlying problem, it may not go far in curing the foreclosure crisis.
