Loan modifications can do a lot to help our housing market recover but it’s really not enough. You see, loan modifications, at least the ones that actually improve someone’s situation, are typically best for those that are delinquent and can’t afford their existing mortgage payment. Unfortunately, there aren’t a lot of good programs out there for people who are current and can afford their mortgage payment.
So, from the eyes of someone that can afford their mortgage payment, it appears that only those that financed more mortgage than they can afford are the ones that are getting the best outcome. Sure, hearing that your neighbor was about to go into foreclosure and then he got a 2% interest rate, with no payment due for 2 months, makes you think this system is messed up. On the surface this is true, but you really have to peel back the layers of the onion to understand why it’s important for everyone that these homeowners get help.
I agree that each homeowner is responsible for the mortgage that they signed up for. But, when you have so many mortgage products on the market, that allow almost anyone to purchase a home, along with the fact that the American Dream of homeownership is forced down the general publics throat, it’s hard not to want to own a home. With that being said, let me digress on why these loan modifications help all homeowners.
Let’s say that we have two neighbors with similar homes and we’ll call them A and B. Let’s say that neighbor A purchased a home on a fixed rate of 5% and their payment was $1,000 per month. Now, let’s say that neighbor B purchased their home on a two year adjustable rate at 5.5% and their payment was $1,150 per month. Neighbor B did the adjustable because it provided a more affordable payment and had every intention of refinancing before the rate adjusted. Now, when Neighbor B went to refi, they were denied because they owed more on their home than it was worth. Neighbor A also owes more on their home than it’s worth but they have a fixed rate.
So now Neighbor B’s rate adjusted to 8.5% and their new payment is $1,550 per month. They are paying $550 more per month than Neighbor A for the same home. After a few months of struggling, Neighbor B just can’t make the payment anymore and is facing a foreclosure sale. The bank sells the home at auction for $30,000 less than what both Neighbor A and Neighbor B owed on their mortgages.
Now, this sale of Neighbor B’s home at auction has further driven down the value of everybody’s home in the area because it will be used as a comparable property by an appraiser. Neighbor B now has to move out and rent a home from Neighbor C for $1,150 per month because that’s what they can afford. If the bank would have worked with Neighbor B to reduce the mortgage payment back to $1,150, this whole devaluation of property wouldn’t have happened.
It makes no sense to send a homeowner packing only to move down the street and pay rent for what they were originally paying on their mortgage. This is why loan modifications help all homeowners.
