Tuesday, January 26, 2010

I got a loan modification, now what?

Note: The thread title is deceptive, I didn't get a loan modification. That would be especially difficult since I rent. I thought it apropos based on the NPR article I read today.

NPR hits the nail on the head about a homeowner who successfully got a loan modification. The question now becomes... Now what?

Salter needed to lower his $2,300 monthly payment because he lost his job as a human resources executive — and with it, 40 percent of his family's income.

It took a year, but his lender, Chase, offered to extend the mortgage from 30 to 40 years and lower the interest rate from 6.8 to 2 percent. That would cut his payment roughly in half, which makes Salter's initial reaction to the offer seem bizarre.

"I call it extortion," Salter said. "Government-backed extortion. I mean, who in their right mind would accept this? No one would. No one should."

The mortgage modification solves a short-term problem: It allows Salter to stay in his home. But it doesn't address a long-term issue. Salter's mortgage is about $300,000. Today, his home is worth $125,000. He's underwater.

To prevent fraud and to gain on any upside in housing lenders will defer principal to the end of the loan. The balance isn't due until the end of the loan. This borrower got $107,000 deferred. He is just now realizing he is renting the home from the bank. He always was. I just wonder how many loan mod success stories will come to the same realization.


Rob Dawg said...

Principal reductions. Two words you'll never hear.

Anonymous said...

A little snooping @ the recorder's office shows the math doesn't add up on this one.

The article claims the mortgage balance is $300k, and the modification calls for a $100k balloon, 40 year term, and 2% interest.

$200k financed @ 2% for 40 years is <$600 a month, yet the article claims the revised payment is $1200/mo.

His original payment would never have been $2300/mo with his original loan balance of <$270k, unless his interest rate was >9%, and he claims it was 6.8%...

More lazy reporting from the msm

Effective Demand said...

Rob Dawg,

If you do hear of en masse principal reductions it will be because the government/taxpayer is footing the bill. I would never say never. We have seen the extraordinary and insane measures the government will take to "support" housing in its current form.


I never did look this one up in the records but if they are looking at full PITI I could see the math working out.

Anonymous said...

Nah, the math doesn't work even with piti unless he's paying $500/mo for insurance. Prop taxes are under $200/mo for the property according to Zillow..

Effective Demand said...

Here is my math:

300k @ 6.8% Amortized over 30 years: 1955 / mo

300k * .01 for property taxes: 250 / mo

I put in $100 for insurance, im sure thats a bit low.

Total: $2305

Perhaps you assumed a non-amortizing loan?