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OMG! Interest Only Loan Modifications? Have we learned nothing?!

Interest only loan modifications may be on the horizon. Earlier this week, JP Morgan Chase and BofA announced their intentions to submit a proposal to President Obama, expanding the current Home Affordable plan to include a potential interest-only period. Their argument is that more borrowers will qualify for the HAMP program if the amortizing principal aspect is left out of the equation. While they admit that they may only be postponing defaults, their rationale is that a borrower whose income has been cut is already unable to make the current payment so reducing it to an interest only amount may allow them time to recover the ability to pay.

Have we learned nothing from the past three years? Of course more borrowers will qualify for the 31% DTI required for the HAMP program if you give them interest-only loans, just like more borrowers qualified for home loans in the first place using this particular mortgage vehicle. Isn't that one of the reasons we are in the current situation? People in homes they can't afford? Borrowers put in loan programs not designed for House Sinking their needs? IMHO any interest-only loan modifications are foreclosures and short-sales waiting to happen, especially in areas like Las Vegas where 81% of homeowners (yes, that is an accurate number) are upside-down in their property. Postponing the inevitable is NOT in the best interest of the borrower.

Even mortgage investors like the MIC are against this idea, calling it "extend-and pretend." Perhaps an interest-only period in conjunction with a principal reduction of some sort would give borrowers more of an incentive to keep their home after riding through the difficult economic times, but these would create other issues and present an accounting challenge for the banks. Leave mediocre enough alone I say. Adding interest-only loans into the modification process is a time-bomb waiting to go off.

Posted by Kendall Aschoff -Henderson Las Vegas, NV Mortgage Loans on 10/16/2009 12:37 PM

Comments (167)

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167 Comments on OMG! Interest Only Loan Modifications? Have we learned nothing?!

OCT

Hi Kendall

Thank you for sharing an excellent article. We can learn form Active Rain blogs.

John Pusa

Isn't this how it all started??? Amazing!

the banks have no new regulations and nothing has been learned!

Kendall - Thanks for sharing. Hopefully, this will not become a reality, for Florida is in the same shape as Las Vegas.

Kendall - I haven't heard of this potential recipe for disaster. Yikes!

You said it John, Dalia, Amanda, Sharon, and Jason--seems unbelieveable!

How about balloon adjustable first mortgages coupled with pick a payment second mortgages? That should give borrowers some breathing room.

Weird in light of Bank of America's reporting losses today.

This is flat-out preposterous. More funny math on the horizon, I see...

I've got an idea why don't we do stated income, stated asset, interest only loans. Oh wait we already tried that

Hi Kendall -- Unbelievable. If this goes through, I will lose all faith that the lending industry actually cares about the consumer. I hope this time, consumers are wise enough to take responsibility and just say NO.

I have used IOs exclusively for my personal real estate purchases and support what these lenders are trying to accomplish. The markets will recover, and instead of foreclosing on the properties that support the IO feature on a jumbo loan product, the banks are saving many otherwise responsible homeowners from going "upside-down". There is also another attraction to IO loans. And that is to say that the appetite for IO products in the institutional markets is still high. Why? Because lenders who service these products have better defined yield and duration of their assets. Additionally, IO loans can be "stripped" of the principal component and packaged into an IO or PO mortgage backed security or Collateralized Loan Obligation (CLO).

I, for one, have never understood why I should pay down principal when my cost of funds is much less than the return on investment that I could obtain by NOT paying down the principal. After all, the present value of $1 today is much greater than it is in 10 years when I sell the home. I'd rather reduce my cash proceeds at closing and have the cash to play with now. But then again, I might be different than most. I like to think of myself as being a responsible homeowner and responsible investor.

As the saying goes - the definition of insanity is doing the same things over and over looking for a different result. DUH!! All we are doing with shenanigans like this is prolonging the agony. But then again, the suggestion is from BofA and Chase.

Interest-only mortgages should be outlawed!

Ok it goes like this: Watch this video and it will explain everything...Bailout Explained...or you could say IO Loans explained

What's funny about Chase is that they haven't even gotten back to homeowners who've applied for a loan mod under the plan. They are a part of Making Homes Affordable and don't even have the common courtesy (even if they are overwhelmed with loan mod packages) to at least put a simple call or at the very least, send a "form" letter out to their borrowers acknowledging receipt of their package.

Back to the topic at hand....I truly believe that if someone is losing their home due to a temporary setback such as job layoff or sickness, they should be helped but if someone took out an interest only loan or a no doc and their financial situation hasn't changed at all except for the fact that now the principal is due along with the interest...then tough luck! You knew back then that you couldn't afford it.

I know it sounds ridiculous, but think about the other options from both sides. For the home owner, they could short sale and rent which does prevent foreclosure, but most really just want spare their credit and stay put. Many of these homeowners agreed to a neg am or pay option arm just to get into this home in the first place so to them this is their dream and they just don't want to give it up and become a tenant. Even though IO is only a bandaid, at least their principle balance isn't increasing every statement.

From the bank side, a short payoff is a huge loss as is foreclosure. If the banks feel like they will be in a better position in 2 years (or whenever the modification agreement ends) they're better off keeping that borrower in place paying the mortgage and waiting out the market.

I hear what you are saying, but the IO mods are still a step up from the neg am nightmare most were to begin with. This is not an origination, its a modification to an existing (toxic) mortgage.

Kendall, The problem is lack of equity. Without a principle reduction this plan and any others will fail. Prolonging the inevitable.

BUT, it will help some keep their houses. Which will lead to a fewer bank owned and start to stabilize the markets. Especially in the hard hit areas. True, they will NEVER pay off their house, but I will give them an opportunity to continue to live in a home and the markets will stabilize.

Don't be too shocked if you see IO refi or purchase around the corner too...

If this happens things will never clear up for the real estate market.

This is exactly why I have no sympathy for the banks

It's great for the banks. It gives them more time to collect more interest and also more time to hide the real value of their assets. The homeowner will probably end up making payments for a few more years and when they want to sell for whatever reason, they'll be right where they were before, less a few years worth of interest payments.

This is TERRIBLE! What happened to pay OFF your mortgage? I tell every client to make an extra 1/12th payment each month to reduce thier mortgage to 23.7 years. KNOWLEDGE IS POWER!

Wow, oh my gosh. Are we ready for history to repeat itself.

Incredible - we HAVE learned nothing!

All this stuff will come back, just the way it was. There has to be a better way!

DEAN & DEAN'S TEAM CHICAGO

What I call. . .a MODIFICATION MORTIFICATION . .I list many of them. . .and they keep calling and calling

That's ridiculous. In the price range I'm in, the principal is usually less than $100 a month for the first umpteen years, so what difference is it going to make on affordability?

Hi Kendall, Smells like vote buying to me. Banks want their loans guaranteed...and our elected officials want those votes.

This is just RIDICULOUS in my opinion. Have we learned nothing? Shaking my head in disbelief.

I know a guy that is getting a 2% rate. I don't know how long he will last either.

