What I was trying to point out is the necessity of factoring in what people and institutions are willing to do, absent force, in order to create positive change, rather than what they should do, in an ideal sense.

Most people and institutions in trouble will only make a change and take a risk that has a clear short term benefit (however small), figuring that living to fight another day is a victory in and of itself.

I agree it doesn’t make sense to modify a loan to a new failure.

And, of course, long term thinking and planning is needed as well, but most homewoners that are in grave need of some kind of modification are likely to choose a short term benefit over a long term benefit.

The “in the long run” quote is from Keynes.

http://en.wikiquote.org/wiki/John_Maynard_Keynes

Keynes had some remarkable quotes…I particularly liked this one I just discovered!

“There is no harm in being sometimes wrong — especially if one is promptly found out.”

Oh, if only Greenspan had been promptly found out…

Why? Consider the possibility that in a few years when the dust has settled, a default during this time period will not be viewed so negatively to one’s credit and the bubble collapse will be taken into account by lenders. If someone qualifies under traditional guidelines and has no other issues, this one time event may be considered an aberration. If I were a lender I might not turn away otherwise good business.

I hope that is not the new slogan for this Country. We have always been a Country of improving things for the generations that follow us. Though I have to agree that I meet many more people who don’t look past their death when making decisions, than those who worry about what they leave behind for others to deal with. I think that’s a mode of “linear thinkers”. Let’s have classes in school that create fewer linear thinkers. That’s an idea.

If you gave me ten scenarios, I would likely have 10 different propositions as to loan mod. Point being, if it doesn’t give the borrower a fighting chance to be able to keep their head above water, it will fail.

Loan mods are not appropriate for anyone whose income is dramatially reduced or gone altogether. So an automatic haircut to 90% on the loan amount is not in and of itself a remedy for anyone. You have to match the circumstances to the situation. The one above backs into a salaried income of $60,000 which was known by the lender on day one. It basically penalizes the lender for assuming a long term consistency of ancillary overtime and bonus income. It also utilizes no bailout funds as no portion of the loan amount is charged off.

Historically businesses want to cut out their bad stuff to put it behind them. But that reminds of of some schools who are given funding based on test scores. Result is they try to expel the lowest scoring students on any technicality they can find or conjure up, or force them out some other way. There’s more than one way to get good scores, one is to outst the poor scorers.

When you take “actions to improve the situation short term, the long term consequences are often severe. No action should be taken short term that doesn’t consider the long term consequence to all parties.

I think it is because of the requirement that the banks would have to immediately “mark to market” that asset, endangering their current liquidity and survival, in exchange for an uncertain future profit in recaptured equity gain.

It is much better (for the bank) to change the loan term (interest rate and length), even if it represents a loss in income to the investment holder (bank, hedge fund, institutional investor, etc.).

Nationally, there is NO clear consensus on which is preferred (lowering home values vs. lowering interest rates/payments vs increasing income). The stance on those issues is not necessarily left or right, and probably will not be cleared up by the election in 6 days. On the whole, politicians are mostly saying we need to enact measures to support current home values, even if they are at unaffordable levels.

Arguably, to do otherwise is political suicide. Homeowners (who represent a majority of likely voters), do not want to hear a message that argues that their investment needs to go down 30% for the good of the country.

Jillayne likes to advocate the moral ideal, as befits her professorial tone and vocation. Ardell describes a more “political” solution, as it spreads the pain and benefits more evenly , fitting for a “boots on the ground” perspective.
Yes, the borrower pays more in interest in a 40 yr loan, but avoids the cost and discomfort of moving and losing their home.

Jillayne’s solution MAY be more rational in a long term scenario (more so to the borrower than the bank, I think), but Ardell’s solution is more immediately palatable to both parties, thus more likely to be enacted.

I’m in favor of taking actions to improve the situation short term, that has some benefits for both parties to the transaction.

Besides, in the long term, we are all dead.

I have been busy today, but it’s been more “busy work” than actual transactions coming together…which is fine. I sent my email newsletter out to my clients…I’m a few months behind and I’m amazed and touched at how many of my past clients have responding asking if I’m doing okay in this market.

Back to topic…I still think that a 43% DTI is pretty hefty if it’s a “true” calculation. We may just end up with humans doing all the underwriting again and if so, be prepared for much longer transactions.

We need to bring back Usury Laws vs. using Bankruptcy to control 25%+ interest rate credit cards. It’s highway robbery for credit cards to be charging 25% to 33% interest rates, and everyone knows it. Someone tell Obama.