Jonathan Polansky

A pretty good webpage.

Creative solutions to dealing with foreclosures

I’m taking a real estate economics class and the topic of foreclosures came up during our most recent class.  After discussing the current economic situation and foreclosures contribution to the issue we were presented with the question about what should be done to solve the issue of foreclosures.  Most ideas shuffled blame between the banks, lenders, and borrowers.  People said that increased oversight, ethics, and personally responsibility were the only way to avoid the situation we’re currently in.

We were discussing how banks are now restructuring mortgages with borrowers to avoid foreclosures.  This allows banks to continue making money on the loan, instead of having to deal with a default, and is seen as a gesture of good will.  During this discussion it was suggested that instead of restructuring the loan with a lower interest rate, why not increase the interest rate and increase the length of the mortgage to 90-100 years.  There are various advantages and disadvantages to this approach.

The advantages benefit both the bank and the borrower.  The borrower is able to keep their property and not default on the loan.  Their monthly payments go down, even with an increased interest rate.  They are able to continue building equity in the property, albeit at a much slower rate.  The advantages for the bank are that the borrower is able to keep the property and doesn’t default on the loan.  Dealing with a foreclosure is a costly process for a bank.  Also, once the mortgage is no longer they cease making money off the loan.  It is in the bank’s best interest to enable the borrower to be able to continue making loan payments.

The disadvantages are similar to the advantages.  The borrower is building equity at a much reduced rate and will end up paying much more in interest over the life of the loan.  The bank is accruing interest at a reduced rate as well since monthly payments are lower.

Once we had presented the idea, the teacher asked why hasn’t something like this been discussed by politicians to help curb foreclosures.  She asked what is the goal of politicians when it comes to the economy?  The goal is to grow the economy.  This solution, while with good intentions, doesn’t serve the government’s purpose.

Tagged as + Categorized as Real Estate

Leave a Reply