The assumption here is that people actually have some discipline when clearly that is not the case.

this would allow them to leave current rates in place and not have to reduce them permanently. so as the recovery takes place and incomes increase they can just reamortize.

Shame, Shame, Shame!

It's amassing how many would limit people a chance to save their homes, just to claim they're holier than tho!!!!!!!!!!!!

If nothing else consider this delaying foreclosures means fewer low priced REO's in today market.

Bill

wow! seems to me like they'd be in less doodoo if they just reduced the buyers' loan amounts to the current market value and go from there.....just my opinion...the home was most likely overpriced in the first place. they loose money either way but i think they'll loose more if they let the current foreclosure crisis continue...

BB is right, the lack of equity is equal to a lack of commitment! It's taking more than one turn on this merry-go-round for folks to learn!

Jesse--That's funny--Option ARMs could be next too!

Missy--Yeah, 2.2 Billion lost and this is the best they can come up with?

Chris--Let's hope the consumers to wise up

Weichert--I am all for mods for people who currently have option ARMS, ARMs, or IO loans, especially in the JUMBO market. I am NOT for having them modified into an interest only loan unless they are currently in one. The banks are talking about using this for ALL consumers, even if they currently have a P&I loan. Interest only loans were meant for people like yourself who understand the time value of money and investing. Unfortunately, too many were given to people who wouldn't qualify under traditional methods.

Gina--see my reply above to Weichert. I have no problem with anyone getting a mod, my problem lies with the type of mod they get. If Chase and BofA have their way, they will be able to take a current P&I loan and modify it into an interest only for a period of time.

New Team--I see your point, but in my book two wrongs don't make a right. I believe a staggering number of the people who are put into an IO loan will inevitably default on the home down the road. Wouldn't it be better to short sale the home now, suffer the blow to the credit report, rent for three years, and then get back in the housing game if the economy turns around? Seems that waiting through an interest only period may be more deterimental in the long run.

Bryant--I have long been a proponent of short-refis. Reduce the prinicpal--reduce the payment. Tough part is the banks don't like only being able to write that loss off over one year when they can write off the foreclosure over five.

Mike W--Here in Vegas, our property values have dropped so severely that a majority of our homeowners will still be underwater in 5 years (even 10 according to some doomsayers). I'd rather have them get out now, rent until their credit is repaired, and buy again in three years--they will still come out ahead.

Tim--You hit the nail on the head--bailing water from a sinking boat.

Fernando--I like that "Modification Mortification" Trademark that sucker!

Dee and Russell--See my reply to Bryant above. Viva the principal reduction!

This is really a stretch (and I never want to be accused of thinking like a BofA analyst), but maybe their rationale is that 1) this will give homeowners a little more time to recover, and/or 2) this will give the market time to recover -- meaning if they do have to take the home back it will at least have gained some market value over the next 6-12 months. I don't necessarily believe that, just trying to figure out the bank's reasoning.

Kendall: I am SO WITH YOU on your saying "extend and pretend" on a program like this :shaking head:

OCT

Isn't this what destroyed the California market? Interest only loans!!! What are they thinking?

Wow, Kendall. I am stunned at the news you have presented here. Truly...words cannot describe how ludicrous this plan is, in my opinion. Again...wow...

I don't think it was the interest only loans that did it, as much as it was the TEASER loans, then and the adjustable ARM's . . .

Everyone knows that the amortization on a loan doesn't even touch (reduce) prinicipal for years and years into the loan.

They are doing just the opposite of what they should be doing. They should make them PRINCIPAL ONLY loans for a period of time until the mortgage balance is in line with the current market.

That way the banks would not have to take the write off of debt forgiveness all in one fell swoop and the borrower would have more incentive to keep their homes instead of dumping them. The borrower would also have much more incentive for making their payments. This is not rocket science.

Interest only was not the real problem. No money down and stated income is what did the mortgage industry in. JP Morgan did not provide those type of loans which is why they have not suffered like most of the rest of the banks.

If you were talking about new loans with new buyers this would be terrible. But since we are talking about loan modifications I don't think it a bad idea. You can't save everyone, but with this program it may save some homeowners that otherwise would be having to sell short or be foreclosed on. It buys them more time with a lower payment to get their finances in order or for the market to recover.

Every market is different. Is the family upside down $400,000 on the west coast going to be saved? Probably not. But the others that are upside down $10, 20 30 thousand have a fighting chance.

As a country and an industry we don't need more foreclosures (REO agents excluded). We need to find ways to slow the leak and this may help.

Here's the tire kicker. We don't know when the housing market will recoup. However the bank knows something we don't. They have annalist that are watching trends waiting for an opening to profit from this down market and recoup some of there earning. We all know that it all comes down to profits. Banks care nothing about people only profit.

On the contrary, the point of the modification is to lower the payment for people so they can afford it.

Interest only loans are not negative amortization loans.

Additionally, these loans will not have balloons, will not have a recast feature like the neg am deals did where it will take the payment way up and unmanageable.

I am not a big fan of what the banks have done, but this makes sense because of the affordability factor and most of all it will keep another foreclosure property off the market hence preventing further valuation declines.

Fred Glick

Great. Bamk of America just posted a 2.3 BILLION loss in the last quarter and here they go again,slopping at the trough of greed. Just another bullet in the ammo belt for the consumer to blame REAL ESTATE agents when things go sour again. NAR should be howling about this.

If it stops more foreclosures I'm in favor of it. It is the foreclosures and short sales that's pulling down appraisals. Whatever it takes at this point.

This is an option to help those people who would otherwise be responsible. People are losing their businesses and jobs with more to come. This is a far better solution than forgiving principle as many people hope to do with the credit cards etc. Modification loans need to have strict guidelines however and for people who have put little to no money down on a property, it is definitely a gamble. Otherwise, I am all for assisting those who have held mortgages and paid faithfully...until this latest crisis caused by banks and people buying beyond their ability in the past 3 years.

Putting in a false bottom uderneath real estate values, i.e. (interest only, 40, or 50 amortizations) will only temporarily keep values from falling. Ultimately, values will drop because households are still experiencing job destruction and the loss of income. Values need to drop further to be more inline with current incomes, it's as simple as that.

Not a good idea. I think they should be modified into a traditional 30 year mortgage.

I have to disagree, putting off the inevitable might not necessarily be true. Having a family in the home and staying in the neighborhood, rather than having another vacant foreclosure falling to ruin seems much more preferable.

What your saying is that families should just be foreclosed on pronto, be forced to move and rent - what's the difference between renting and interest only? Any idea that allows a homeowner in distress to stay in their home, is a good idea, as far as I'm concerned.

What's wrong with making the payment affordable with an interest-only loan?

Approximately 31% of loan mods default within a year anyway, and this is simply a way to allow people to actually make their payments. There is nothing to preclude anyone from making an extra principal payment if they want to do so.

A P&I payment is not going to pay a loan down that quickly. Reducing foreclosures will increase property values more than a few P&I loan mods.

