The solution to the housing crisis is principal reduction

Two words that seem taboo in this down turned economy and horrific housing crisis are "Principal Reduction". Are the geniuses that created this mess at the banks going to keep telling us how impossible this concept is when nothing they do even dents the problem, but actually continues to exacerbate it? Principal reduction will not only help us out of the housing crisis, but will stimulate the economy! As another wave of foreclosures loom on the horizon, due to back logged banks and slow release of negative assets, ARMs adjusting, and strategic defaults, is it possible that at some point banks could be forced to resort to a treatment they have been attempting desperately to steer clear of? Government intervention and past attempts to reduce interest rates have done nothing but insert false hope into a hopeless situation. They kick the can down the road for the next person to try to figure out, and they more realistically just prolong the inevitable: Foreclosure.

What's not working: interest rate reduction, government intervention, basically everything that's been tried thus far. No matter how much they dangle the carrot by lowering interest rates, it will always be just that- an unattainable factor. In order to re-finance to a lower interest rate you must have one of two things, equity or equality in your current mortgage. According to a recent statistic, over 50% of Americans are upside down on their mortgage, so refinancing is not an option. Government programs, like HARP, HAMP, HAFA, and the $1 billion the Federal Government allocated to housing just recently, which primarily helped 3 states- Pennsylvania, Maryland and Connecticut- none of which were at the height of the housing bust, are complete failures. All of these programs put into place to help the housing market are just further botched endeavors attempted more for political gain than economic benevolence, and worse, promote false hope among the American public.

With little hope of improvement and a $7 trillion loss in the housing market since 2007 the American dream seems to be a fleeting thought of yesteryear. According to Zillow, negative equity rose to 28.6 percent for single-family homes with mortgages in the third quarter of this year. In simpler terms, that's 14.6 million borrowers who are behind on their mortgages with some states, like Nevada, having up to 60% of home owners upside down. Most experts agree that negative equity is the number one problem in the housing sector today, causing foreclosures, stifling consumer spending, and trapping homeowners from selling or refinancing- leaving them feeling hopeless with no solution. The fall of the housing market continues to consume billions of dollars that would otherwise go into our economy in the form of consumer spending and business investments.

The programs that have been implemented are focused on making the banks whole but do little to fundamentally restructure and reduce the debt load carried by homeowners. This is more apparent with the release of the secret federal loans that helped banks net over $13 billion in profits by taking out low interest rate emergency funding. Another program where banks were incentivized to foreclose is the FDIC's Loss Share Agreement. Tax payers' dollars allowed banks to collect 80% of the loss based upon the original loan amount. Why wouldn't they foreclose and collect 80% of the loss? That is more than they will get on the open market. Instead, banks are slowly trickling out foreclosures to mitigate falling home prices, but with millions of foreclosures in the pipeline this concept is absurd and will prolong the entire economic crisis. As the banks continue to make money the American home owner must wait things out and hope that somehow things will magically get better.

Although flooding the market with the current inventory would inevitably cause prices to dip based on the law of supply and demand, it would start a recovery, and free enterprise would start to take over. With the amount of current inventory we have, not including the shadow inventory, or future strategic defaults, we will be in this housing crisis for 5-8 more years. The current action plan or lack thereof is not only flawed, but is actually exacerbating the pain for millions of people and continuing to undermine the long term likelihood of a housing recovery.

With so many homeowners under water, strategic defaults looming before the end of 2012- when the debt forgiveness act expires, and the high cost to litigate foreclosures, it would seem to be a no brainer to implement those two forbidden words: Principal reduction. The banks have the ability to restore the American dream of home ownership and in the process rescue the American economy. The banks were rescued with approximately $14trilliion in taxpayer funded bailouts, which should have started the much needed lending cycle for the American people and jumpstarted the economy, but did neither of those things. Although some of this money has been paid back, most of it has not and will never be returned. The banks created the housing crisis with their reckless and predatory lending practices and should be held accountable for the damage they have done by contributing to the solution. They are currently sitting on cash reserves of $1.64 trillion.

