Nov. 15, 2008: A workout loan can be a win-win solution to avoiding foreclosure
We talked last week about lender "workout" loans -- a scheme lenders have come up to keep homes from falling into foreclosure. The premise is simple: If you can't pay your mortgage, the lender will write you a new loan that anyone could pay.
I'm not kidding. Let's say you bought a house in 2005 for $300,000. If you put nothing down, your payment might be $1,500 a month -- not counting taxes and insurance. But the market value of the home is now $150,000 -- a $750 mortgage payment.
As an investment, your home isn't performing all that well. You bought at the top of the market, and you probably can't even sell at a loss.
Worse news: Your hours at work have just been cut back.
You're not in foreclosure. You're making your payments. But you are an excellent candidate for what lenders call "jingle mail" -- mailing in your keys and your deed. This would wreck your credit -- for a while -- but you're looking at wrecked credit anyway.
But wait. Your lender's workout department wants to speak to you before you do anything rash. If you qualify -- which means if you have income -- they might suggest something like rolling both of your mortgages into a new interest-only third mortgage at a very low interest rate.
Your existing monthly obligation of $1,500 will accrue month-by-month as new debt by negative amortization. In two or three or five years, you will resume paying on your old debt while you continue to pay down the new debt accrued on the third mortgage.
If this sounds silly, it's because it is. The lenders are doing everything they can to make bad debt look good -- temporarily. But a workout could be a win-win for you. If the market rebounds strongly, you can refinance all three notes. And, if not, you will have lived almost rent-free for the next few years before you lose the home in foreclosure.
P.T. Barnum said there's a sucker born every minute. But who would ever expect to find suckers running our banks?
Greg Swann is the designated broker for BloodhoundRealty.com, a full-service Metropolitan Phoenix real estate brokerage. This article originally appeared in the West Valley regional sections of the Arizona Republic.
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