GGGEEEEZZZZZ Why am I not surprised. No kidding I was just talking to someone last night over a Margarita... That interest only loans was the beginning of the mortgage mess we are in. The people in these loans are either crazy or were lead blind by greedy lenders to get any deal done, no matter what the cost down the road to the homeowner.

That and the 100+% loans. Greed and the idea that everyone should own a home, the american dream got us in trouble. Some people just cannot afford to be in a home, sad fact, but true.

I surely hope Obama says What the HELL are they thinking!!!!!!!!!!!!!!

I will say that I understand and agree with much of what is being said but lets try to understand that having options is not the problem. We cannot save people form themselves forever . Our greatest asset we have in this country is freedom. Some people make good decisions, others do not.

That being said, one important fact you need to realize about interest only loans (also the neg am loans) is that it is the only product that will allow the monthly payment to recalculate itself if a large payment is applied. In the days prior to IO loans, people who bought a home prior to selling theirs, were stuck with a high P&I payment even if they dumped 100k down on their mortgage. The only way to change the monthly payment was to refi, and in NY especially its costly. Also, for people who get large bonuses or whose income comes in large spurts (like home builders) the loan is great since they are able to benefit from putting a large amount of money down on their mortgage payment.

Anyway, dont blame the casino owner for people spending their entire paycheck on roulette.

I'm not surprised about any of this. I've been beating the war drums on this subject for months. Check out my series of AR articles on this subject if you want some eye opening news about LM's. These things will bring the houses of cards tumbling down all around us and we'll never get out of this mess. I will add you on to my associates and keep in touch. Thanks for the info.

http://activerain.com/blogsview/1235113/loan-modification-companies-new-business-model-or-risky-scam-chapter-3-resources-for-home-owners-in-need-of-loan-modification-advice-

Hi Kendall,

It's good to see that this issue is getting the weight that it's due. I just did a blog on this topic as well. If you're interested in more responses, please see below:

INTEREST ONLY MODIFICATIONS...NOW THERE'S A DUMB IDEA

In California lenders are only cutting interest to get to the 31%. Principal reductions are very rare. MHA has a principal reduction component, where if a homeowner makes on time payments while in the program the gov will subsidize a principal reduction of $1000 per year. By the way new law in CA. No one, not even attorneys can take up front money or a power of attorney to do a mod. That means that even if you wanted to do it as a favor and help, you can't. Lenders around here just didn't want to deal with lawyers and they got their wish through lobbying.

I support any type of loan that makes sense in an appropriate situation. To reject Interest only loans out of hand is, IMHO foolish. IO loans are tools in your mortgage toolbox. We might compare an IO loan to a hammer; using it wrong can result in a smashed thumb but does that mean we should outlaw hammers?

Underwriting is the key. IO loans, properly used should not create any more problems than any other type of loan

"This is a great time to buy a house".

Akron, Ohio

Having more vacant, distressed properties on the market does not make sense. Even if it's a band-aid, helping the homeowner stay in their home seems to be more logical to me.

Linda Metallo, Re/max Impact, Lockport, Il.

Extend and pretend is the only way the Obama can keep the small country GDP sized bonuses flowing to his Wall St. contributors. The second the lienholders have to recognize the foreclosures on their balance sheets, Goldman Sachs will lose all profitabliity and Tim Geithner's Goldman Sachs buddies will have to cancel their Maybach orders. Obama will not treat his bribers er, contributors that way.

The corruption of this administration makes the Sviets look like raggedy street people. The looting of America continues. The people get the government they deserve.

This is CRAZY!

I am shocked at some of the comments I see here by my colleages. Who cares about the banks, BofA lost $2.25B?!? Oh well. Too bad for them. What IS important is keeping people in their home. What's the diff between renting and int only? If you can get an interest only loan, and IF the market recovers, then it's win-win. If not, then you have only forestalled the inevitable, but in the meantime you kept yet another foreclosure or short sale OFF the market while these idiotic banks figure out which way is up!

Jeff Burnham, Rosen & Co. West, Las Vegas NV

Kendall.. You know that saying "History has a way of repeating itself"? But this soon?

On the upside.. I had an interest only mortgage for a while. It worked for me. I was just getting started in real estate, and when times were tough I knew I *could* just pay the interest. This never happened because I knew I would get nowhere by doing that. But the peace of mind knowing this was in place gave me less stress.

I've since converted to a fixed 30 year mtg.. but what I'm getting at is that this could work.. FOR SOME people.. not the majority. It is NOT a free ride by any means.

valerie osterhoudt

I guess the banks are getting more comfortable owning real estate and renting it to "buyers"...

Coming from Charlotte, NC, where Bank of America is headquartered, the whole idea of interest only modifications in the face of Bank of America's $2.2 BILLION loss in the third quarter seems ridiculous.

HOWEVER, it seems the current loan modification programs aren't working hard enough to find solutions. I don't think new ideas should be dismissed out of hand. We need some creative folks working together to get us back on track. You're right, we can't save people who can't save themselves, and many many STUPID, indefensible loans were written prior to the crash, but there are homeowners out there who played by the rules and find themselves in distress. If the banks can find a way to keep these people in their homes without dragging them further under water, I think those ideas should be fully debated.

I really liked your post, and LOVED the picture of the house sinking under water! Great job!

WOW! All great comments and I too loved the sinking home. Ben's comment about the banks becoming acclimated to landlordship was spot on!

I can see both sides here. With the growing number of foreclosures and short sales, the banks are becoming more and more overwhelmed. The property values will continue to plummet as more and more foreclosure/short sale homes hit the market.

On the other hand, a lot of the people who are in trouble are the ones who had IO loans and either didn't or couldn't refinance out of them.

I think what this country needs is "Adult Responsibility 101" in high school. Teach everyone how to balance a checkbook, how to save appropriately, and the correct way to use a credit card (pay it off every month and if you cannot, then you don't charge to it or own a credit card). We've gotten so deep into keeping up with the Jones' that we cannot possibly sustain this lifestyle.

But, if the IO loan modification will help keep people in their homes and NOT flip to a 12% interest rate in 12 months...then maybe it's worth taking a look at. I do not know all of the logistics of this program, so it's hard to comment on.

The thing that got a lot of people in trouble was IO flipping to a high interest rate after x amount of years. They just simply cannot afford it. But, if they can afford the IO payments, the bank will lose less money on the property, the HO will be able to stay and it will all help the market recover a bit.

I think it's worth taking a look at (and reading the fine print). We'll have to see what happens.

I have a question for you. I have been contacted by 2 different companies this week looking for local representative help homeowners work their loan modifications with their lenders. I know there are a lot of companies out there taking advantage of people who have been overcome with hard times. They claim they can work the loan modifications out for the homeowners, even though the mortgage companies have not gotten around to offering this to the owners. Is there third party companies who can help the homeowners modify their home loans with the mortgage insurance companies? Are they legitimate?

