- - - - - - - - - -
Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc.

Larry’s commentary is his and his alone and does not necessarily reflect the views or opinions of the management of FlippingFrenzy.com. You can read Larry’s thoughts here on FlippingFrenzy.com most Saturdays or Sundays.
- - - - - - - - - -

As mentioned in the recent post, “Rally Is on to Stem Foreclosure Epidemic,” the government, mortgage lenders, and consumer advocacy groups are scrambling to come up with all sorts of solutions to stem the rising tide of foreclosures in the United States and resuscitate a flagging economy. Unfortunately, all of these fixes tend to be stopgap measures designed to make their proponents look good rather than offering real long-term solutions to suffering homeowners.

I say that we need to take this foreclosure crisis personally. By that, I mean that we need to toss out all the traditional policies and automated foreclosure systems and put people in charge of solving this very human crisis. We need to replace the collection robots with living, breathing, caring people. We need to give management back the decision-making powers based on their knowledge and knowledge of the situation. Throw away the policies and procedure manual that might read like this:

“…upon a 90 day default from a borrower, no remedial action shall be taken by our firm and the file is to be immediately turned over to our attorneys for foreclosure action regardless of any extenuating circumstances that may exist with a borrower which would otherwise have us rethink and possibly restructure our loan with them.”

No, this isn’t a real policy quoted from anyone’s manual, but it’s a pretty good depiction of how the system currently operates. In fact, I was told by one lender when attempting to work out a loan for a client, “They will have to bring the account current before we can even begin to discuss anything.” That’s just mind boggling — a Catch 22 if there ever was one. “Well,” I replied, “if they could do that they wouldn’t be delinquent nor need my services and we wouldn’t be having this conversation.”

Where is the logic? A lender forecloses, incurs thousands of dollars in legal fees, earns no interest, pays thousands of dollars to prepare the property for sale (in addition to holding costs, including property taxes and insurance), sells the home for well below what was owed them, and pays the listing agent a commission. They take the write down, diminishing the value of their own company and reducing their operating income. As a result, they have to lay off a good portion of their personnel to compensate. (GMAC had to lay off 15% of its automotive finance unit due to collection problems. Citigroup recently laid off 20,000 due to their mortgage shortfalls. Employees of Merrill Lynch faced similar layoffs, as did employees at other lending institutions.)

Would it not be better to freeze a rate for a homeowner who has been paying at that rate rather than foreclosing and kicking the person (and his or her family) out on the streets? In the extreme, would it not be better to cut the rate in half rather than foreclose? Any contractual obligation can be renegotiated by both parties. If the lenders/mortgage note holders wanted to offer solutions to borrowers, they could.

Look at the benefit of the extreme — cutting the rate in half.

Say someone is paying 8%. Due to extenuating circumstances, such as an expensive family illness or company layoffs (see “Homeowners Aren’t the Only Ones Hurt by the Mortgage Meltdown“), the person is unable to make the monthly mortgage payments.
If you were the lender, would you rather have:

1. A non-performing loan that will cost you tens maybe even hundreds of thousands of dollars if you foreclose.
2. A property physically deteriorating, as vacant foreclosed homes typically do.
3. A further reduction of the property value and neighborhood value.
4. A loan returning zero percent income prior to, during, and after the long foreclosure process that can last for 12 months or more.
5. A loan that loses value for the investor in the mortgage-backed security (MBS).
6. Moreover, most of all, creating a homeless situation for an American family.
7. A LOSE/LOSE situation for EVERYONE.

1. A well maintained property, maintaining value.
2. A property maintaining the value of the neighborhood.
3. A loan that is no longer a complete write off but is still producing income.
4. A return to the investor in the MBS, albeit smaller. Isn’t something better then nothing?
5. No cash expense and loss to the lender.
6. A steady stock value of the lender.
7. A family that remains in its home.
8. A WIN/WIN situation for EVERYONE.

This solution is not for everyone. The speculative “investor” earning $25,000 a year who purchased 10 properties while living in an apartment (true story) should not be saved. Investors in general, who purchased for little or no down payment with the intent to “flip” and got caught up in this crisis, BY NO MEANS deserve a break. However, to the owner occupant, with qualifications, I say why not?

We don’t need legislation or political maneuvering. The government can’t and shouldn’t bail out mortgage lenders and homeowners. The people who created this crisis are the best people to resolve it, and “people” is the key word; this crisis requires people working together to develop rational, practical solutions. Our country has always prided itself in coming together when times are tough. Now, times are tough. Corporate America, you are part of the citizenry and should “come together.” Your profit motives brought this crisis on, and the fallout is destroying you as well. Do you not see the potential for self-preservation?

There is more to this story and additional solutions. More is coming. Stay tuned.