Your Goverment Bailout? Nyet!

There is only one thing more harmful to society than an elected official forgetting the promises he made in order to get elected; that’s when he doesn’t forget them. – John McCarthy

So… The big banks and the President are going to bail you out of your upside-down mortgage? You have been saved from the housing downturn. You have been rescued by the great pumpkin! Thank the Maker! May I get real for a moment? That’s not going to happen. But here is how this was reported by our 4th estate this week:

“HUGE settlement between nation’s largest mortgage banks and US Government to ease housing woes.”

Let’s examine this more carefully, and in the full light of truth. The total amount of the settlement is approx $40 billion. That sounds like a big number, but in relation to the total amount of upside down mortgage debt, it’s a drop in the bucket. In the 4th quarter of 2011, the Federal Reserve estimated the total outstanding single-family mortgage debt to be over $10 Trillion. The $4 Billion our government has extorted from the major banks will amount to 0.4% of the total. Doesn’t seem so grandiose now, does it?

In addition to being a paltry sum, you must be upside-down and delinquent on your mortgage. If you have fought, scratched, gone without food and other necessities to pay your mortgage on time every month through hardships, layoffs, and a horrible economy – there is nothing for you. If you were delinquent in the past few years of turmoil, but have fought your way back to good standing – there is nothing in this for you. If you are struggling to make payments on a mortgage with a much higher rate, but do not now meet the qualifications for refinancing at today’s historically low rates – this settlement will do absolutely nothing for you. In fact, you might be hard pressed to find somebody who will benefit from this settlement beside the President’s re-election campaign.

This is largely a “market problem” and the market will need to clear it out. Washington can do all the arm-twisting it wants, but until it becomes very painful for the banks to hold onto these mortgages as-is, or it fits into their forecast for profitability, no changes will be made. Banks have had problem mortgages on their balance sheets for years. But after stubbornly hanging on to those trouble assets, some banks are coming around and changing their tone when it comes to so-called “short sales.” In fact, not only are they allowing such transactions to happen, they’re also giving homeowners some big incentives to do so.

Short sales occur when a prospective buyer makes an offer on a home that isn’t enough to pay off the seller’s mortgage. Especially in states like California, where the lender often doesn’t have recourse to hold the homeowner liable for any shortfall, lenders have often resisted short sales. For a while, that made sense, as banks figured that short-sale offers were low-balling the true value of the home and that if they foreclosed on the property, they could resell it at its higher market price.

But lately, banks have realized that the foreclosure process is long, costly, and fraught with peril. With regulatory investigations into foreclosure practices adding to the potential problems of years-long delays and an obstacle course of legal requirements, banks are concluding that it’s better to accept the bird in hand of a short sale than to hope for a recovery that may take years to come.

I’m not trying to rain on your parade here. You may be one of the few who are going to be helped by this latest development. Your mortgage may be refinanced at today’s low rates and put you in a better position to keep your home or make it possible to sell it. If you think you may be one of the lucky few, it is definitely in your best interest to ask. Call your lender and ask if your loan is eligible. The worst they can say is no.

If you’re in the majority, then you are stuck with your current mortgage and home. You have a couple choices. You can try to refinance. You can try to sell, or short-sell if you are under-water. Or you can stay pat and live in your home and wait for the recovery. This is how the market works. It is isn’t always fun or fair, but it works itself out eventually.

My point in all this is to give you some perspective on what you hear coming out of Washington. Remember, it’s an election year and both sides are going to promise to take care of all your ills. Promises like bailing you out of your debt, and paying for retirement, and covering college tuition for your kids. The problem is that those promises will likely never materialize. It pains me to be the messenger but – we’re on our own. Sometimes the problems are too big to be fixed by campaign promises and rhetoric. Hold fast. The recovery will come from Main Street, not Wall Street. It will come from the heartland, not the Beltway. You and I will be the recovery if we’re diligent and patient and resolute.

All Real Estate.  All the Time.


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