To Own or to Lease?

Posted on August 11th, 2009 by saman

Buy or Lease

By offering financial institutions with sufficient capital for survival (and thriving) within the last year, this federal government stopped the economy worldwide from stopping. However, it might also have encouraged banks unwittingly to prevent resolutions of delinquents, as well as defaulted underwater loans which commercial real estate and homes kept safe. This kind of behavior does very little but delay any losses – which would help explain recent crops of prediction-beating and market-rallying reports of bank earnings – while at the same time worsening and prolonging damages made by horrible loans.

The White House has already met with gaggles of executives from mortgage companies in order to talk about why programs of loan modification ended up being so ineffective. Actually, recent studies have shown that such programs were not too ineffective, but rather unused: just 8% borrowers that are seriously delinquent have gotten a kind of modification of mortgage and less than 3% of these borrowers got concessions on interest or principal payments from lenders. In contrast to this, around half of the loans that are seriously delinquent came with proceedings of foreclosure that started on the other side. This would be a record rate of around 1.9 million filings of foreclosure within the initial six months of the year.

Naturally, banks generally lose much more money through home foreclosures compared to renegotiating principals of loans. However, since foreclosure timelines oftentimes run from twelve to eighteen months, this loss will take much longer to actually show up on these balance sheets. This will result in banks pushing this mess well into the year 2010 while maintaining the fiction of borrowers having the ability of repaying loans that are severely underwater in full. Even banks are starting to turn away requests of borrowers for instant short sales, where homeowners will sell for anything they can receive and then offer up these proceeds to lenders since this could also mean that banks need to record principal losses immediately instead of later on.

The actual magnitude of such debt bubbles – twice as much to be 11 trillion dollars within home loans, as well as adding trillions more in overall American debt within the last decade – with collapses of prices of real estate, make it very unlikely that these houses might recover their overall values soon enough to actually mitigate the embedded losses within balance sheets of banks. Also, by stretching time out that banks have continued to hit their capitalization with losses with, banks can no longer fulfill their overall missions by offering brand new capital for growth and recovery of their economy. With fear of their personal solvency, banks have instead salted away huge reserves that may even set new records.

To place such bubbles in our past, we require putting mortgage lenders onto paths in order to settle things up with homeowners who are underwater. One viable way in doing this would be to let banks accept voluntary surrenders of deeds to then lease these homes back to the former owners. These former homeowners need to retain rights of home purchase back to the fair value of the market after around five years, where they will have to get all of their affairs of finance in order.