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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Tom Vanderwell says:
Greg,
You say it well. As a banker, I have to agree, there are a lot of things that are being done in the banking industry that we’ll look back at and say, “What were we thinking?”
Tom
November 15, 2008 — 1:22 pm
Doug Quance says:
>P.T. Barnum said there’s a sucker born every minute. But who would ever expect to find suckers running our banks?
You have heard of the bigger fool principle, no doubt?
More than half of the people in this country have shown us that they believe there IS something called a free lunch… and they are in line for theirs.
The bankers, as we have seen, are no different.
November 15, 2008 — 5:24 pm
David Shafer says:
You forgot about the time value of money. This would make that deal a poor use of any money. But if you just stop making payments (including taxes and insurance) until the bank throws you out, and take whatever money you can and put it into a reserve fund, or if you already have that into a decent investment you will come out way ahead. Renting in overheated markets makes much sense now. I bet you can get some great deals from the banks that own them!
But you are right about the craziness of it all!
November 16, 2008 — 7:20 am
David Shafer says:
Ok did I read that wrong. Do you not have to make any payments???
Now that would truly be a great deal for the homeowner.
November 16, 2008 — 7:22 am
Greg Swann says:
> Do you not have to make any payments???
The loan I described — which I have heard about but have not personally verified — would be an interest-only neg am on the amounts that would have been owed under the temporarily forborne notes. So the first payment would be the interest due on $1,500, the second on $3,000, etc. At the end of three years, the monthly nut is the interest due on $54,000. If the forbearance ends there, you now owe $354,000 in three amortizing notes, but you just lived for three years with ridiculously low mortgage payments.
November 16, 2008 — 8:05 am
Kevin Tomlinson-Miami Beach Real Estate says:
“Scheme” is a perfect word. It seems like the banks are going down the same road but with different “product.”
During the boom, banks used the word “product” all the time.
All these new products will unfortunately not keep these loans from going bad –they will only stave off the inevitable.
November 16, 2008 — 8:15 am
Brian Brady says:
Loansharking 101…Robert?
November 16, 2008 — 10:41 am