Blogs For Victory

This is the guy who is in charge of looking after America’s banking industry, boys and girls:

A senior House Democrat threatened banks Wednesday that if they don’t volunteer to save more homeowners from foreclosure, Congress will make them.

In a sternly worded statement, Rep. Barney Frank said Congress will revive legislation that would let bankruptcy judges write down a person’s monthly mortgage payment if the number of loan modifications remain low.

Frank, chairman of the House Financial Services Committee, also said his committee won’t consider legislation to help banks lend unless there is a “significant increase” in mortgage modifications.

It doesn’t quite work like that. Frank’s plan is actually so dumb that I theorize that it is the plan of the lenders, using Frank as a mouthpiece.

People can do a lot with their home loans – but for those who are upside down, the only rational thing to do is short-sale or let it go in to foreclosure. If someone owes $400,000 on a house currently worth $180,000, what is the point of staying even if the lender is willing to come down massively on the monthly mortgage payment? Does anyone really think the house will go above $400,000 in the next 10 years? Heck, in the next 20 years? The banks love very much to have a loan modified to keep the principle balance at boom market levels…but more and more home owners are starting to understand that there’s no sense at all – and no moral justification – to continue to shovel money in to a financial black hole.

The only leverage a borrower has over his lender is the threat of yet another house to sell in a saturated, depressed market. I’ve heard credible stories that 35,000 foreclosed homes in my area are being kept off the market in order to try to support home prices – do the banks want to add more to that pile? Probably not. But Frank wants more and more people to lose this leverage – or, at least, delay exercising the option until, perhaps, its too late to easily have done with it.

Take one for-instance I found out about recently. If a person is upside on his loan by 50% (let’s say) and approaches his lender to say, “hey, lets make a deal – reduce my principle by 40%. That way I keep my house, and you get more than market value for the home.” Except in the rarest of circumstances, this is not happening. Why? Because the investors – those who hold the note, as opposed to the banks which service the loan – would rather see the house short-sale for only 40% of the loan balance than “re-loan” the home owner 60%. A bird in the hand is worth two in the bush – better to have the $150,000 for the short-sale than $200,000 in a loan which may yet default as the economy worsens.

Borrowers of America, Unite! You have nothing to lose but your FICO score! A bit silly, I know, but I’ve said before that we need a national bankruptcy reorganization of our housing market – and if Frank and his corporate, fat cat buddies won’t do it, we might have to take matter in to our own hands. Better a short-sale or even a foreclosure, and the books cleared, than to hang on to the dead hand of the 2005 housing market.