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Mortgage Refinance help please...

Mortgage Refinance help please...

Old Sep 4th 2009, 5:21 am
  #31  
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Default Re: Mortgage Refinance help please...

Originally Posted by Michael View Post
If that problem was there 5 years ago, nothing will change that now. That could possibly be one of the issues that the bank would have with a loan modification if they don't believe that they will carry the loan to term or possibly sell the home with equity in the future. This is why banks are hesitant to perform loan modifications on homes that are 50% underwater. In those cases, the borrower may still walk away in 5 years because the home may still be very underwater. But at 15%-20% underwater, the risk is not as large to either the lender or the homeowner.
This graph seems to suggest that a large number of modifications are merely postponing the inevitable:

http://1.bp.blogspot.com/_pMscxxELHE...recidivism.jpg
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Old Sep 6th 2009, 8:43 am
  #32  
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Default Re: Mortgage Refinance help please...

Originally Posted by Giantaxe View Post
This graph seems to suggest that a large number of modifications are merely postponing the inevitable:

http://1.bp.blogspot.com/_pMscxxELHE...recidivism.jpg
That is true. A lot of people racked up a lot of other debt (credit cards, cars, etc.) before they got a loan modification. They were borrowing from Peter to pay Paul and didn't adjust their lifestyle. Then their home price declined even further during 2009 and they decided that it wasn't worth making the payments.

Usually for a loan modification to work, other debts have to be minimal. For example if both spouses worked, were fairly debt free except for the home, both made about the same salary, one lost their job, their front end debt went from 30% to 60% due to the job lost, and they got a loan modification to reduce the front end debt to 40%, they may be able to make it through the tough times until they were both again working with lifestyle changes.

As an example, lets say a couple had a $140,000 mortgage at 7% which would make their mortgage payment be $931 plus about $300 for property taxes and insurance for a total front end amount of $1231. If the combined salary was $4,000 per month, that was a front end ratio of 31% and would double to 62% when the one person was laid off. With one person laid off at 3.5% interest rate for the next 5 years, that would lower the monthly mortgage payment to $629 (total front end $929) or 46% front end debt ratio. If the interest rate was 2% for 5 years, the mortgage payment would drop to $517 ($817 total) or 41% front end ratio. That still may be too much and the lender may modify the loan as an interest only 3.0% loan for 5 years (but add 5 years on the back end of the loan at 5% including principle payments), then the payment would be down to $350 ($650 total) with a front end debt ratio of 32.5%.

With the government subsidized program involved (not available last year and subsidizes half the amount of front end debt ratio reduction between 38%-31%, the bank will get more than the 3% indicated by the interest rate.

It may be tough but with unemployment benefits and lifestyle changes until both have jobs again, it may be possible to pull through the hard times. If both people can be working again in a fairly short period of time, they could possibly end up in better shape than they were before the job loss possibly paying down the mortgage quicker. If they were lucky enough to get back working quickly, they should have savings of about $35,000 over 5 years to pay down their mortgage when it adjusts to 5%. I know there is a lot of ifs but that is the theory.

The closer the front end debt ratio gets to 31%, the greater the chance that a loan modification will work. Last year the banks did not have any incentive to get to a front end debt ratio to 31% (your graphs are for modifications done in 2008). Hopefully home prices have also bottomed out making it less likely that people will walk away from their home.

As far as the OP is concerned, he has a disadvantage of being 65 so he may never pay off the mortgage but at the same time, he will get extra income shortly from social security supplementing their income.

Last edited by Michael; Sep 6th 2009 at 9:19 am.
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