Thinking Out Loud - the Mortgage Crisis?

Lets just take a quick assessment of the situation.

Mortgage lenders were doing some pretty snarky deals; getting people approved who really could not afford it in the first place or getting people approved for house that were too expensive for their situation. They fudged incomes, left sections blank or just simply lied in order to get certain high risk borrowers approved. (We'll ignore the part where lots of people applauded such practices as giving people access to the American dream who might otherwise not have had the opportunity.) In some cases, in order to offset the risk, lenders even played with the adjustable rate, ignoring the fact that the borrowers would likely not be in position a few years down the line to afford them.

Not to be outdone by such devious maneuvering, the borrowers were well aware that they really couldn't afford such homes; either at the time of purchase or when the balloon payments would come due. And they still went ahead and "believed" the lender because they wanted to.

Now we have the proverbial essence hitting the fan in a sort of financial perfect storm. High oil prices raising the cost to transportation, food and just about everything else that is manufactured. Jobless rates climbing and pay scales dropping. Health costs on the rise. Weather conditions making everyone crazy not knowing if there's going to be a flood, a drought, a hurricane or an earthquake.Then there is the war and the plummeting of the dollar. With all these things making everyday life unbearable, something has to give. And it is apparently the mortgage. People need food, to get to work and stay healthy. A roof over the head comes dead last in priority as they can move to a cheaper place, stay with relatives or live out of their cars.

So the foreclosure rates jump sky high, people are mailing in their keys and walking away (known colloquially as 'jingle mail'). And the banks have to deal with the loss of income, the possession of property that is not making any money because people can't afford them (for aforementioned reasons) and the loss of stock holder confidence.

But here is where I think the immediate problem is imminently fixable.

If banks dealt with the borrower before foreclosure and found out why they can't make payments, arranged for an alternative payment method, and extended the life of the loan, everything else would correct itself.

For example, a bank could contact the borrower and determine (from a preset list of reasonable reasons) what the problem is, they could set the payments to be interest only or interest and part of the principle (whichever is determined feasible). Then they could extend the life of the loan for a reasonable period (say a year or six months, for instance). All the original provisions of the loan could stay in place (such as interest and adjustable rates). This way, the loan is still bringing in some money and the borrower remains in the home. Both the bank's image and the confidence level is improved, thus allowing their stock value to remain intact. Overall consumer confidence is improved and the value of the dollar holds or maybe even improves.

Granted, this will not be possible for every single borrowers, as some circumstances are through failure on the borrower's part to maintain their part of the agreement. There will always be those who will try to take advantage of any situation. But for the most part, the reasons people are unable to pay their mortgage has to do with the country's current dilemmas trickling down.

This type of situation would have been standard years ago when lenders knew their customers and believed in personal service. The shift away from the old practices was a serious gaffe for the huge banking conglomerates of today. Had they maintained even some semblance of the personal touch with their customers, we might not even be in the situation we find ourselves in today.

Call me crazy or an idealist who doesn't know a lien from a deed of trust. Or maybe you think I am an unsung genius, a mortgage savant who has hit the nail on the head. Either way, something needs to be done about this problem, and government bailing banks out isn't the answer.

But no matter. This is just me, thinking out loud.

Have a great day!