WOW- I really see a lot of high and mighty comments and perceptions here. How soon we do forget! Let's not forget also that most of us were all too happy to bank those fat commissions at the time. How eager we were to call our favorite loan officer to get a good deal for our clients and just get our buyers qualified and the deal done. Further, it is naiive to think that this situation is going to turnaround if folks will just exhibit more will power and pay a little extra on their mortgages each month. Are you kidding me? Knowledge may be power, but consumer confidence is key to stabilizing the terrible situation that we are in in this country and most of that centers around stabilizing the housing market. Displacing more homeowners, creating more empty REOs with green pools and unkept yards, and driving values down even further in neighborhoods is not going to do that. From what I see, loan mods have not been terribly effective so far. They are too little, and too late, in some cases. So, I say let the banks propose changes to the loan mods. It may get us closer to the stabilization we all so desperately want - especially the folks that would like to stay in their homes, raise their families in their homes, grow old in their homes, and yes, maybe, pay off their homes!

Thanks for speaking out on this issue Kevin, If we can't learn from the past, we are doomed to repeat it!!!! As real estate professionals I think we have the responsibility to influence change for the long term, rather than for the quick sale and immediate gratification.

UGH....This sounds like another way for banks to preserve their money and prevent home owners from making true modifications that will help them long term.

Wow, I'm surprised at the negativity here. Whis is key here would be the guidelines for offering the IO period. If these loan mods could be structured to have an I/O period and recast to a fixed rate low interest rate this would create a win'win.

The question is if the banks will truly evaluate the clients financials and put together a program that makes sense.

I'm with Beth on this one. Way too many of the comments are judgemental. There is an opportunity here.

Do I have faith in the banks, no. That said this could work.

IO loans were so wrong to begin with. The writing was on the wall all along. BAD IDEA. If you can't afford it now-don't buy it. Many consumers will not wise up, it's a case of "I WANT MY OOMPA LOOMPA NOW"

Interesting comment we will see what happens next.

A 5 year float period of I/O might not be as bad as it sounds. I would hope that the job market and housing market might have had some serious recovery by then. If people can't make the payments when the I/O period is up, it is very likely that their houses might not actually be upside down. If people have stable jobs and reasonable credit I say let's try to keep these families in their homes.

Monica--It does smell funky. Sounds like they'll do anything to get that Fed money

Jay--Good point, assuming incomes increase :)

John--It may be a stretch and it may not be. If I believed that the banks had borrowers best interests in mind I would think it was option 1. As a pessimist Option 2 makes more sense--they'll get more money on the foreclosure down the road--not a very altruistic thought.

Carla--Good thought. The interest only loans were more of a problem on the borrower mind-set side. "My home is always going to go up in value." All those programs you mentioned were designed for specific borrowers and circumstances and were abused by the lending industry.

Nancy--I agree! Haven't heard of the Principal Only loan before (and unfortunately probably never will again). I like that idea. I'm hoping that Barney Frank will be able to change the accounting rules to let them write the principal reduction off over 5 years

I just saw an interest only loan mod finished on a $900,000 loan. Unbelievable. I hope it works out for all parties concerned.

What about the people like "Realtors" that had a big drop in their income, this might help. I know one case that it would help the homeowner if this were to happen. Everybody needs to get off their high horse and stop making judgement calls. How about if they let this happen for people who have owned their home for more than 6 years. That way it leaves all the people out who bought above what they could afford, but it would help people who really need help because of lose of income.

Then again, what are we talking about this for? There are no modification happening out there. 5 million people need them and they only allowed 1 million. Obamas plan is NOT working. Banks don't have to do anything. If your loan got sold to a hard money lender they do not have to follow any guide lines set by the HAMP. The person is screwed!

Frank--No skin in the game was the biggest culprit. "Liars loans" the second.

Brian--You make a solid argument, and it may very well be of benefit to those who are only slightly upside-down, but IMHO it's unnecessary. A homeowner who can't qualify for a loan mod at 2% interest P&I should probably no longer be a homeowner, bad economy or not. I don't believe the banks are proposing this idea because they care enough about homeowners to give them the extra needed time. Thanks for your insightful comment.

Malendaz--Spot on!

Fred--See my comment to Brian above or Nancy's on Principal Only loans. Also, I think in most cases it will only delay the foreclosure, especially in areas like Vegas where we are so upside-down.

Tim--Yes, NAR and NAMB both should be.

Great information!! OMG!! disaster written all over again!!! What are these people thinking?

I agree with those here that say it is not the best solution - but it is clearly not the worst one either. If an IO payment means the difference between a family staying in the home and comfortably making payments for the next few years, then that is a great result - one that all Realtors should welcome. Owners can always make period principal payments when they are able to. At least it seems that Chase and BofA are getting more creative by offering more market solutions for troubled homeowners, not just one off-the-shelf solution for every consumer. I say, it's about time!

Whatever B of A, Chase or any other major national bank does, you can bet will help their bottom line. I can't say that I see a problem with assisting homeowners who've become behind on a payment due to lost jobs, medical etc...

Maybe the majority end up defaulting in the long run, but if modifying the loan for a temporary period, long enough for distressed homeowners to 'make-up' payments in arrears instead of slamming the hammer on them, works for some, then it works for me.

The banks are run by the government the idea is to get as much as possible and keep people in debt as long as possible. I do not blame the banks too much for creating this mess, they were regulated into it. But now it is about the government taking control of how we live through a lending monopoly and the banks. No Bail Outs, let the chips fall and let everyone get on with their lives.

If they want to help, let people buy a new home two years after foreclosure, cut taxes, and provide more loan options for self employed.

EW--Principal reductions will stop foreclosures, modifications (especially interest-only) will delay them in my humble opinion.

Kathleen--To me it's like putting a band-aid on a gaping wound. It will slow the bleeding but not stop it. Seem to me we need to cauterize the wound with principal reductions not string people along with interest-only loans. Seems a disastarous road to me.

Peter--my point exactly.

Mary D.--Hate to sound cold, but not everyone should be a homeowner. If you can't afford a 2% Principal and interest modification, no matter what your economic circumstances, then an interest-only loan won't be much help. Of course I want to keep people in their homes if possible, that's why I am a proponent of principal reductions (which, by the way, stabilize property values better than any other vehicle). The difference between renting and interest-only is not on a monthly basis but at the end of the term. Neither will have any equity in a property unless values jump significantly, but the renter is not saddled with a property that may still be underwater. Don't think of it as "forcing" them out of their homes, think of it as them making a financial choice to leave.

Great post Kendall! Although not ideal, I don't think this is as absurd as it appears, and this is already happening quite a bit. I've referred many clients, friends & family to an attorney for loan mods, and several of them have received I/O mods if they truly couldn't afford the fully amortized payment. Most all of them convert to a fully amortized payment at some point, so eventually principal will be paid down. What would be really insane is if the lenders started giving them neg am loan mods, but as long as their principal balance isn't increasing every month and the homeowner has a chance to get back on track and stay in their home, I think it's a viable option.

Kendall, I have to disagree with you-- think this way for a moment: if a homeowner is in trouble trying to make PITA payments, but sincerely wants to stay in his home, lowering his payments to an (honestly) affordable amount will give him a chance to do that.

