These are some of my favorite video bloggers that have a daily blog covering mortgage and real estate related content. They can be very wacky but they take some pretty dry content and make it interesting. This particular post talks about a pilot program that Bank of America (BOA) started a while ago. It has gone so well that I hear from several different reliable sources that they are going to expand it into a full blown program and particularly here in the Southland. And the rumor is that many other lending institutions will follow suit. Watch the video then read my thoughts below! (you can jump to about 40 seconds in for the meat of the video)
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The only change I have heard to their description is that BOA plans to hold on to the properties rather than selling them in bulk. This would make it so that they get their treasury dollars based on todays deflated value, and then would sell it to the then renters in 3 years for a higher price when the market has stabilized.
This arrangement is a surrepetitious principal reduction with a minor slap on the wrist to the defaulting homeowner and a big reimbursement from the Fed to the Bank. It results in keeping homeowners in their houses and giving them the chance to recover the house when they have cleaned up their financial situation at a current value.
With all the defective plans we have seen over the past couple of years attempting to fix the housing crisis, this one actually makes some sense. The major ingredient we are missing for a solid recovery is the confidence that real estate values have hit the proverbial bottom. The rumored and in my opinion greatly overstated “shadow inventory” of houses facing imminent foreclosure has a huge negative impact on this confidence. This plan could take a huge portion of the possible distressed inventory off the market. Or at the very least take these non-performing loans off the banks books for a time period. Even if the current owners do eventually default or move out of these homes, it would effectively make this inventory come on the market in a trickle rather than a waterfall.
In the short term this will create a huge vacuum in houses for sale. We are already experiencing a very low number of houses for sale. The law of supply and demand has not kicked in fully yet due to the low confidence level. But, with this program in full swing all the other elements are in place: low interest rates, loan programs that are obtainable for qualified people, and a huge pent up demand for people to move into different housing.
There is no panacea for the housing crisis, but many different solutions have already been put in place. This could be the straw that breaks the camels back in a good way. The housing market in Sherman Oaks, Los Angeles, and the San Fernando Valley could certainly use this tool to help stem the flow of Foreclosures, and Short Sales. It will also stem the false promise of distressed homeowners from trying to get the unobtainable loan modifications.
In the long run this could work to bring better homes for sale to the market, get underwater homeowners into a house that makes sense for them, and turn the tide of home values. And the long term is not a very long term relative to our delayed recovery.