This is my column for this week from the Arizona Republic (permanent link).
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?
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Colin Brazendale says:
I don’t think they are helping the homeowner here. It might be a temp solution, but the owner is digging a bigger hole of debt. I say, cut free from your debt, take the know, but start over. But this time do if right.
The bottom of the property cycle will take longer to reach with this new arrangement. As soon as the bottom is reached, we can move forward to the next property cycle. The recovery! And then the boom!
November 15, 2008 — 1:22 pm
Lenn Harley says:
I have thought about this and written about it for a week and have come to the conclusion that our market will not recover for many, many years unless and until there is a MASSIVE write-down of mortgages across the country.
The government’s exercise in pumping Trillions into the financial industry has not helped. They money is NOT being used to cover losses for mortgage write-downs.
Mortgage companies are NOT vigorously accommodating home homeowners unless the home owner is in arrears and is already credit impaired.
The problem is that we have about 70 Million home owners who are HOSTAGE to a home on which they owe more than market value. They cannot sell because the home would not appraise. They cannot refinance because the home would not appraise.
Mortgage companies are giving lip service to mortgage modifications while they sit on Billions of tax payer money. Or, they are using the money to acquire other like institutions in a mad rush for dominance.
The real estate industry, critical to the financial health of our economy will not recover until home owners can sell and buyers can buy more than foreclosures and short sales.
Only a massive national write-down of mortgage balances in line with market values will bring our market out of the grave yard.
The government’s plan to pump Trillions of Dollars into the industry that invented and profited from the securities represented by MBSs is the most wrongheaded use of tax payers resources in my lifetime.
Lenn Harley
Broker
Homefinders.com
http://www.homefinders.com
November 26, 2008 — 9:12 am
Roger Hamilton says:
In the short run, it looks like a very good plan. However, if things turn for the worse, the owner will be stuck deeper in the debt hole.
November 28, 2008 — 9:09 pm