Early on in the loan mod process, there was a lot of talk about lowering the interest paid to 2%, which could be a homesaver for many people-- but not for all.

Going to zero interest, after fully qualifying the borrower for the resulting payment, makes sense to me. Now he is paying PTA for a defined number of years. That allows him to stay in his home, feed his family, pay his other bills-- and because he is not adding an increment of unpaid interest to the loan balance each month, he will benefit from the appreciation (remember those great days!) of the home.

And the lender will benefit also-- no costs of reposession, no costs of selling the home later.

I know there will be some takers of this mod who will not be able to make it work-- sudden illness, loss of job, transfer to another city, etc, are some legitimate causes in this economic environment. But I think it is likely that a large majority will find it works for them.

It could be an all-around win.

Hello there from Texas Mortgage Pro:

Let's be fair Interest Only loans were not the cause of the mortgage meltdown. Greed, loose guidelines from the major Banks and financial institutions, Borrowers wanting more house than they could afford and or loss of income after closing on the home, un-qualified loan originators that offered these or other loan types to the wrong borrower for the wrong reason are to blame.

Interest Only loans were / are great for several reasons. 1, someone that is re-located a lot with their job. since little principle reductions is realized in the first few years. why put your money there? 2, Borrower with non-tax deductible debts and are determined to eliminate this debt faster.

Every client I had placed into an Interest only loan or a ARM we had made a plan to use the difference in payment to pay off other debts. Made a follow-up schedule to make sure they were still on their goals and once completed either start making principle reduction or invest in rtirement plans.

Not one of my clients has defaulted on their interest only loan and are in a better financial position today than when we started the loan.

Interest only, ARM, stated loans all are great financial tools in the right hands. A gun is a great tool that if used improperly is dangerous too. I hope we can have these tools back and take the greed and improper use away so the real professionals and borrowers can use them again.

Instead of a knee jerk simplistic reaction, let's be alittle more nuanced and think more deeply.

This was caused by people in good times WITH jobs, in an economy that provided jobs buying first homes that had no business doing so, who walked away having puy little or nothing down, therefore having no strong desire to try and keep their homes when rates went up. IF this were being offered to new purchases, yes, it would be the same again. But this time it is NOT going to people who should not be making first time purchases they could never afford to begin with.

NOW, THIS is for people who HAD good jobs, were keeping up with their payments have lost those jobs, and are obviously VERY motivated to stay in their homes (the walk-aways who triggered the crash have already done so) and are desperately seeking just enough time to recover the perfectly adequate earning capacity they DID have before the crash took away their jobs.

Another thing, as with any investment when the market drops you lose your principle. Be it stock, bonds, 401K, gold or a house. So if someone had been paying principle and interest into a home and the market dropped, they lost their money just like a stock or any investment. By owning a home where you do not put more principle money into it but diversified your portofolio, paid off unsecured debts or invested correctly their overall financial position is safer.

I like this "extend-and pretend." What, are the lenders thinking, that if they get a little for now, home values will rise and they can make more later when they short sale or foreclose....hmmmmm.

I have clients who were offered a loan modification on the "Pick A Pay" plan- ie-they are still doing a neg. am. payment. There are elderly and just wanted to stay in their home. The payments were substantially above what they would pay if they were renting- plus they still have to maintain their home. I discussed with them at lenght that they had to at least make the I.O payment so their principal balance would not increase.

THey are still in their home and will eventually lose it because they are on a limited income and this loan will re-set when they reach 110% of their origianl principal balance.

I know they get to stay in their home, but when I think that they could be saving $1,000 per month and renting rather than "renting" their own home, well, I just feel terrible about it. They only have a rudimentary understanding of what is going and and figure the bank will just continue to help them.

Ken,

People tend to forget so quickly and go back and repeat the same mistakes they

made in past cant believe they would consider such.

Oh Sweet Mercy! These lenders need to lose their business. It should be malpractice to encourage this type of behavior. Granted, people make their own decisions; however, broke people shouldn't buy houses period. Finacial responsibility.........what a concept.

Like Niel Cavuto would say, "OK I give up. I can't reason with you." Obviously, there are still too many of the "old school" greedy bastards in the system.

Principal and/or substantial interst rate reductions seem to be the way to go. Give those in default who can afford to turn things around a real shot at it, and make the banks bear the burden. They've already been subsidised to the tune of trillions of dollars and some like JP Morgan are starting to report strong profits. Okay, now that the biggest haven't fallen, it's time to make them pay their fair share. This interest only scheme seems like more of the same. The plan looks like it will just stall the more painful, necessary solutions to these problems, generate more income for the banks in the meantime, and delay the return of the housing market to more 'normal' conditions so that they can dispose of their excess inventory more profitably. It's pretty clear who is running the show here.

Kendall now we know why the country is in a huge mess. We have become a country that does not learn from our mistakes because there are no consequences for our actions. When someone over buys or extends themselves to far we bail them out with bankruptcy. I can't tell you how many have said I'll just do a short sale cuz it only nics my credit and the banks won't come after me. Or it's a business decision to foreclose I'm not going to stay and pay the bank X when my house is worth Y. Because they know within a few years they can purchase again.

I say quit rewarding people that make mistakes and help those that do the right thing.

Kendall,

Hopefully, this "proposal" will hit the circular file.... where it belongs!

Kathy Opatka

Great post, Kendall. Sounds to me like lenders are just trying to make more money (interest only) on the backs of distressed home owners.

About a year ago I was close to loosing my home and rental property. I was upside down on my rental property mortgage and the mortgage was more than $1,000 above my monthly rental amount. When I had bought the home two years earlier, I had intended to pay extra every month and pay down the mortgage quickly. Then the mortgage market collapsed and my two biggest clients ceased to exisit. Overnight my revenue dropped 80%. I was seriously close to loosing everything.

Rather than just giving up and walking away I called my lender and they reduced my interest rate to 3% and made it interest only for 3 years. Just that one thiing has allowed me the time to drastically reduce my expenses and I'm now in the process of paying off my credit cards. My hope is that by the time the 3 years is over, I will be in a vastly improved postion and won't have to walk away from my mortgage, even though it's worth $250 and my mortgage is $460. This will save my credit and save the mortgage company a $200k loss. Seems like a win-win situation to me.

When the banks give loans they are investors and are at risk as well. Sure, you can argue every individual case, point to the contracts, and talk about the personal responsibility (and risks taken) by the borrowers when holding them liable for the failure of their loans. But what about the 'social contract' and fiduciary duties owed by the banks to their customers. Judging from all the laws regulating lending, 'caveat emptor' doesn't seem to be the operative premise here.

341,180 homes went into forclosure in March alone this year. When taken as a whole, it's it's obvious that the banks failed to act in good faith. They were driven by the pursuit of profits, rather than responsibly qualifying people for home ownership. They were to busy 'overselling' to 'oversee' their role in the financial system and economy as a whole. While it may be difficult to prove that the banks are responsible for the failure of any single loan, they're plainly responsible at large and should be held legally and financially accountable for their actions.

