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Saturday, October 23, 2010

Down Payment Rebate Checks to foreclosed upon home owners could help both the banks and struggling homeowners solve the current home foreclosure mess.


Mortgage loans used to be boring. A down payment of anywhere from 5% to 25% was required, and then the homeowner simply paid their monthly mortgage bill. Since most mortgages are for either 15 or 30 years, unless the homeowner moves, once the home loan is approved, it's a LONG TIME before the bank will see another chunky down payment on that home.

But what if the homes could be "churned" at a faster rate than once every 15 or 30 years? Then the banks could get their hands on more "fast money" aka, down payments. Nowadays, when a bank forecloses on a home, they can financially benefit in a myriad of ways. The banks can charge all kinds of fees and penalties on late payments, the banks can file and collect a claim against the mortgage insurance that is attached to a foreclosed home, the banks get to keep the foreclosed upon home owner's down payment, and, once the home is resold, the banks can finance the next occupier of that home and once again, keep the down payment.

To summarize, four income streams are available to the banks when they foreclose upon a homeowner, the original down payment, fees and penalties, mortgage insurance, and then a new homeowner who comes along with their down payment. So, it appears that banks are more motivated to foreclose, than not to foreclose.

I would suggest that the original down payment made by the foreclosure victim should be fought for in a court of law. I think it can be argued that a predatory situation gets created when the banks rapidly suck up the homeowners original down payment and then reuse it in such a way that it no longer exists, (bankers bonuses, commissions, excessive salaries and the repackaging of the mortgage loan into different types of wall street offerings).

If foreclosure meant the homeowner would be rebated back a fair percentage of the original down payment, say 75%, it would level the playing field in terms of how the foreclosure process proceeded. If a homeowner put a 100,000 thousand down payment on a 500,000 dollar home, but then could no longer make the monthly 3,000 mortgage payment, the 75% mortgage rebate concept would actually buy the homeowner 25 months of living in the home without making a payment if they so choose, or, if they voluntarily left earlier than 25 months, a pro-rated amount based on the $75,000 "credit" that they had earned from their original down payment of $100,000.

There is an expanding polarization going on between homeowners and the banks. If the homeowner is expected to walk away from their home with very little to nothing, then they may try every maneuver they can to stay in their homes for as long as possible. If however, the homeowner was offered up to 75% back of their original down payment, they might be willing to run out the door, last one out closes the lights!

Suddenly, all the other valid foreclosure concerns that are in the news become less alarming. Lets say the homeowner thinks they signed a predatory loan, fine, move out and with the 75% down payment rebate, the homeowner may actually have enough money to both hire an attorney AND pay rent elsewhere. Meanwhile, the banks can, if they want, RENT the home out, NOT SELL IT, but RENT IT, until the litigation on that home is completed.

I really believe if homeowners could fight for a return of a significant portion of their original down payments, and get the courts to see that the banks lose the desire to work with a homeowner since they already possess the original down payment, then massive progress could be made in the entire home foreclosure issue on EVERY LEVEL.

The rush to foreclose would be reduced since banks would be cutting 75% down payment checks on every foreclosure. The banks might instead decide to let the homeowner live in the home until the homeowner has exhausted their 75% of their down payment rebate. That is fine as well since it means the banks DON'T HAVE TO RUSH every foreclosure. The passage of time is no longer considered a financial issue to the banks since the extended stay in the home by the homeowner will reduce any down payment rebate the homeowner is to receive.

The homeowner is now incentivized to move out of the home, (especially if they find a lower cost rental situation) with the knowledge that they will get a CHECK for up to 75% of their original down payment. As long as the IRS does not step in and consider the rebate as income, it seems like a "75% down payment rebate to the homeowners" concept could help grease the wheels for the entire foreclosure mess.

One more point, if the homeowner has actually built up a bunch of equity above and beyond the original down payment, than a percentage of that equity should be rebatable as well.


1 comment:

Alessandro Machi said...

If anybody chooses to respond to this article, please don't write, "they will never approve such an idea".

That is not the point!

The point is, if the 75% down payment rebate idea levels the playing field and prevents a lot of the bad behavior that is going on ON BOTH SIDES, then lets let a judge decide the merits of the idea.

If you like the idea of a 75% down repayment going to the homeowner, just say so. If you don't like the idea, please don't say it is because "they would never allow it".

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