Creative Loans Can Ease Nation’s Subprime Crisis

When reviewing the news articles on the subprime mortgage crisis, I see Congress responding with some legislative ideas. There is another way this financial challenge can be remedied without taxpayer money trying to fix it.

As a boy I recall watching Captain Kangaroo read the story “How to Make Stone Soup.” It is the story of three French soldiers who enter a small village and go door to door asking for food. They didn’t know the townspeople had seen them coming and had decided to hide their food. Seeing the town without food and therefore in crisis, the soldiers called the townspeople together in the square and told them they would teach them how to make stone soup, thus allowing the whole town to eat. They needed a large pot, water, a fire and three large round stones. Some of the folks volunteered and brought these items to the square. Thus began the making of the stone soup. The soldiers pointed out the soup would taste better if there were some carrots available; someone volunteered the carrots, then some celery, and soon some beef was volunteered. As you can see, the story of stone soup is that it can be made if the community works together.

This is the route to solving the challenge facing the nation and the many, many families who had subprime loans that are ultimately destroying their family life through foreclosure. As the AJC pointed out in a recent editorial, these foreclosures will lower home values in all our neighborhoods. Can you hear the bells tolling?

Follow the stone soup process: Banks can work together and make loans to the families now in crisis at a reasonable fixed interest rate, not an inflated subprime rate. The rate should allow the families to afford the mortgage.

This first step can be achieved through a consortium process whereby the lenders share a smaller risk in every loan, instead of all the risk in one loan. There is a history of this process. The Atlanta Mortgage Consortium was formed as a group of banks that shared the risk of loans to low-income borrowers. No lender owned the entire loan, only a piece of the loan. This takes leadership and cooperation, not competition, in the banking community.

But what about the current lender who has the loan and is ready to foreclose? This lender will lose a great deal of money on the loan, and they already have additional costs because of back payments and attorney fees in developing the foreclosure. This lender is accustomed to a “short sale.” A short sale is made by the lender when someone is willing to buy the property, prior to foreclosure, at a cost less than what will be lost through foreclosure.

Most properties lose an automatic 10 percent in value when they are resold after foreclosure. This is the cost of real estate fees and closing costs. There is an additional 10 percent to 20 percent in property loss because of neglect and damage when the property is vacant. So a lender is looking at 20 percent to 30 percent loss when they foreclose. If the consortium of banks buys the property from the foreclosing lender, following the short-sale process, under market value but not at a liquidation price, banks could then automatically resell it to the current family with a new shared-risk loan.

What is achieved is a new loan, with lower risk for each lender, at a lower rate to the borrower. The borrower does not have to leave their home, and the current lender, although facing some write-off costs, is not losing their full loan value through foreclosure. The community wins, as the family stays in their home, thus keeping up current market values, the loan is worked out and new loans are created at lower risk to lenders without the need for taxpayers stepping in with billions only to bail out the lenders, yet not the families.

Leadership, lender cooperation — not competition — can get us through this crisis. This is a challenge for the financial community and American families caught in “interest only” and high-interest loans. It is not the problem for all taxpayers. What we can see in this cooperative process is a national community coming together to create stone soup, so everyone wins and everyone eats the fruits of the American dream.

— Charles Scheid formerly managed the Atlanta Mortgage Consortium. From: www.ajc.com The Atlanta Journal-Constitution

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