Lenders didn’t try hard enough, early enough

In a recent column, I explained why one of our nephews decided to walk away from his home loan. While he questioned if the move was “morally right” when he first contemplated the decision, the unwillingness of his lender to respond to his numerous requests for an interest rate reduction eventually changed his outlook.

Our nephew, Matt, thought this to be a reasonable request because the country had funneled cash to banks for the purpose of making more loans – money most banks chose to use elsewhere.

He was confused and upset that his bank wouldn’t even listen to a good customer who wanted “to do the right thing” even though he doubted he could ever sell the home for its original purchase price.

Matt stayed in his home. He hasn’t made a payment in more than a year and is waiting for the bank to repossess the place. While the “rent-free” time period might appear surprising to some readers, the national average time it takes a lender to repossess a home is now 477 days.

That statistic generated all sorts of comments and perceptions about what should have been done – and when – regarding national defaults and foreclosures. While all parties where complicit in helping to create the problem (some consumers over stretched their financial limits to purchase homes and some lenders allowed/misled them to do so) the effort to solve the problem before it steamrolled downhill was not equally shared.

In addition, nothing was done to assist homeowners who were underwater (owed more than their home was worth) yet continued to make timely payments. For the most part, lenders – or the institution that owned the loan – were willing to help only when they feared they would be facing a negative equity situation and eventually receive less than what the home is worth.

It a nutshell, lenders were reactive and not proactive. It did not go over well with the general population given the recent bank bailout.

We had our own story about a lender’s unwillingness to budge. We were three years into an adjustable-rate mortgage that had its interest rate fixed for the first 10 years. The loan carried a pre-payment penalty if we refinanced within the first five years of its term. The prepayment addendum, known in the loan industry as a “soft” prepay because no penalty is assessed if the couple sells the home, stipulates that a refinance could cost an amount equal to six months of interest payments.

Our lender, with whom we held three checking and savings accounts, said there was no way that the investor that bought the mortgage (Bank of New York) would be willing to waive the pre-payment penalty. The reason given was that there was no incentive to do so – the home had plenty of equity and if we defaulted, the bank could sell the home and be repaid all of the outstanding mortgage, plus fees and expenses.

What was the lender doing to ensure a future customer? In light of the national lending environment, why not go out of your way now to help your chances later?

There were opportunities to stop the bleeding sooner. For example, the National Association of Realtors, the largest trade group in the world with greater than one million members, offered a solution to the housing dilemma. In 2009, NAR presented Congress with a Four-Point Housing Stimulus Plan to help stabilize the housing and mortgage markets. The crux of the package suggested using $130 billion of the $700 federal billion bailout funds on housing, specifically earmarked for an interest-rate buy down and more tax credits.

That buy down would be one-percentage point on fixed-rate loans for all buyers. The reduction reportedly would have resulted in approximately 840,000 additional home sales and reduced the inventory of homes by as much as 20 percent.

The incentives that became reality were an $8,000 first-time homebuyer tax credit and an existing homeowner tax credit of $6,500. Those helped people buy, but it did nothing for homeowners who wanted to stay put.

As in our nephew’s situation, the key was helping earlier in the game.

Tom Kelly’s new novel “Cold Crossover” is now available in print at bookstores everywhere and in both print and Ebook form from a variety of digital outlets. Follow real estate agent and former basketball coach Ernie Creekmore as investigates the disappearance of his star player on a late-night boat. Check out the national reviews and put “Cold Crossover” on your list.