Banks are not in the business of being benevolent. Still, they look at several factors when deciding to foreclose on a property. First, what they can recover from the owed debt- whether through short-sale or trustee/auction sale, the bank will eventually recover some of the bad debt though a sale. Second, is evaluating how many payments the defaulting borrower has paid, and the third is assessing if the mortgage had insurance and if there is a recoverable factor. Finally they need to account for the cost of the foreclosure. If they short-sell the property they will mitigate the cost the real estate agent spends to obtain, evaluate, market, and sell the property. If they sell it on the court house steps they will need to spend money to evaluate the property and assess its value. The most expensive of these options is foreclosure. The bank needs to spend money to evaluate, price, hire an agent, keep up the property, turn on utilities, hold, sell, and close the home. All of this would logically be cut if the banks assessed property value and cut the Principal to the appropriate level for a qualified homeowner that could stay and make the new payment.

According to CoreLogic, as of June 2011 underwater homeowners owed $709 billion more on their mortgages than their homes were worth. If banks wrote the Principals and interest rates down to market value, it would save homeowners $71 billion per year. Banks can afford this with their reserves. In 2010 the nation's top banks paid out twice that amount in bonuses and compensation ($146 billion). If we allocated these funds properly and wrote down upside-down loans for qualified borrowers it would stimulate the economy by putting up to $71 billion into consumers' pockets, create 1.05million jobs, reduce mortgage payments approximately $6,500 per year per household and help investors come out ahead, as opposed to the negative financial impact of foreclosure. Homeowners would have money to put back into their homes, the malls, or whatever they would like, which in turn not only creates more jobs, but helps the foreclosure mess subside, stabilizes prices and puts the American dream back on the map as an attainable goal. In essence the $6,500 savings would amount to $6 billion every month and act like a direct cash stimulus into the economy without extra burden on the taxpayer. As consumer demand picked up so would business, building, hiring, and economic growth.

The opposition wants to believe that this will hurt Mortgage Backed Securities, investors will worry about investing and more people will default because they can. However, according to The New Bottom Line's explanation of the impact on MBS and investors as such:

Banks that service mortgages often hide behind investors to explain why they refuse to write down mortgage Principal in order to prevent foreclosures. Servicers claim that they are just middlemen and that they cannot reduce Principal because that mortgages are actually owned by investor- public pension's funds, Fannie Mae, Freddie Mac, other institutional investors, and in many cases, banks themselves. Nevertheless, a recent study by the Center for Responsibility (CRL) shows that these investors would typically be better off if servicers would agree to loan modifications with Principal reductions rather than letting the homes fall into foreclosure.

When a servicer forecloses on a home, the investor is saddled with all foreclosure-related costs: legal fees, maintenance costs on the property sales costs, etc. CRL estimates that for prime borrowers, these costs amount to 49% of the total unpaid Principal on the mortgage, and that for subprime borrowers, they come to a staggering 75%. Underwater homeowners owe$709 billion more on their homes than they are worth. That represents just 36% of unpaid Principal. It would be far cheaper for the investors to write down Principal to market value than to suffer the consequences if these homes fall into foreclosure.

Still, servicers have different incentives. Foreclosures typically do not cost servicers anything, but loan modifications do. In fact, servicers can even make money on foreclosures through late fees and other foreclosure-related fees. According to the National Consumer Law Center, "A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified and no penalty, but potential profit, if the home is foreclosed." As a result, servicers generally prefer foreclosure over loan modification, even if it is not in the investor's best interest.

But this view is short-sided. Widespread Principal reductions would help stabilize banks' own balance sheets since the same banks that service mortgages also own billions of dollars' worth of mortgage backed securities (MBS) in their investment portfolios.

There is currently a big cloud hanging over the banks' MBS portfolios because no one knows how low housing prices will fall and how many more homes will go into foreclosure. Moreover, the large amount of negative equity is forcing many underwater homeowners to consider walking away from their homes, just like the Mortgage Bankers Association walked away from the mortgage on its headquarters building in Washington, DC in 2010. This adds an additional pall of uncertainty over the value or MBS. Writing down Principals would stabilize the housing market, and it would effectively put a floor on MBS prices. This would help all investors, including banks.

