No to mortgage principle reductions? I don't think so

By Frank Louis

No to principle reductions? That is what Fox News Financial Expert Bob Massi said this week on Fox and Friends. Yep, Let 'em foreclose. That is his solution. The worst housing market since the Great Depression, but continue foreclosing. How is that working for the country? 1-million foreclosures in 2010, another 8-million people not paying their mortgages now. Plus the infamous "shadow inventory." I'd say this is a potential voting block of 40–50 million people. I'd say it is not working very well.

What are foreclosures of not "principle reductions" in a sense? They are just not principle reductions" for the people who have their names on the loans. But the "principle" (equity) in the property is gone and you still owe it. If the house across the street from you (I think that was the example Mr. Massi made) gets foreclosed and then goes on the market for less than half of what your mortgage on a similar property is, guess what happened to your "principle" (in the form of your home's value)? It just dropped to the same value as the foreclosed property. Your house is now more or less worthless too and you still owe all of the money.

Bank of America gets off for one penny on the dollar of $128 Billion in mortgage fraud dollars (with our tax dollars to boot), and you say "no principle reductions" for people who actually bought their property with money down? What? And the "investors" who bought these mortgages at the other end in the form or mortgage backed securities can just "put back" these investments as defective products. But we are stuck with property we were defrauded on when we bought it? What?

So, let me get this straight: when I try to sell, then my property can just go into foreclosure. Is that correct? Is that what you are saying? Really. I keep hearing about people who "bought houses they could not afford." I surely do not argue that fact. In fact, perhaps millions of them were not even people. They were "straw buyers" fraudulently brought to the table by fraudulent realtors and fraudulent mortgage brokers who ran the values up with the fraudulent help of fraudulent appraisers. That, Mr. Massi, is the fact.

However, there are also millions of Americans who were working hard, buying property, remodeling it, living in it, reselling it, renting it, and, in general, doing capitalism. Isn't that what this economy is based on? Capitalism? However, these hard working Americans did not know to short the housing market. Only Mr. Paulson knew to do that. There was anything but full disclosure by the banks in these transactions. Americans who made down payments were lied to. Capitalism, Mr. Massi, will not work if it is based on fraud. I did not hear you or the rest of the Fox news team address this point or use that word.... "Fraud! "

No, you alluded to some stupid hypothetical scenario with Brian Kilmeade regarding principle reduction. You asked him how he would like it if the person across the street from him got a principle reduction and he did not. Regardless how one might "like it," if the house across the street from you is foreclosed, your equity has been reduced as well. Gone... zippo! And, you still owe the full amount. You are upside down in value. The joke is on you! No, the housing market was not overbought... it was over-frauded.

Think abut it. You just got a "principle reduction" on your property's value but still owe the fraudulent, overvalued price. Good luck. Real estate values are based on comps are they not? In this scenario, you are like the person I mentioned in a recent article that is bleeding to death but continues to say "I'm OK" while they continue to bleed to death. Seek help! Fight this needless upcoming depression rooted in real estate fraud that still continues.

Another fact you leave out is basic. If you bought property before the 2004–2005 fraud-bubble you are probably not "loosing" anything if your neighbor gets a "principle reduction." Your property was purchased before the fraudulent prices went up. You owned your house while prices went up and while they went down. You were not defrauded; you have not lost the tens of thousands of dollars you made as a down payment at fraudulently inflated values. As well, if you paid nothing down you have also lost nothing.

In fact, I would suggest that all real estate transactions made during that fraudulent time-period should have the option to be "returned as defective" by the buyers who paid down payments should they opt to return the property. Give their down payments back. Then the banks can go after the commissions and other fees they paid on these fraudulent deals to the fraudulent professionals in this industry. I believe that most if not all of the sub-primes have already left the building. The folks being foreclosed in this new wave are us.

If you bought during the fraud period we call the "bubble" and paid 20-30% or more as your down payment, you have probably lost it all and are in big debt as well. In fact, I would venture to bet that the down payments many made in 2004 '2005 were equal to or greater than what the person across the street paid, fully, for the property in 2000- 2003 or earlier. Your down payment is also most likely more than the property is worth today. So, "buyer beware?" Capitalism is not designed to be a safe haven for fraud perpetrated on a giant scale by economists with PhDs. Capitalism is not gambling. It requires an element of honesty and that, Bob, was missing when this fraud prevailed.

