Better Late Than Never

I meant to comment on an article in The Wall Street Journal last week, the thrust of which was that holders of distressed mortgages are more inclined to write down principal than they have been in the recent past. While it is more likely for a lender to negotiate an interest rate adjustment, in certain instances they are now willing to reduce principal as a last-ditch effort to avoid foreclosing on homes. 

Regardless of one's political inclinations, this is good news for home values. By way of example, assume you have a neighbor who is under water on his mortgage payments. He cannot afford to sell, because of his home value in relation to what he owes on the property. If renegotiating his interest rate is inadequate to alllow him to make his payments, traditionally there are only two likely results. He would either negotiate a short sale, or let the home go to foreclosure and thus the home would ultimately be sold by the lender. The result would be disasterous regarding your home value. Assuming your neighbor's home is similar to yours, that home (which was sold under distressed cirumstance) would now be used as a comparable home in any appraisal or comparative market analysis of your property.

Now assume in that same instance, the lender writes down the principal of your neighbor's home to such an extent that the mortgage now become affordable. The result is no impact on the value of your home. Your neighbor keeps his home and the bank loses less money than it would going through the foreclosure process. Moreover, the principal write-down should not affect an appraisal or comparative market analysis on your property, as there is no mechanism for this information to come to light when these reports are promulgated.

On a lighter note, I recently heard an amusing interview on CNBC with a woman who follows anecdotal evidence relating to the economy. At the inception of an economic recovery, the rate at which men purchase denim products, pink ties and underwear increases. Take that for what it is worth.