My blog about “ending the foreclosure crisis” was an idea to persuade banks to go along with such a program in exchange for the bailout they were getting, but I needed political cover. The plan was devised in mid 09 when there was lots of talk of nationalizing banks and having judges make decisions on bankruptcy for homeowners facing foreclosure. I was offering something that would avoid either of these but at the same time give foreclosure relief. My plan called for creating a “foreclosure clearing house” and it would work as such.
1. All participating banks would be required to send the clearing house a notice on every homeowner who missed two (2) consecutive mortgage payments. The clearing house would determine what the homeowner could afford. If what they could afford is what the bank would get in a foreclosure NET, the homeowner would be given an opportunity to stay using the best program the bank could offer of new rate and term. If necessary a deferred amount would be placed on the back end and valued at %5 to 15% but non-performing as a lien to protect the bank for value return. NO MORE SHORT SALES.
2. After the bank has given the best new program it has and the homeowner is still not able to afford the home based on what it would bring in foreclosure NET, the homeowner would be offered alternative housing. To be eligible for alternative housing, the homeowner would have to agree to having the %5 to 15% of the loss of the present home placed as a lien against the new home, but the bank would give them a mortgage in a home they could afford from another foreclosed home that bank owns or another bank owns. The amount placed as a lien would be non-performing and require no payment, but would protect the bank against the total loss as values return and the homeowner could not sell or refinance the home without dealing with the lien. This way the bank is protected against the total loss of mortgage balance vs. value as it would be in a foreclosure where the whole amount is loss forever if the foreclosure is done.
3. When I was considering this at first, I was thinking of using it as a formula for the Government to decide on how to award bailout money. For every such dollar the banks would use as such, would entitle them to bailout money based on some formula. This would mean the government would not necessarily have to make the bailout payments it is making now but something of a reduced amount by mortgages saved by these means. This idea was developed in 09 at the height of the banking crisis. Now that banks have recovered somewhat it may not be as appealing but I still think it has merit to solving the foreclosure problem.
4. If the homeowner moved before value was returned, the homeowner would be responsible for the lien amount, but not interest bearing. If they did not move and stayed in the home until value was fully restored, the lien amount would be considered before any equity would be payable to the homeowner and the amount the government had bailed out the bank would be released by the value restored and there would be a replenishing fund to banks based on this.
5. Any home that could not be saved by this plan would become inventory for the my office initially or now a REOPRO branch office.
There would be no need to nationalize banks or have judges make BK decisions. This would definitely cut down on foreclosures, stabilize communities and the economy. A group like REOPRO could run such a clearing house with member branches throughout the country. The structure of operation and compensation would have to be decided but I saw this as a service I would offer banks for a fee or commission. Banks would save a fortune in foreclosure dollar value lost and related expenses and should be willing to pay REOPRO representatives accordingly. With all the attempts of remodification, there are still serious foreclosure problems and they won’t go away. The idea of addressing the principal is the only answer to make these mortgages affordable and keep owners in these homes. I was hopeful that placing some of the principal on the back end would be encouraging for the banks. At the same time, getting homeowners to accept something less than the full amount should be an incentive for them. I have dubbed this program “whack and tack”. Whack it off the front, and tack it on the back. At some point in our economy, values have to return and everyone will be made whole again.