Stop the Foreclosures!
Flexibility in Terms of Mortgages Needed to
Adapt to a Changing World Economy
“People should not lose their houses because of an economic downturn or because of a relatively short-term decline in earnings when their long-term earning potential is not significantly affected.” – Roger Thoney
In today’s global economy, it is unrealistic to expect that a borrower’s financial situation will remain steady or steadily improve throughout the term of a 30-year mortgage. More and more people will experience “times of plenty” and “times of want” over a 30-year period. We must adapt to the changing world economy and make the terms of mortgages more flexible so that a person will not lose his house during a “time of want.”
The primary security backing a residential mortgage is the borrower’s capacity to earn over his lifetime and that of his heirs. The value of the underlying property really is just secondary security. A relatively short-term decline in earnings will not significantly reduce the borrower’s lifetime earning potential because the decline will be small relative to the remaining earning potential of the borrower and his heirs and it can be offset later in life through education, career change, or improved economic conditions. Since the primary security of the loan will be minimally affected by a short-term decline in earnings, basing default actions upon payment performance during a relatively short 6- or 12-month period is not reasonable in most cases.
Instead of foreclosure or refinancing, the terms of payment can be temporarily changed until the borrower’s financial situation improves. Banks can agree to not foreclose and accept any payment that is affordable to the borrower if the borrower commits to actively looking for work and making lifestyle changes needed to live within his current means. The principal balance of the mortgage will increase over this period and new terms of payment can be negotiated when the borrower’s financial situation improves. Thirty-year mortgages can be made into 40-, 50-, or 60-year mortgages if necessary. Some European mortgages have 95-year terms with heirs making the final payment.
Foreclosure is bad for both banks and homeowners, so there is no good reason for a bank to foreclose on a person’s house unless that person is unwilling to make payments and the lifestyle changes needed to meet a revised payment schedule. The changing world economy makes it necessary for us to “think outside the box” and change some of our past practices and ways of thinking. Making the terms of mortgages more flexible is one change that needs to be made.
If banks had adopted this approach when the number of non-performing loans began to increase significantly, then there would have been fewer foreclosures; real estate prices would not have declined to the extent that they have; bank write-offs would have been much less; and TARP would not have been necessary. We are enduring a severe financial crisis because we reacted conventionally to the effects of the hyperinflation in oil and failed to “think outside the box.”