Refinancing mortgages, solving foreclosures

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Perhaps soon enough we’d be in a position promised to Jeremiah (and repeated in Ezekiel) that the proverb “Parents have eaten sour grapes and children’s teeth are blunted” shall be replaced by an appreciation that everyone shall pay for his or her own sins.

Unfortunately, we are not there yet.

The housing bubble with its attendant financial crisis is still with us.

The combination of lax regulation and heavy subsidies to large financial institutions orchestrated in the Bush Administration is still plaguing the Obama Administration and Treasury Secretary Timothy Geithner, along with its newly appointed Chair of the President’s Council of Economic Advisors, Alan Kreuger.

Business cycles are not bound by or timed according to the changing of the political guard. They have a rhythm of their own. Intervention in these cycles is at most precarious or counter-productive, at worst disastrous. With a $14 trillion economy, the original $700 billion TARP infusion (some claim $1.2 trillion) represents 5 percent, just enough to have an impact on the margins, but not the heart of the economy.

Bloomberg LP News, under the Freedom of Information Act, discovered some pearls of folly. Here is the lineup: Bank of America and Citigroup received $45 billion each, JP Morgan Chase and Wells Fargo received $25 billion each, Goldman Sachs and Morgan Stanley received $10 billion each, as well as others, like AIG, US Bancorp, and GM. Even foreign banks who have a branch in NYC enjoyed the bounty: The Royal Bank of Scotland received $84.5 billion and, the Belgian Dexia $58.5 billion.

While most banks have returned the bailout handout and in some cases the Treasury profited from the transaction, foreclosure rates in the heartland have increased overall and sky-rocketed in select markets. More than 3 million foreclosure notices were served in 2010 alone. Why hasn’t the financial health of banks affected the housing industry? How is it that with 0 percent interest paid to the Federal Reserve banks can’t lend money with 1 percent interest — it is after all a 100 percent gross profit margin?

Local landlords know that tenants are their most precious commodity. If taken care of, tenants will pay rent on time and renew their leases even in bad times. Given the current situation, the rental market has adjusted, despite fixed-rate mortgages and escalating costs. This means, for example, that we’d rather give a tenant a break, reduce the rent by 10 percent, rather than lose the steady income that helps pay the mortgage or have a vacant space till a new tenant is found. Sounds reasonable, does it not?

Why can’t financial institutions lead the way out of the Great Recession? They can change their policies and shore up the housing industry. Let’s do the math. Assume you bought a $500,000 property. Assume you put 20 percent down, and took a mortgage of $400,000 with 6 percent for 30 years. Your monthly payment would be $2,398.

Given the housing bubble, the value of your property has been reduced in two years by 30 percent, from $500,000 to $350,000. Your down-payment of $100,000 is wiped out, and you owe more than your property is worth. Assume you want to retain your property and that you are still employed: can your bank help?

The bank can write off the $50,000 difference between your principal and the current value (you now owe $350,000), lower your interest rate to 2 percent, and have your monthly payment be $1,293, almost half of your original payment. You might feel more inclined to stay in your property, pay the mortgage, believing that an upturn in the economy will restore some of your original $100,000 equity. Default risk has decreased substantially.

In addition to profit optimization, banks are interested in risk mitigation and cash-flow. In the present case, the bank will be losing $50,000. Writing off this loss against profits from other operations, the nest loss may be cut in half. Comparing a loss of around $25,000 to the loss of the entire $400,000 is simple; even when comparing it to a loss from a short-sale of $250,000 it makes sense for the bank to refinance.

What about the loss of interest income, from 6 percent to 2 percent? Two mitigating factors come into play: first, the interest charged by the Fed has decreased to 0 percent, and second, wouldn’t the bank rather steady its income stream than lose all of it? It’s the same logic that motivates landlords to reduce rent rates.

If greed is squared off with common-sense maybe its devastating impact can be moderated; if sort-term considerations is compared with long-term prospects, maybe the effects of business cycles can be somewhat mitigated. When banks realize that their partners are indeed its customers rather than federal regulators, they can lower their risks, retain a steady cash-flow, and improve the health of the economy!

Raphael Sassower is professor of philosophy at UCCS, pays mortgages and is a landlord. He can be reached at rsassower@gmail.com. Previous articles can be found at sassower.blogspot.com