Most opposition toward Principal reduction seems to come in a couple of major arguments. First is the idea that reducing Principal will hurt the investor behind the pooled mortgages or Mortgage Backed Securities. However, you can see it would actually give a floor to how low that particular investment could potentially go and again start recovery and reinstall faith to our lending markets with realistic benchmarks.

Foreclosure has a greater negative impact on Mortgage Backed Securities

When a homeowner forecloses or short sells, the MBS consequently suffers. With the uncertainty of how many people will go into foreclosure the MBS market is in limbo. Implementing Principal reduction could rapidly account for those who will choose and subsequently qualify for Principal reduction. Foreclosure has a greater negative impact on Mortgage Backed Securities, costing the pooled loans billions in fees to assess, maintain, litigate, and close a foreclosure. Although the overall dollar amount would still be compromised it would cost the banks less than the foreclosure process.

Still, a larger concern is the moral obligation and slippery slope of how many people would want to take advantage of this program. Even those who can pay their mortgage would want to reduce their Principal because they can, not because they need to. Here's a wakeup call- the ugly truth is they already are, by way of strategic default. Strategic default is when you take your emotional being out of your financial decisions and think more like a business. Banks and businesses make financial decisions and if it is a good one they keep it and make as much money from it as they can. If it is a bad decision they find a way to take the loss, write down the debt, and make a better financial move. We are taught as home owners this is offensive and unethical, however business and banks do it all day long. Do the banks not have moral obligation? Did they have moral obligation when they made over $13 Billion off of $7.77 trillion emergency loans tax payers knew nothing about? Yet, they have money in the bank and families are losing their homes left and right.

It is time to wake up and run your life like a business. Banks are in the business of making money by lending money, yet their lending ability has been stifled by their lack of belief in Americans to be able to pay their debt. Did the banks have a moral obligation to their investors when they were giving out liar loans and making money hand over fist? Now all of a sudden the American homeowner is supposed to suffer because they got bamboozled by the traveling sales man peddling the magic elixir. The moral obligation is on the banks that started this mayhem, got bailed out, and are sitting on reserves. We need to be financially educated and make good wise financial decisions.

The banks can take a $709 billion loss off of their $1.64 trillion reserves accumulated from profits, bailouts, and backstops thanks to the American taxpayer. In the past regulators have been more willing to modify accounting rules to help banks, but now is a good time for a modification in how the banks can write down these losses. They could allow these write-downs over a period of several years so they do not have to record them all at once.

The American economy is chained to the crushing housing debt load. Chronic unemployment, foreclosures, and small business closings can all ultimately be traced back to the housing crisis. Working families across the country have seen their home values plummet, have had their life savings wiped clean, have been powerless to help when their loved ones lost their jobs, and in too many cases watched helplessly while they lost their homes to banks that continue to post billion-dollar profits and pay out billion-dollar bonuses. Add to that the trillions in bailouts and backstops that taxpayers gave to the banks, and one thing is clear: tax payers have already done their part. Now it is the banks' turn. Principal reduction will restore the American Dream, create jobs, and give the American family the ability to breathe again.

Real estate guru and investment extraordinaire Tanya Marchiol is commanding respect and demanding attention. While many are losing millions in an unstable economy, Tanya is thriving and garnering incredible returns for her clients and her company. With an unstoppable drive and determination to succeed, Tanya is part of the new school of self-made moguls. As founder and president of TEAM Investments, she has built an empire on coaching others how to make money and prosper. Dominated by her intense desire to help others, Tanya teaches professional athletes, entrepreneurs, investors and individuals how to not only maintain their current financial status but create generational wealth. Her business acumen and sharp strategies distinguish her as a business leader. Her personalized approach and attention to detail have earned her a reputation for excellence. Her commitment to impeccable service has set her in a league of her own. There has never been a better time to create wealth through real estate. Tanya can be seen regularly on FOX Business News, HGTV, CNBC, and CNN Tanya Marchiol, President Team Investments Direct: 480-283-0274 x111 Mobile: 602-882-5263 Fax:  480-471-5663 Email: tanya@teaminvestmentsinc.com Web: http://www.Teaminvestmentinc.com

Published: December 2, 2011

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