"Fairness" In the Mortgage Market

A big issue in the Presidential election revolved around the notion of "fairness."    The thought that those who can afford it should pay their "fair" share in taxes.  It was a word that came up frequently.  If there must be "fairness" with taxes, we must have the same concept in mortgages.

This morning Citigroup became the latest mortgage lender to announce a plan to rework mortgages and payments for struggling homeowners.   JPMorgan Chase and other banks have announced similar programs with similar terms.   Details from the Citi website devoted to the program:

Citi also recently streamlined its existing loan modification program, which is similar to the FDIC/IndyMac model, to aggressively rework delinquent loans. This program uses a simplified formula to determine an affordable payment as a percentage of the borrower's gross income and then reduces the monthly payment to that amount by one or more of the following: interest rate reduction, extension of term or forgiveness of principal.

If we are to be "fair," then we should extend the same offer to all homeowners and not just those who are behind in their payments.   Those who are paying on time and who bought a home within their budget are, in a sense, being penalized because their loans are not being restructured.

Many homeowners were responsible in their borrowing but are simply unable to pay for reasons such as sudden illness, medical bills or job loss.  Those are the ones most in need of help, and they should get it.  All that can be done to keep people in their homes should be done.  A foreclosed home is good for no one: not the family, not the bank, not the community.   It can be a devastating loss for many.

The issue in these Citi and JPMorgan programs is one not just of banking, but of public relations.   It appears to many (judging from your comments to this blog) that there is a form of favortism being extended to those who can't or simply won't pay their current mortgage.  There seems to be a growing belief that there is little incentive to pay your mortgage on time, even for those who can afford the regular monthly payments.   A common thread in your comments seems to be "why pay on time when I can get my payments and/or principal lowered if I miss payments?"   It's a good questionn.

Citi and JPMorgan have said they will create new teams to help borrowers restructure their loans but also to vet the need of doing so.   Sounds good on paper, but the actual practice of walking through hundreds of thousands of individual balance sheets to discern who can and should pay more or less is difficult if not impossible.   What criteria and formulas will these banks use in figuring out who can afford to pay or afford to pay a certain amount?   How much will the bank dive into your individual finances to determine your true ability to pay and how much to pay?   The manpower needs are staggering, if not impossible.

Anyone who bought a home in the past five years has been impacted by the bubble in some way.  Many likely overpaid for their home given the market today, and overpaid because the market surged in part due to speculators and homes bought with loans that are now being lowered.   Additionally, many ARMs that are now being reset are being reset higher to offset the cost of lowered payments to others.

If "fairness" is to be a theme in taxes, it must be in housing as well.