What an excellent way for banks to continue to line their profits by doing a continued interest only at the current agreed upon rate, extending the time homeowners can stay in thier homes....In California we call this RENTING! Without the ability to pay down principal due to the interest only payments being set right just within homeowners' budget, there is nothing left to put towards prinicipal. It's pretty hard to convince someone who had intentions of buying a home as an investment to just continue to rent for say the next 10 years only to end still owing the same amount of principal....Yes, we call this RENTING!

This is amazing, but I can see where they are promoting these loans. You see, if the default is postponed, the bank can earn more on interest in the interim... sneaky sneaky....

This has to be Bank of America's idea, it sounds like somehthing they would definately support, they have taken up all of Countrywide's loans only to prove that the word "America" in their name means "sell-out". They will not even respond to clients unless you are in default, and are allowing homeowners to go long term without payments just so they can dribble out thier REO's and drive up the prices. In the meantime, they refuse to work out these modifications in a timely manner, and are now using debt to income ratio's for the government proposed program of 37% instead of 31%, what a joke for the homeowners. How are they continuning to get away with what countrywide started?

This is the era of bailouts. Why not creat more need for big brother to step in for the rescue again. First bailout the banks for stupidity, then bailout borrowers for stupid. Like Kim said, repeat history...

Bravo to Jerry Holcomb #92 and #94 for explaining the mortgage meltdown and his statement, "A gun is a great tool that if used improperly is dangerous too. I hope we can have these tools back and take the greed and improper use away so the real professionals and borrowers can use them again."

Approximately 15% of the commenter's got it right, so what happened to the logic of the rest of the professionals? Misinformed, misguided, no education, regardless, it's never too late to get accurate, verifiable and factual information and become a fearless professional.

Real Professionals are those who advise their clients about how to buy and sell real estate or how to structure a loan based upon their client's goals and objectives utilizing all the tools available to help their clients.

So many comments from professionals in our industry regarding this post, yet most don't have a clue about how money works, shouldn't you? Read the book, "The Creature from Jekyll Island" during lunch and get knowledgeable about how money works and explore many of the creative financial solutions that are being used by real professionals that are suitable for their clients. Most of you will be enlightened and excited to discover how much more value you'll be able to offer your clients and just as important learn more about money and how it really works.

Finally, the purpose of the IO loan mod is to help homeowners retain possession and avoid foreclosure. The effect is to maintain stability and real estate values, reduce inventory and economic stress. How can anyone argue negatively about that? Adding 50-60 year terms is another solution and if our government continues to spend our tax dollars and increase deficits, those terms will be standard practice.

I have to tell you, a straight ahead Interest Only option almost sounds better than what many lenders are actually offering today. Has anyone read any of the FAQs lenders are sending to borrowers for the these Trial Mods? I have and they state quite clearly that the difference between what the payment should be and what it will be under the Mod gets added to the principal balance, at least during the "Trial Period". Unfortunately, many of the homeowners I've met with have been making their "Trial Period" payments for 6 or 8 months now without being able to go any further with their lender or get any answers about a permanent Mod. Also, none of the lenders I've spoken with have been able to actually confirm that this piece changes with a permanent Mod. Under this scenario, any small reduction made by applying a monthy principal payment is going to be more than eaten up by the additional interest added. Sounds like Negative Amortization to me.

If that is what helps keep someone in the home they love I am all for it! Appreciation has been the key to Real Estate as stated in this article some others also. If you look at an ammortization chart the first 21 or so years are mostly interest. $3000 a year will not change the situation for most in equity postion, but it could keep a roof over there head. There is a BIG misconception that everyone in trouble has done a stated income loan, but fully qualified borrowers are now in trouble. Wake up people we are having some of the highest unemployment most of us have ever seen, Corporate cutbacks and manufacturing slow downs. The economy must and will return, property will once again appreciate at a normal 3-6% annually and the system will have to balance itself out. No equity is really only a probhlem if you are selling, if you love your home it really does not matter. I do think we will now see a slow down in home owner movement and the 3-5 year residency will go back to homeowners staying in their homes 10-15 years, again slowing the market and limiting buyers and sellers.

Extend and pretend is an interesting choice of words there. I don't think it matters because if these are newer loans, the interest is 90% of the payment anyway! Am I the only one that's got a calculator? Who cares, sounds like more BS and fluff that anything substantial to help the homeowners.

I do not have a simple solution(s) to the complex problems that both our industry and our country is confronted with today. As a realtor, I am just trying to be the best that I can be in my chosen profession. If I had the answers, I would change my profession and become a banker or a congressman or even president of this great country. However, I think it is hypocritical to stand on the side line and Monday morning quarterback as many of my fellow professionals are doing. The reality is when the commission check was on the settlement table, we like the bankers, our congressional representatives, and the lobbyists, took the money and ran. We did every thing that we possibly could do to get to that settlement table when the going was good. Now that we have to pay the piper, we are pointing the finger at everyone else. Let he and only he who is without sin cast the stones. I just think that we should all work to make this Great Country ONE NATION UNDER GOD, WITH LIBERTY AND JUSTICE FOR ALL. Judge not lest ye be Judged. To all of you righteous ones I say quit whining and get to work to make this a better AMERICA and REAL ESTATE INDUSTRY.

Can't help but agree with #12,17,33,47, 49 etc ... This is a crisis and if we say NO to every idea, homeowners, realtors, etc will be mired in this muck forever. We need to find ways to tread water and help others to do the same. In doing so, we help ourselves. our industry, and our US economy.

FIRST ... our country needs JOBS; SECOND... people need a chance to recover financially. So the IO for a fixed period doesn't sound bad to me, so long as the period is long enough to give the homeower and our country a chance to recover. Then, when values become more stable and start to rise, people can re-fi. This is a bandaid, but not a bad one.

Beyond this, I like the idea promoted by the FDIC with the INDYMAC loans; peel off a part of the principal and interest currently due on a loan; then calculate 30 year fixed interest on a principal amount that makes the 30yr P & I mortgage payment affordable today and for a fixed number of years -- say 5; then add the "peeled off principal" and the interest that should have been paid on it to the back of the loan. Bank and investors ultimately get all their money -- which they are entitiled to. Homeowner gets to stay in their home. When market turns around, they can sell.

Note to #64: Rewriting history, are we?

This is surprising to hear. I can't say that I am surprised by B of A on anything these days. We just had a short sale closing with them that took TEN months to approve, and they cut our commission to roughly 1/2 of one percent, so I am not a big fan.

Good point Kendall,

In actual fact, the difference between a fully amortized payment and a interest only payment will not usually make a difference significant enough to help the distressed home owner out. Add to that the fact that it does nothing to reduce the principal, at best only delaying the inevitable.

Of course, it make the politicians look like they are trying to help. Unfortunately, it is all fluff and has not substance.

Rediculous!! When will they learn??

Thanks for putting this out there for us today.

Patricia/Seacoast NH

Rediculous!! When will they learn??

Thanks for putting this out there for us today.

