Wednesday, July 21, 2010

Market solutions don't need Washington D.C.'s approval or even involvement

The credit crunch continues. One in seven homeowners with a mortgage are behind on their payments. Foreclosure rates are still at historic highs and government programs to help alleviate the problem aren’t working.

There are some common sense approaches to the credit problem though, that don’t require government involvement or taxpayer dollars. Many lenders, regulators and politicians are just making the issue more complicated than it needs to be.

Lenders want to protect their investments. They have no vested interest in seeing people tossed out of their homes just for the sake of tossing them out of their homes. What if they could protect their interests and equity without an eviction?

If someone is several payments behind on their mortgage, they are likely going to lose any claim to the house. Since they had borrowed against the value of the home, they really aren’t losing anything as far as assets go. They never really owned it. The heartbreak and upheaval comes from having to pack up and move, and having to do so while one’s access to credit is non existent. What if the lender agreed to finance the arrears over a period of years while allowing the customer to rent the home at current market rates? The customer would give up any claim to the home, pay back the arrears over time and must make timely rent payments. The bank doesn’t have to go through the expense of foreclosure, maintains a revenue stream from the property and retains all its equity in the property.

What if lenders could make it easier to avoid getting behind in the first place? My very first loan was for an old VW Bug I bought when I joined the Army. My credit union had a policy of offering a “skip a payment” option each December to help customers free up some cash for Christmas. It’s not as generous as it may sound. The lender just extends the life of the loan by a month and actually ends up making more money than they would have if you didn’t skip a payment. The customer gets to have a Christmas budget without ever having “saved up”. This doesn’t have to be a Christmas thing. What if borrowers could earn a “skip a payment” option every twelve months (use it or lose it, you can’t skip two payments in any given 12 month period)? This would help mortgage holders when things get really tight. It just might give them the breathing room they need to get through a tough time. Again, the lender is just deferring the payment and getting some extra interest in the process. If it prevents a foreclosure, they come out way ahead.

Why aren’t more of these types of solutions employed? Well, because lawmakers and executives who spend too much time in meetings tend to think the worst of the “average American”. Thus, policy is developed based on the what the very worst among us might do. To be fair, HOA’s and other civillian oversight organizations display the same tendencies. The fact is, most people are good people. A bit less paranoia in the marketplace could serve us all very well.

Of course, not all bad cash flow situations can be salvaged. Sometimes you just have to take your licks. However, with a bit of creative thinking and cooperation rather than panic, lenders and borrowers can work together to serve their own interests without relying on legislation and mandates. Finding ways to minimize trauma while protecting your interests can be good for business in the short, medium and long term. How long do you think a customer will remember that you could have forced them out of their home, but chose not to?