Avoiding foreclosure vs. getting ripped off

A significant post at Naked Capitalism asks “Why Are NACA’s Innovative Mortgage Modification Marathons Below the Radar?”    Suppose a property bought for $300,000, with a $290,000 mortgage, has declined in value to only $200,000.   If the borrower can’t keep up the payments, the lender could foreclose, but would net less than $200,000 after expenses, while the borrower would lose the property.

The rational solution is for the parties to agree to a reduction in principal, write the mortgage down to, say $200,000, with payments reduced commensurately.  The lender is better off, the borrower is better off, and there’s no vacant foreclosed home for the neighbors to worry about.

But homeowners under financial stress tend to have a lot of difficulty dealing with their lenders.  Lenders want to pretend that the mortgage is still worth $290,000 (otherwise they might have to liquidate or raise more capital), and/or hope to be bailed out by yet another federal program, and/or lack competent staff.

The NC post implies that NACA can be helpful in this situation.  But, as one of the commenters there notes, thousands of other enterprises make similar promises, and many of these are predatory.  How is the stressed homeowner to find someone who will help, rather than rip her off?

NACA provides some reason to be suspicious:

NACA – America’s Best Mortgage Program
The incredible NACA mortgage allows NACA Members to purchase or refinance homes with:

  • no down payment,
  • no closing costs,
  • no fees,
  • no requirement for perfect credit,
  • and at a below-market interest rate.

Everyone gets the same incredible terms, including the below-market interest rate, regardless of their credit score or other factors.

I can only answer by treating it like any other purchase of consumer services. You ask your friends, google around to see what other folks say about it, evaluate the explicit promises made on the provider’s web site…. and maybe you guess correctly, getting real help. [Hopefully you are not working three jobs trying to make ends meet, lacking time to do any real investigation.] There is no sure solution, only ways to improve the odds.

A better remedy, of course, would be a system that allows people to obtain decent housing in a decent neighborhood, without having to mortgage their futures for an “investment.” That would be one benefit of a land value tax.  No, we wouldn’t expect our homes to appreciate in value, at least not beyond the general rate of inflation.  But we would need much less debt to purchase them, and more easily build a reserve of real savings.

A warning about the NACA web site, btw: They seem beholden to Microsoft and will display an error message on many pages if you are not using genuine Internet Explorer.  I think some other browsers allow you to pretend to be using IE, and possibly this will solve the problem.

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