Principle reduction... or deferral?

irvinehomeowner

irvinehomeowner

Well-known member
There was an interesting entry on the IHB today:

http://www.irvinehousingblog.com/blog/co....nay-16-ir vine/

I also do not like principal reductions but what are the alternatives?

geotpf suggested his 99-year mortgage again:
I have a suggestion for the banks-convert them to 99 year fixed rate loans. Payments will be small (good for the home"owner"), but lots of interest will be collected overall (good for the bank), and the loan will be paid in full when the house is sold or refinanced down the line, after prices have eventually recovered (also good for the bank). Nobody will ever pay off these loans off without a sale or refinance-it will be like renting the house from the bank, without the bank having to do all the things that come with renting (pay taxes and repairs and HOA fess and the like). Now, a few of these loan mods will fail, but much less than anything except principal reduction, and the home"owner" won't be able to move until prices recover, but if they wanted to move they would just let the house fall into foreclosure in the first place.

I really don't see the downside to this approach. Seems like a win-win for both parties. Why aren't the banks doing this, or is there something I'm missing?
Click to expand...
This doesn't sound half-bad.

And OrangeRenter had another suggestion:
The solution IS foreclosure or short sale, NOT principle reduction!

TWO THINGS:

IrvineRenter says this, "By reducing principal to avoid a foreclosure, we are rewarding the foolish homedebtor who previously outbid the prudent renter by using toxic financing."
Why should the homeowner get a hundred thousand-plus GIFT for finding a way to latch on to a home they could never really afford?

And, why should this same person get this gift when his responsible neighbor does not?

Home values WILL increase in the future (not tomorrow, but think years down the line), at which point the irresponsible liar will reap, say $300,000 from his sale (principle was reduced $200,000), while his long term neighbor who made all his payments nets only $100,000 (no principle reduction).

Principle DEFERRAL is Ok? This way the guy gets an affordable payment today, but STILL OWES the entire balance years later upon sale.

NO MORE BAILOUTS? people can just go rent somewhere, and the market will stabilize at fundamental values.
Click to expand...
My one question here is most would prefer short sales or foreclosures... but aren't those the same as principal reductions anyways?
 
I'd much rather see principal reductions with a 10 year recapture provision. Example: A $3,000 payment for a $550,000 loan amount (not a FNMA/FHLMC loan so mods are out of the question) Reduce the $550,000 to $417,000, refi into a FN/FR 5.0% rate, reducing the payment to $2,238. The "forgiven" $133,000 is priced at a US 10y T-bill rate (3.8%) due and payable upon sale if equity exists, or forgiven completely in 10 years.

If the homedebtor cannot make it at $2,238 then foreclosure is the answer. You were not meant to own a home after so many breaks in your favor.
 
[quote author="irvinehomeowner"]geotpf suggested his 99-year mortgage again

This doesn't sound half-bad.
[/quote]

Fine, but what is a fair market interest rate for a 99 year loan? Factor in that much uncertainty and it has to be a lot more than current 30-year fixed interest notes. The only way it works is for government intervention, which is still the wrong answer IMO.
 
99 year loan is the same thing as an interest only loan. Do the math. Sorry, but any bank/investor is going to want their principal back at some point. That, and if the principal gets reduced by a borrower, then the bank can lend out more money to other people. This improves their capital ratios, otherwise they can't lend out an more money. Isn't this the problem that we have now? Not enough lending? And banks make money on new loans, and as rates go up banks need to charge higher interest rates on new loans. Oh and last I checked banks like to make money on lending and are pretty sick of losing their a$$ on it.

I could go on on why geotpf doesn't get it, but he is not here, and I don't feel like teaching banking 101. He truly is beyond naive.
 
Even though geotpf is not here, I think I will constantly quote his nuggets from IHB just to keep graph active here.

But... I would take a 99-year loan over AZDave's preference for a 50% down 5-year loan. I'm sure a bank loves Dave's idea... but I'm not a bank.

So can we blame all these insane home prices on the 30-year mortgage?
 
[quote author="irvinehomeowner"]So can we blame all these insane home prices on the 30-year mortgage?[/quote]
It should be clear the loan product isn't the culprit. Government manipulation is. 30 year mortgages do much better (require higher interest rates and down payments) when lenders don't have GSEs to pawn off their bad decisions onto.
 
You must log in or register to reply here.
Back
Top