Where I disagree with Mark is the cure. While I don't support the appraisal waiver on refinances, I do support the relaxing of guidelines and pricing bumps. If you successfully allow a borrower to lower their monthly payment through refinancing, I don't believe this would cause a new wave of defaults. Rather, this should create a more solid block of paying customers.
One thing here, this credit scoring system is a very flawed method of determining a borrowers credit worthiness. How on earth did our mortgage/housing market ever survive for years with no scoring system, actually having live underwriters looking at applications to determine a borrowers ability to repay a loan.
They are trying to walk an impossible tightrope.
On one hand, they want to come up with methods to lower payments, thus stabilising the base of payers.
On the other hand, they want to avoid at all cost home devaluations, and the affects that can have on neighborhoods.
These are two incompatible goals. It’s the astronomic rise in haome valuations that caused the bubble in the first place.
I wish I knew of a good way to short real estate. I’d be richer than Warren Buffet!
That makes sense to us, but not to the banks. How, for instance, would the bank sell and package the new mortgage, which is greater than the value of the property securing it? Even if the mortgage is not sold, how will the bank value the mortgage on its own books when it is underwater right from the start? Admittedly, the original mortgage is underwater as well, but it won't have to be revalued if the property is not sold or refinanced.
With so much of the country's real estate now worth far less than the mortgages on it, a great block of the real estate sector is literally dead to commerce: it cannot be sold or refinanced, only abandoned or foreclosed on. Since so many people derive their incomes from real estate, starting with real estate agents and bankers, cable installers, plumbers, carpenters down to the clerk at the local hardware store, I don't see how the economy will pick up if we just let things drift along as they are. It may take a decade or more before inflation solves the problem for us. Somehow, congress is going to have to come up with a method of cramming down mortgages to at least property value at the same time they are bailing out the banks.