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Long Island Housing Crisis – A solution By Joseph Fritz, Attorney at Law

Posted on | January 27, 2009 | 4 Comments

Mr. Fritz is a practicing attorney for over 25 years and for 15 years was a mortgage broker in Suffolk County (1987-2002).  The author is a reader and contributor to Subprime Blogger.  If you are interested in contributing articles to Subprime Blogger, please contact us at jwojdylo@subprimeblogger.com

In Long Island we have the potential for an economic disaster brought on by the Real Estate Boom that started several years ago,

As we know, the boom was fueled by the phenomenon  now known as the subprime mortgage mess.  Home buyers were encouraged to buy homes with little or no money down and they were fooled by “low cost loans” and home prices that soared by double digits each year.   They could buy a house that would be worth thousands more than they paid for it in the first year.  The result, they thought the spiral would continue upward.  Like Newton’s theory, “what goes up must come down”, the housing market fell.

As house values plummeted, mortgages balances were greater than house values.  The result is a negative value .  Worse yet, a lost job or pregnancy made the mortgages not only unattractive but unaffordable.

The banks are in a crisis because of lack of public confidence due to the world wide economic crisis; the banks are failing.  In comes Congress and they provided the 700 billion seed money to rebuild our banking institutions so that the economy will not collapse.  What about the people who are also suffering from the fallout? What about the  itinerant homeowner who is also in crisis  unable to pay the monthly mortgage payments?   We have failing banks.  What about failing communities?  Communities that are in dire straits because of a spike of foreclosures.  Cottage industries of foreclosure seminars are abounding in the media, the newspapers, and the internet.

The crisis is not going to be solved by the free market.  It will be solved by a combination of government and private intervention.  Below, I will illustrate a way that the crisis can be abated but not solved.  It can only be solved when we have a return to reasonable regulations of our home buying industry and our banking industry.

Here is my scenario:  A house is purchased in 2004 for $500,000.  The buyer has good credit   but  0% down.  The family lived in an apartment and has $10,000 in savings.  They buy the house with the seller offering to pay the closing costs.  The bank permits a seller to pay 6% of the buyer’s closing costs.  This equals $27,000.  This permits the buyer to put nothing down and their savings of $10,000 is used for moving expenses and miscellaneous fees at the new home.  The Buyer obtains a first mortgage of  $450,000  and Home Equity Line of Credit of $50,000.  In this way, they bypass PMI (Private Mortgage Insurance) , the penalty charged for not having a down payment of 20% of the purchase price.   The mortgage  payment  ( including Taxes, Homeowners Insurance ) is:

$450,000 for 30 years at 6.5%  =                           2,558.00
$50,000  6%  Adjustable – Interest only       =          250.00
Taxes & Insurance Tax (8,000)  =                            667.00
Insurance 1,200 per year                                         100.00

TOTAL PAYMENT                                                     $3,575 PER MONTH

Two years later the home is worth $390,000 and the mortgage balance around $488,000. Negative net worth is  more than 100,000.   The family has just lost a breadwinner to a pregnancy and the homeowner is now falling behind in the mortgage for three months.  Crisis!

There are two key problems.  What can the homeowner afford and what can the community stand in having their village dotted with foreclosures.   Foreclosures lower the property values of  all  homes in the community.  The community becomes a joint sufferer along with  the homeowner.   My suggestion  below  is only one possible solution to the problem, but not the only one.

Lets ‘s  look at a solution.  Suppose the bank is required to redraft the loan to a  new mortgage at 390,000 @5% for 40 years.   The second mortgage will be proportionately paid its share.  Remember under foreclosure, any other mortgage (unless there is a surplus) is usually expunged .

The new mortgage payment  is   (390,000 @5% for 40 years)     1881.00
Taxes are ( 8,000 per year)                                                        667.00
Insurance is ( 1,200 per year)                                                     100.00

NEW TOTALS                                                                       $  2,648 PER MONTH

Let us assume that the homeowner can only pay $2048 per month.  There is a shortfall of   $600.00 per month.  That amount ($600 per month) would be added to the back end of the mortgage.  In effect, the shortfall will be added to the mortgage.  A few years later the home may have a significant increase  in value and the homeowner will have the option of selling the property.

The other alternative is the homeowner continues to pay the lower mortgage payment  ($2,048) with the monthly shortfall added to the end of the mortgage OR  the homeowner can start  paying the correct amount ($2,648)  of the mortgage when he regains his economic footing.  In either case, he can remain in the home and the community is spared the blight of foreclosures as a result of the bank’s greed.

The homeowner may not be able to keep the home.  However, with the terms suggested above,  the homeowner may be able to afford to stay in the home, will be contributing to the welfare of the community, and the bank will be paid their mortgage even though not on the original terms.  The alternatives are bankruptcy, short sales, boarded up houses, graffiti, and degradation of the community and loss of property values.

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Comments

4 Responses to “Long Island Housing Crisis – A solution By Joseph Fritz, Attorney at Law”

  1. » Subprime Blogger » Long Island Housing Crisis – A solution By … » Subprime Mortgage Refinance
    January 27th, 2009 @ 9:29 pm

    [...] news by unknown « Subprime Blogger » Weekly Mortgage Rates Predictions – January 29th The Subprime [...]

  2. Debra
    January 28th, 2009 @ 11:44 am

    Who can negotiate with the lender to refinance the lower interest rate and a fixed 40 year note?

  3. george
    January 28th, 2009 @ 5:11 pm

    Great idea provided the person is still employed.

  4. guinea mic
    January 28th, 2009 @ 9:35 pm

    sounds too good to be true…people who don’t have the cash or income shouldn’t be buying a home or receiving loans. Like me, I have a long way to go.

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