The factor I haven't mentioned with regard to the banks' dilemma is the way the appraisal industry operates under the new HVCC rules propagated by Andrew Cuomo. I have written about the serious problems this new law has caused, but I will put it in perspective for this discussion. In a refinance, under HVCC the appraiser isn't told the size of loan, type of refinance, lender or, in many cases, hasn't ever worked in the location of the property. In a purchase, the appraiser knows the price but not the down payment or loan size. Appraisers have been criticized severely, so their inclination is to bring the values in as low as possible. There isn't any incentive for them to seek a middle ground because, unlike in the past, they are hired by third parties from whom they have no reason to expect more business. The National Associations of Realtors reports that these low appraisals have caused a great number of sales to fail. Note: Now, as in the past, a lender can question the appraisal by doing a desk or field review, checking an automated value module, or all of the above.
Another issue banks face is whether or not to grant loan modifications. Most banks will only consider modifying loans on owner occupied properties.
Furthermore, they won't begin to discuss loan modification with a borrower until his payments are late. They will only modify a loan if the borrower can show sufficient income to make the new payments. Essentially, loan modifications are reserved for employed borrowers whose interest rates are high, but who can't refinance their mortgages because of bad credit, high loan to value, or insufficient income and are behind in their payments. Usually, under these circumstances, the lender will modify the payment, the balance, or both on a first but not a second mortgage. The numbers of loan modifications are extremely small in relation to the borrowers in need of them and infinitesimal in comparison to the total mortgages outstanding.
Once a borrower gets a loan modified, he may be faced with a new problem. Credit card issuers continually check on a borrower's credit, and missed payments alert them to credit problems. They will cut off the borrower's privileges or lower his limits immediately. As a result, we will have a new class of working citizens who are unable, if willing, to make the new purchases that drive our economy. How did this happen? The borrowers needed to miss their mortgage payments in order to get their home loans modified!
This administration doesn't appear to be all that concerned about the real estate industry. Rules and regulations arrive weekly making it increasingly difficult for would-be borrowers to qualify for loans and forcing those who are self-employed to continue to find some alternative to standard home financing. With the reset of the Option ARM (known for its 1% start rate) staring us in the face, along with the aforementioned problems, we are facing the tips of some rather large icebergs that could eliminate any chance of a quick and lasting recovery.
Remember, when your neighbor loses his house to foreclosure or short sale, your equity is diminished. Like it or not, we are all in this together.