"Interest-only" mortgages, which enabled borrowers to defer principal payments for several years, thus keeping their monthly payments temporarily artificially low, were used during the boom years to get folks into homes they couldn't really afford.
An analysis undertaken for The New York Times by First American Core Logic, a real estate information firm, revealed that in the next 12 months, $71 billion of interest-only loans, "which put off the principal payments for five, seven or 10 years," will reset.
During the latter half of 2010, another $100 billion will come due and borrowers will have to begin to repay the principal. After the second half of 2011 (less than two years away), another $400 billion will reset. The Times' story indicates that there are "2.8 million such loans on lender banks' books totaling $908 billion."
Since most of the loans are "under water" (the properties are now worth less than the amount of the loan on them), it is highly unlikely that the homeowners will stay in their homes. It is highly probable that they will default as the interest-only period expires and the payment jumps substantially (payments on many loans will soar by as much as 75 percent).
David Sisko, a director at Deloitte, who advises mortgage services, "expects foreclosures to continue to soar as job losses make it more difficult for services to modify loans." Sisko recently told Dow Jones that "the industry is trying to turn lemons into lemonade."
This will set off a catastrophic tsunami. Prices will fall, not only for the homes being foreclosed upon, but also those in their neighborhoods, since there will be so much more product on the market. RealtyTrac, which reports monthly foreclosure data, indicated that in August, there were 358,471 foreclosures filed in the United States (an increase of more than 18 percent from last August).
In the meantime, the banks involved with the initial foreclosures will take a significant impact to their balance sheets due to the regulatory mandate that they be written off as "non-performing assets." The other banks (or other lenders) for the remaining homes will see their collateral drop, since these homes will lose value as the appraisal process works its way through the neighborhood.
There is another way, one that will keep existing homeowners from automatically defaulting. It will also keep the lenders from writing down their loans.
That is simply continue with the same program of allowing the current homeowners to pay interest only, on their loans, thus avoiding a default. Extend this condition for another five years. Most of the homeowners have jobs and are dutifully making interest payments.
In five years, most people believe home prices will firm up. Wages will rise and those very same homeowners will be in a better position to begin paying down their debt. In addition, as times get better, the huge inventory of homes that banks currently possess because of foreclosures will be reduced, as they are gradually sold off. In the meantime, the banks will avoid massive write-offs and the neighborhood will be stabilized.
While the banking industry will have to accept a somewhat slower repayment schedule, this can easily be mitigated by reducing the typical new 30-year mortgages to 25 years, thus speeding up repayments on all new mortgages issued. There are many other such structural solutions to the problem, but the key today is to forestall and defuse the potential problem that exists now from such a meltdown in the near future.
This will keep people in their homes, keep banks from writing off loans, and avoid affecting other homes within the neighborhood. Clearly, this approach is better than triggering another time bomb of defaults as the interest-only period expires and payments jump dramatically.
We should reach out to our local representatives, both federal and state, to be sure this simple solution will be heard, giving it maximum exposure. There will be a lot of push-back from those who will cite "contract law" and the idea that, once an agreement is made, it should be adhered to.
The fiscal landscape has changed dramatically. Other "rules" have changed. Other accommodations have been made that are too numerous to cover in this piece. Certainly, we can execute this common-sense approach to keep our citizens in their homes during these temporary but very trying times.
Martin Tuchman is CEO of the Tuchman Group and vice chairman of First Choice Bank.
