Thursday, December 4, 2008

Take A Look At This Mortgage Modification

Recently, a number of banks and mortgage guarantors announced they will suspend foreclosures for 90 days. Merry Christmas. Similarly, to help stem the tide of foreclosures, Fan and Fred, major banks, and the FDIC have announced plans for mortgage modifications.

But mortgage modifications anger many people. "Anger" is an understatement. "Turn apoplectic," "breathe fire," and throw large objects across the room is more like it. This is because mortgage modifications are often given to homedebtors who wouldn't have qualified for a loan in a market that wasn't insane--debtors who have low credit scores, didn't accurately report income, and made little or no downpayment, plus opted for Adjustable Rate Mortgages.

Responsible mortgage holders, whose house values have dropped along with those of the irresponsible, feel punished for doing the right thing--getting/earning a mortgage the "old fashioned" way: scrimping, saving, paying bills on time, managing credit cards. Why should these folks, as taxpayers, help bailout the idjits?

We're of at least two minds on this. On the one hand, yes, it's galling to consider a mortgage mod for someone who has made poor choices. On the other hand, there are folks who did not make poor choices, and are still in serious trouble. And on the third hand (hey, wait a minute...) the housing market isn't going stabilize until foreclosures go back to their "old" levels...and until the housing market stabilizes, the entire economy will be seriously impacted. So anything that can help should, IOHO, be considered.

But this isn't the way to go about "helping" mortgageholders facing foreclosure. Take a look at this "actual" mortgage modification. A debtor has to really be in love with a house in order to agree to this kind of financial insanity, which includes turning a $475K home into a money pit of $840K. It's 176% LTV. And includes a balloon payment of $245K in 2035.


Courtesy of Mr. Mortgage.


Anonymous said...

This is why IndyMac has only been able modify about 5,400 loans, much to the disappointment of Sheila Bair FDIC chair who had to eat Indy's losses.

Montpellier said...

When I first heard of the first of these proposed mods - another proposal by Ms. Bair, though she wasn't yet holding the reins of a Subprime Mega-lender - I was really shocked, offended and PO'ed.

But, as our dear departed Tanta was quick to point out: there is no free lunch - these deals may appear, on the surface, like a sweet do-over, offered only to the imprudent - a boost up only for those who'd made bad choices - but as Mr. Mortgage points out, these are really a permanent debt trap.

So, really, who cares? If you were prudent, then the odds are you aren't completely trapped - ie, you've already got a decent 30 or 15 year and a nice low fixed rate. You also likely had a real downpayment and aren't underwater. Most importantly, you won't be trapped in the debt prison until it's time to go off to the nursing home.