The author is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities
In this column (first of a series) we look at the national and international credit crisis of Sub Prime and Alt-A mortgage loans, not from the macroeconomic, global perspective, but from a personal, one on one, microeconomic level. For irrespective of . . .
- The stuff you read,
- The excuses you hear,
- The blame shifting the parties attempt.
It ALL boils down to individual loans made to individuals; the problem that was created; and the alternatives that are there to solve the problem.
Let's you and I do a thought experiment.
We are siblings. I'm the younger, you the older. We look out after each other when we can, look after each other's families. You have a good job and are asked to transfer.
The house you are living in is perfect for me and my growing young family. You own the house debt free. I'm a renter. We strike a deal. I'll buy your house with liberal terms; market value, but with little down payment and repayment terms that allow me to grow into the house note. It's all done legally, using a real estate attorney to write the loan contract, liens are filed, a note is drafted with repayment terms specified.
A few years go by. I've made the payments...interest only for a couple of years, and now the full amortization we agreed upon is ready to kick in. But a problem is looming. One of my children has had an illness that results in our having sizable health care expenses, above and beyond what our health insurance policy covers. We are struggling with that unplanned burden.
Reluctantly I call you and explain the situation. You are certainly aware of the the illness, one of your nieces, and you've been worried and supportive during her trials. No problem you respond. Things have changed. Unforeseen things. We quickly agree on a new arrangement that I can handle, effectively extending the interest only period for several more years, allowing me to retire the health care debt and get my family back on track.
That's what families do. They support each other in tough times.
In this case, the solution made perfect sense even from an investment perspective.
You were now living out of state. Had you elected to not renegotiate the loan terms you would have had to take the house back, incurring the legal expenses to do so. Then you would have had to locate a Realtor, list the property, endured the marketing period for a vacant house.
When a contract on the property was finally negotiated the terms would likely have favored the buyer...you would just have wanted to settle the thing. A lower purchase price, some deferred maintenance items that I had to delay when dealing with my medical crisis, stuff like that. You likely would have lost 20, maybe 30 percent of the original value of the house in incurring all those expenses,including the 10-12 percent closing costs.
By simply renegotiating when I presented the problem, you saved my family from further distress, and preserved the principal of your loan. A win/win situation for everyone. Yep, you delayed the return on and of your investment somewhat, but cash is coming in each month, the asset is preserved, and everyone is better off.
It really was a no brainer. Do the right thing. For everybody.
Multiply our thought experiment by 600,000 to 1,800,000. That's the Sub Prime brouhaha.
Multiply our thought experiment by another 1,000,000. That's the Alt-A and "Prime" ARM time bomb.
In the next installment we'll talk about them. See you then!
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