Wednesday, June 24, 2009

Loan Mods = Tomorrows foreclosures

  • IR : Interest Rate - Current Interest Rate for the loan.
  • SR : Start Rate or Initial Rate - Initial Interest Rate for the Loan
  • RR : Reset Rate - Rate at which the loan will reset
Much of the drop in REO activity can be attributed to loan modifications. But the million dollar question is will the loan mods work. Considering the re-default rate is over 50% after 6 months I think the answer is obvious. Loan mods are not working. The ones that survive in the short term will very likely default a few years down the road. Unless of course the bubble prices return. Chances of that happening are about the same as for me marrying Salma Hayek.

Why wont the loan mods work? The only way a loan mod will work is if the principal balance is reduced to market value. Practically zero of the loans are getting principal reductions. And personally I don't believe any loan should get a principal reduction. Most of the loan mods are simply getting interest rate reductions or freezes at the start rate of the loan or some other favorable rate. A few loans are getting extended terms (this is idiotic). The end result is that the home owners are still stuck miles underwater. Sure they may be able to afford the payments but they are trapped and will never be able to sell. I suppose if the payments are similar to what rent would be, then you could justify it by saying "it's the same as rent". But renters can move!

Many of the loan mods are only freezing or reducing rates for 5 years. Then what? I don't think anyone with half a brain thinks prices will be any better in 5 years. Are the banks going to do another loan mod? We are just turning today's foreclosures into tomorrow's.


Kane said...

Yeah, pretty much. Why foreclose today when you can do it tomorrow (when the economy stabilizes)?

The press eats it up as "the bank is helping out thousands of homeowners", and the banks get to postpone the inevitable write-off to another day. Win-win, right?

Empire Realty said...

90% of e mods I have had offered to my clients or seen take place have been on the terms but almost never on the principal.

They offer guys that are $200k upside down a 40 year 2% fixed rate loan that drops his payment to a very reasonable monthly payment. This is very temping and every client that has gotten offers like this has wanted to take the bait. Once I explain the probability that they will be upside down for a decade and that it make better business sense to walk they normally listen.

I am presently trying to get the banks to help these people is getting a good short sale offer in and then submitting the present homeowner's offer of $30k above the good short in an attempt to get the banks to modify the loan at reasonable terms.

I wish the banks would really try to help the homeowners that are still in their homes, ok ok I am still waiting for that utopian life too.

OSA said...

i asked this question before. why would banks rather foreclose on current homeowners, go through the hassle of trying to sell at a greater loss. why not modify the existing homeowners loan? they are going to lose the money anyway? makes no sense

Kane said...

Two reasons why they rather foreclose - the current occupants already have a history of not paying their bills and because many of the loans have been packaged/resold as "grade A investments", it may not be in the bank's legal right to simply renegotiate the terms, especially on the principle.

OSA said...

thanks for the reply. maybe they can do something depending on situation? i am current on my payments and am a prime borrower / have a prime loan

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