Monday, August 22, 2011

Extreme Mortgage Idea

About a year ago, my wife and I decided to place a bid on a short sale that was happening in the condo complex where we were renting. Our bid ended up being accepted, and we were happy to be paying a mortgage on a place as opposed to renting. After all, many financial advisers in the world seemed to agree that last year was a good time to buy a home as both prices and interest rates were low.

As human beings in a capitalist society are wont to do, a few days ago, I did some research into what the value of my wife and I's investment was. As you may have already guessed, I wasn't pleased with my findings.

According to a search through Chase Bank, condos in our complex that are the same size have recently been selling for about 25% less that what we paid. My wife and I assumed that values had fallen some, but we were not expecting such a dramatic decrease.

Even so, we aren't in such a bad spot financially. The cost of our mortgage (even with HOA fees) is still comparable to what we would have paid if we continued to rent. Further, after the (rightful?) demonization of adjustable rate mortgages (ARMs) following the economic meltdown of 2008-2009, my wife and I have our mortgage at a low fixed rate. Finally, we qualified for the "free" money that the federal government was offering (although me missed out on the California state incentive because the company who dealt with the escrow was staffed by a bunch of jerkoffs who, though nearly every other company filed the paperwork on behalf of their clients, did not file the necessary paperwork for us. I guess you could say that I'm still a little bitter) to first-time home-buyers, so we're not as bad off as we might have been.

On the downside, our air conditioner has gone to that great HVAC retirement plant in the sky, so that adds further costs to the equation.

Still, though things are somewhat bleak as far as our home being a profitable investment goes, they are not nearly as bleak as they are for others. Some of our friends purchased real estate at the height of the bubble, and the bank, after twiddling their thumbs for months as this couple attempted to work something out with them, eventually called back and gave the couple 48 hours to vacate.*

In the midst of all this, various pundits have put forward ideas about how to resolve this issue of record foreclosures, and Suze Orman has a rather extreme idea that I think actually makes a lot of sense. Her idea is, essentially, if a couple buys a house for $400,000, and, after the crash, the home becomes only worth $150,000, instead of foreclosing on the couple and then selling the house for the $150,000 it's worth, the bank should simply refinance the loan to the original couple so that they now owe $150,000. This keeps the bank earning as much as they would likely earn anyway, and it keeps the original couple, you know, having a place to live.

I can see why banks would never go for this; they want to squeeze every last cent out of the couple that they can. However, the bank is going to be out money either way (unless the couple simply continues to make payments on their drastically over-valued mortgage). Why not save everybody time and headache and simply give the couple a (more than) fair shake?

What do you think? Is this idea something that you could see catching on (like Suze's shiny jackets?)? Let me know in the comments.

*This is why when I see the recent news that Bank of America and Citibank's stock prices are going in the toilet, it's difficult for me to feel too badly.

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