Patricia/Seacoast NH

You have GOT to be kidding me!

Everyone needs to remember that the intent of the Modification Program is as much for the consumer as the banks. These banks need to figure out how to help their clients, not just themselves.

I actually have a different spin on this which will disagree with your position on this Kendall. Quite frankly, I am tired of fielding calls from homeowners who are looking for a way to KEEP their homes despite the fact that they are under water. Many of these people are looking for a way to make their payments. So, interest only is ONE method to accomplish this. It helps the banks because at least they now have performing assets. This is NOT a negative amortization situation where the loan balance actually increases every month.

So, you mentioned that foreclosure or default for these people is inevitable. Well, they do not hand out loan mods like Halloween Candy. You also have to qualify for it. Trust me, I have tried to help many people get a loan mod and you often need to have naked pics of someone in a high place at the bank. Your current debt and income situation have to make sense or the loan mod will be denied. Meaning, if moving to an interest only version does not put you in a situation where you CAN make your payments, then no loan mod.

In addition, some of what I am reading here is the sentiment that the values will not come back. The idea behind this interest only situation is for people to stay in their homes and make affordable payments until the value increases to a level where they can refinance or sell. Are you saying values are not coming back? Those of you who think values are not coming back.....are you telling that to your new prospects who are thinking about buying a home? Of course not, you are telling them that the market is probably near the bottom and that it is a good time to buy. What is NOT a good idea and what will contribute to declining values is to do let these foreclosures and short sales continue. Allowing a loan to be modified to interest only makes much more sense than bailing out a banks by writing government checks. At least the interest only loan is an attempt to HELP not bail out the homeowners. It allows some of them a real chance to make it through a tough time. It helps the banks balance sheets if the foreclosures decline. It helps the overall real estate market and your commissions.

Finally, I want to reiterate that an interest only loan in general is NOT a bad thing. It can be a useful tool to build wealth. Many savvy customers of mine chose interest only loans because they had opportunities to invest the additional cash somewhere with a much higher rate of return than the interest rate they were paying to borrow that money. Some were using the additional cash to put together a down payment for an investment property. Some were using that type of loan to free up additional money to max out their 401k contributions especially after the huge decline not too long ago. Good time to increase your contributions right? Remember, when it is time to retire, you cannot borrow from someplace to create a retirement fund. When you get there, it is what it is.

Kendall,

It's like putting your finger in the dike to halt a leak. It will manifest itself somewhere else. What is B of A and Chase thinking? Certainly, not the long term benefit to the consumer.

Folks interests only loans are okay. There is nothing wrong with them. As stated above, the bad guy is the negative amortization loans.

Please read Dream Home Financing #123 for further explanation.

It looks like renting is the best alternative for these people who are in trouble with their loans. I'm curious how we can convince teh bank for loan mod if these homeowners cannot even show a bank statement with positive number. Almost 1 year of not paying their mortgage and maxed out credit cards, $24 in the savings account and none in checking. I don't get teh picture...will the bank consider letting them be homeowners?

Interest only "modified" loans...I'd say renting is better...no taxes, no insurance

Here we go again folks!!

Geez, I'm surprised at how few understand IO loans - they are not a one-loan fits all. I have an IO loan right now on my home and love it. I have no reason to pay down principal at this time.

I work with homeowners struggling with mortgage default every day. The majority are definitely NOT IO loans - they are refinances from a couple years ago when values skyrocketed and life was wonderful, everyone was working and people did not worry about taking the equity out of their home - after all, values were still going up...

Oops. Fast forward to today - unemployment in this area of Florida is over 10%, values have decreased in some areas by 50% or more, and good people - responsible people are facing ruination that they never dreamed would happen to them.

Interest only loans mods aren't the answer UNLESS the interest rate is lowered to 3% or so. Principal reductions will HAVE to happen in some cases - one way or another, either by agreement, short sale or foreclosure.

One size doesn't fit all....cure all.

I am appalled that Realtors are quick to point the finger of blame, how many of you sat at a closing table and said, WAIT ...this is not a good loan product, or had that discussion with their client prior to letting them move forward with a purchase of a home that the Realtor knew they could not afford!

Part of our job is to educate our selves and our clients on loan products, not just show and tow and hope they buy!

Sitting down and qualifying a buyer isn't just about a loan, it's about getting to know the prospective client and getting to know what their goals our in buying a home and how much they can afford to buy. Yes, some peoples circumstances have changed, but ask your self..should I have said more??

Interest only may be part of the problem but it seems there are many other things that did so including neg am/pick a payment loans.

What about people who are already in interest only that they can't afford? What are the odds they'll qualify for a fully amortized with a lower payment? Should they have the option? I agree principal reduction would be great, but will the banks really do it?

OCT

I could not stomach reading all of these posts but it looks like about 99% of you think you know it all and want to limit the options available to borrowers. I call them borrowers not consumers because people remain ignorant because they accept that they need experts to tell them what to do. The fact is educated, sophisticated borrowers can beat the banks at their own game all of the time.

These posts represent why most realtors are held in such low esteem by the public. You don't think borrowers are capable of learning about finance and how to make smart money decisions. When you know what you are doing it is not about down payments or interest only. It is about what your objective is and your exit strategy and matching your cash flow to outgo.

What people need is a financial education in money. And the realtors need it just as much as the borrowers. Robert Kiyosaki has a new book "Conspiracy of the Rich" I highly recommend it to all of you. Robert writes in a very earthy style and once you read it I believe you will change your mind about arbitrary rules that you want to apply to everybody and limit the options no matter how sophisticated the borrower is. That is what is dumb!

Wiechert Realtors had the most intelligent post I read here. They clearly "get it"

AHMSI mortgage offered a loan modification to a client while they were trying to do a short sale (they wouldn't do it when their customer asked for a loan mod before doing a short sale) They offered it at 5% interest only for 5 years. So in 5 years the original terms of the loan would apply and they would be looking at their same interest rate again and same payment. They chose not to take it because they had already moved out of their house.

The problem I see with my above example is in 5 years the principle balance will be the same and the market is not going to re-bound enough for them to be able to sell it or refinance in five years. So unless their financial picture improves dramatically or they pay extra so it will go to the principle, then it's just putting a band-aid on the problem.

this blog is another example of why realtors should have no opinion of finance,,,,cause in most cases

you people b stupid!

An interest only mortgage may be THE ONLY financial instrument available to those who believed that realtor who tild them that buying that house at that price was an investment!

At least the homeowner can stay in their home, ride out the market and hopefully sell their home a few years later when prices improve!

Folks this is finance 101, If you do noy understatnd simple principals, shut up!

What we learned was that it was not just the interest only loans, it was the adjustable rates and the subprimes that got us into this mess, too.

I understand your concern about doing interest loan loan modifications, but keep in mind there are lots of people that didn't just over extend, people have lost their jobs so they can't pay their mortgages at this time so they need some type of adjustment to help them stay where they are.