When property is foreclosed it is devalued far more than the value would be if the property owners would be provided the opportunity to have a principle or interest reduction and keep the property. Think about it. That would mean that the value left in your property during this era of devaluing real estate would be greater if other properties were not foreclosed. Your property becomes worth less when the property across the street from you goes into foreclosure or short sale than it would if the mortgage was simply adjusted It would also mean these people's credit scores would not be ruined to the point that they can't even rent a car or have a real credit card. The economy would recover.

We are talking about people who often had credit scores in the neighborhood of 700 or better and savings of hundreds of thousands of dollars only 5 years ago and are now bankrupt and, in many instances, approaching retirement age. Now, we also learn that these people may also be further punished because the only credit cards they may still be able to get, "sub-prime" credit cards as they are called, may also be on the chopping block. Banks nickel and dime us over every aspect of banking as a result of "fin-reg" (thanks again to Mr. Frank) that we were told was to designed protect us. What are we doing? People who never missed a payment in their lives are now ruined. This is our economic system?

In addition to primary residences, there are also investment properties that families own that are upside down in their values and in the dollars they can bring in each month. These properties cannot be competitive with those that are now foreclosing and short selling for less than half of what these properties are indebted for. Once foreclosed, this is irreclaimable debt too I am willing to wager.

In a hypothetical example as you mention, let's just say that a property is (for round numbers sake) mortgaged for $400,000 after the buyer, in good faith, made a down payment of $100,000 (money they had worked to save) based on the fraudulent appraisal information provided them by the industry during the "bubble." Many of these properties were purchased by folks that saved all of their lives and bought these properties, perhaps to leave to their children or for their retirements. Who knows? What we do know is that they were not, as we are falsely told, "seeking the American Dream" for no money down, and with no-doc. They made good faith investments, backed with their cash, based on the alleged fiduciary responsibilities they believed those in the real estate and banking industries were supposedly living up to. They paid to buy. They were robbed.

The monthly payment in my example is $4000 but now with the overall economy being where it is (foreclosures, the resultant unemployment, millions of people in this country illegally, etc), the monthly rental income is only $3000 at best. The property is now upside down as far as the ability for it to be a sensible investment by at least $1000 each month. Why? Because of the fraudulent market in which these people bought property, that's why. A fraudulent market that was based on fraudulent values assessed by fraudulent lenders. Everybody got his or her commissions and kept them too!

Let's go on to say that several of the properties in this hypothetical area are now in foreclosure (not an unrealistic assumption) and that they are now going for $150,000 or less. Tell me Mr. Massi, what is the way out here? More foreclosures (bringing values down even further) or working this out with the people who actually made down payments? People that nobody ever mentions... ever.

My solution is simple, let the current owner keep it and do whatever it takes to get the cash flow correct. Primary residence or not, it does not matter. In this example, that would be around $300,000, double of what it would foreclose for, double of what it might bring in a short sale. Your property value remains doubled too. No more of these stupid government programs that only open the gates for even more fraudulent activities. No more commissions, no mortgage counseling services, and no more industry based on this fraud. Crisis solved! Your property still has value too!

I call my solution: the "Short Keep." Lower the principle, lower the interest, but do it today. Maybe even put in a clause stating that should any value return to the property and should the borrower sell it, the bank would split the additional equity with the borrower. Everyone makes out better. No one walks on his or her mortgage just to stop the bleeding. The bleeding is stopped instantly.

If not, every property in this hypothetical scenario might ultimately be worth less than $100,000 perhaps much less. You can play "he-man" all you want and keep paying your $500,000 mortgage as long as you want. When you die or need to move, you can be foreclosed then. File for bankruptcy then. Bob, your thoughts are half-baked. Brian, you are a fool for not calling him on this.

This nation was based on sound Christian principles. The Founders prayed daily for guidance and wrote the Constitution and Bill of Rights based on that prayer activity. Perhaps today, some Biblically based decisions might again be in order to solve this crisis. Not financial schemes and decisions based on what Ben Bernanke calls "exotic" financial mechanisms. It was economists that got us into this problem in the first place. I can promise you it will not be economists that get us out. Please, No more Harvard MBAs and PhDs giving us unsolicited solutions to the unsolicited problems they created.

© Frank Louis