Lending laws are destroying our communities – this must change
Jeffrey P. Newman
The news is filled with stories of over-reaching lenders and imprudent buyers – in short, a good deal of blaming the victims is going on.
But there are other victims – innocent and blameless victims – in this drama, and they are us, and our communities. Vacant homes in a neighborhood are often left untended and are vandalized. Then neighborhood safety diminishes. This, in turn, makes it harder on the neighborhood and the people who are still there. A foreclosure drives down the appraised value of all of the homes in the neighborhood, which, in turn, drives down local property tax revenues, further straining our communities’ ability to provide desirable public services.
A tragic downward spiral, ruining the lives and dreams of the whole community, can follow. What we urgently need today is a new law, one that better balances the interests of our communities as well borrowers and lenders.
A large part of our problems today stems from radical changes in the way mortgage loans are made and owned. A generation ago, the local bank or savings and loan association made the mortgage loan and held on to it. The lender generally employed people who knew the neighborhood and often the borrower. The lender likely had many mortgage loans in the neighborhood. In short, the lender cared about what happened to the neighborhood and the community in which it operated. When troubled times came, the lender had an incentive and the ability to take the longer view, to work with the borrower, and to preserve the values and the community the homeowners and lender shared.
During the Great Depression, California passed laws to protect homeowners from losses greater than their equity in their homes in an effort to allow families to at least salvage their assets outside of their homes to live to fight another day. Today, California and the nation need a similar intervention to protect our neighborhoods.
While there are still local banks and savings and loan associations and branches of national banks, there are also mortgage brokers – and almost all of them sell their mortgage loans to bundlers who then sell off the pooled loans to investors all over the world in slices of varying perceived risk and return. The local originator of the loan may have retained a modest financial stake in the loan, but what it did not retain was a substantial local economic stake and the ability to restructure the loan.
In this system, the authority to modify loans is held by distant and disparate investors with no stake in the community and only a tiny stake in any one loan. They really have no knowledge, ability or efficient way to make flexible local decisions about any individual or community or troubled loan. Even if they did, they would have huge conflicts among the owners of the bundled mortgage securities.
This is not to say that the bundling and resale of these loans has not had advantages by making more money available for home loans or in reducing borrowing costs, but there has been a steep cost to our communities when things turn sour.
This needed new law should require loan sellers to retain the right to restructure their loans and require that they retain a larger percentage stake in the loans they originate in each community than is now required. We also need to immediately implement a new law to prevent foreclosure on subprime loans for owner-occupied homes. We need to give these homeowners three years to regain their financial footing.
But this delay in foreclosure would only apply where the subprime mortgage borrower lives in the home, is current on the property taxes and homeowners’ insurance, is maintaining the property and is paying interest at a new lower rate that is the same as prime rate mortgages. In this case, the interest would be based on a loan principal amount that was equal to the then currently appraised value of the home.
For example, if the homeowner originally borrowed $300,000 and the loan called for 11 percent interest, but the house now appraised for just $250,000 and prime mortgage borrowers were then paying 7 percent interest, under the moratorium the defaulting subprime borrower could stave off foreclosure by paying 7 percent interest on a balance of $250,000 for up to three years, but any excess value in the home at the end of the grace period would have to be paid to the lender.
This could mean that the new interest rate or the principal would be lower than the original loan. The lender would still get a fair return on its loan and collateral. This new law should also provide a glide path from this emergency arrangement back to mortgage interest rates and terms determined by the free market.
If the property goes up in value, of course the increased value needs to be used to repay that excess to the original lender so that there is not an unfair incentive to default on these loans. But the point is that both the lenders and the borrowers – and most important – our communities will have a workable period in which to adjust to try to maintain the property values and community of our neighborhoods. In the end, this sort of legislation will help save not only neighborhoods, but also the victims – the subprime borrowers and lenders.
In the end, this sort of legislation will help save not only neighborhoods, but also the victims – the subprime borrowers and lenders – who will have more staying power and needed time to get whole.
In California, lenders are almost never able to receive more on their home loans than they can get from selling the home. Under my proposed arrangement, the lenders would get a fair return on more than they could hope to derive from a foreclosure sale; the homeowner retains a place to live and more time to improve the home and find a solution to the financing problem, and the neighborhood retains its people and vitality.
The point is simple: The way home loans are made and held today is destroying our communities. We urgently need to fix this situation. We call on the Legislature and the governor to pass new legislation to protect us all.
Jeffrey P. Newman is a commercial lawyer with more than 40 years’ experience – much of it in the real estate industry.
Tags: lending laws and the effect on foreclosure, real estate news, news on the on going foreclosure crisis
Rob Fleming is a Freelance writer with over 10 years experience in Developing unique website content, Website Marketing, and SEO techniques. He has authored hundreds of powerful articles on building site authority and driving traffic to websites. 
Filed under: The Editor's Pick
Like this post? Subscribe to my RSS feed and get loads more!
Leave a Reply