In FLorida, they are now having banks appraise homes that people can't afford adding the difference to what they owe and what it's worth to the end of the loan (forbearance), then when there is a recovery in three or four years, reassess. If the amount of the appraisal hasn't increased, the bank will eat the difference. That might be something to consider on doing.

I want to say back in the 70's in Seattle, Washington, there was a company that went under which held most of the employment for that district or region. People couldn't afford their mortgages, so the banks decided to let the people not pay their mortgages, stay in their homes and maintain their properties. I don't remember how long, but until Microsoft and Nike moved there it helped them recover and everything turned around.

I know we have to do something and I'm not sure what would help everyone in this depression, but abandoning homes that the banks are now doing nothing about because they are overwhelmed is making matters worse. It is ruining the low as well as high scale neighborhoods, the owners have no where to go and I'm reading that we haven't seen the next group that are in place for foreclosures.

I don't agree that after we bailed out these banks, President Obama wants to put another plan in place on giving incentives to the banks to move these properties, that's ludicrious. Aren't they already getting paid to do this work. Is this another way of the banks getting more money?

I'm appalled and disgusted on what this country has done to get us in this situation, but the people have voted in these politicians and look where they have gotten us. Look at the billions they spend in other countries to rebuild, trade, etc. and on research for the future when there may be no future. We need to straighten our country out now with those billions of dollars that's being spent.

Put the money where it's needed to bail out the Americans. The banks/charge companies, insurance companies have control in the country and look where it's gotten us. Let's not forget about taxes. All the tax money we put out there has still done nothing for us and they to want to impose more on us.

We need to take a stand!

Rich and Wendy, I am glad that the two of you understand....

When I posted my response above, I thought I was the only one here on Active Rain who agreed with my point of view.

All we really need to do is review the video that Sara Homan posted. It clearly demonstrates the perception of banks and the consumer. That was a GOOD LAUGH! Loved it! Thanks Sara.

On a more serious note...I think right something has to be done. The problems as I see it is that investors, who have already made a ton of money are not willing to work out "affordable" modifications" with homeowners...I mean TRULY affordable workouts. This is why most Loan Mods fail. Somehting has to be done to help the homeowner....! If I had a one size fix all solutions, I'd be rich I guess. Can we think of the people in these homes and not those greedy ....

A very interesting discussion. I wish that comments had to be accompanied by at least a first and last name and an affiliation; and I guess it's no surprise that the nastier (and more poorly written) comments are anonymous. If they are one of the "we" as in "...we like the bankers, our congressional representatives, and the lobbyists, took the money and ran" then they should be man (or woman) enough to identify themselves. In my state, agents don't get involved in qualifying buyers, so I don't know a lot about the financials of my buyers.

There is a lot here that I don't understand; first, if you suddenly find your home is "underwater," but you have had no change in your financial situation, then why the concern about the "value" of your home? The value of a home is more than what it is worth in the current market; it's your community, where your kids go to school, where you worship, etc. Why should anyone care what the market says about the value? Second, if I've lost my job and can't make the payments, then how do all of these solutions help? If I can't pay my mortgage, then I can't pay an interest only loan, I can't qualify for a loan modification, or any other "creative" loan product. It seems to me that these solutions help a very small pool of people as evidenced by the fact that the loan mods have only been given to 500,000 people, not the 9 or 10 million that they were supposed to help.

I have read with interest the pros and cons of interest-only loans, and I don't have a particular beef with any any banks or the fact that they make profits; I'm all for that. But I have to be wary of any suggestions they make at this point. I feel that they are proposing this because they don't want to move forward with the loan mods (I was at a convention earlier this year and walked up to a BoA reprentative to ask about loan mods-he never heard of them). I don't see the point in paying interest only, which is in effect renting, when I still have to maintain the property and pay property taxes, no small thing in NY State. I'd rather sell short (if I had to sell) and try for home ownership again later on.

What is really alarming to me is the current legislation being proposed by Barney Frank - the Community Reinvestment Modernization Act of 2009. I've heard very few people talking about it and this is scary stuff. The proposal is to expand the CRA beyong the current scope to combat redlining and discrimination and to "close the wealth gap in the United States." Talk about not learning from our mistakes.

I/O loans are NOT the reason we're in this credit mess!

It's real estate agents that had no real knowledge of how loan programs work! (Lenders, creating their own rules, investors taking huge risks.) That certainly includes

all adj. programs. If you did you would certainly understand the power of an I/O loan!

Take me for example: I took out a 5 yr I/O loan from GreenPoint in March 2003. The rate was

2.875% on a $315,000 loan, with a payment of $985 which included interest, taxes and insurance.

Thats' a SCREAMING loan!!!! The loan is tied to LIBOR (how many know what that is?) and the margin

is 1.5. (If you know anything about matgins that's excellent).

AT it's peak of the interest rate rise it went to 7% and a payment of approx. $2,200. Which we paid on time.

In March of 2008 (we had planned to sell within those five years, but....) it coverted to P&I. Fortunately rates dropped and it became 4.625% loan with a new payment of approx $2,000.

Rates have continued to drop and now we're paying $1562 /mth P,I,T,I at 2.25% HELLO!!!!!!!

Our new balance is about $304,000.

LIBOR, which so many people had such great fears of has dropped to .71 for the 6 mth index. Add that to our margin of 1.5 bringing the rate to 2.25%.

That's AWESOME in anyone's book!!!!!

It's NOT the programs that are the problems. It's real estate agents that don't understand loan programs.

Mortgage agents and lenders "qualifing" people for loans they can't possibly meet in the future.

Wall Street, contining on investors to purchase loan packages on a global basis.

Speculators offering "insurance" on mortgage backed products that were starting to fail, thus causing

the credit crisis.

Lend with good practices and you'll have a good system!

Free market baby...no "cramming" (forced principle reductions), no bailouts. If the lender wants to offer IO to existing IO ARMs or even P&I loans then so be it. The lender becomes a landlord/investor. Free market baby...

Interest only loans should be against the law. Without equity or the chance to accrue equity, a homeowner is not better off than a renter You have a right to live there but you will never own the house, but oh, wait, you have to pay your own taxes and your own insurances and make all your own repairs. Therefore you are worse off than a renter. You are now shackled financially to your house with no chance of freedom.

Why would a bank want an interest free loan? For a bank it is a dream come true, an income stream that never quits! For the homeowner, in the early years, the equity accrual is small and slow, but at least it is a steady incremental investment in the property albeit perhaps only a few hundred dollars worth early on, but guess what it is not the banks few hunderd dollars worth!

What will help homeowners is to free them from the bondage of being indentured to the bank and insure that they are able to accrue equity in a home which is true homeownership. Better to own a little bit of your house than be on a financial treadmill going nowhere. Home ownership is an American ideal. Interest only loans are a short term fix for long term pain and agony. Interest only loans should be against the law.

Beverly, I disagree and I do not think you fully understand how interest only loans work. First of all, you are not going to pay only interest forever. These loans all have a point when you MUST begin to make payments towards your loan balance. Second, they are not available with 100% financing or anything close to that. So, you need to contribute a significant amount of equity up front or you are not getting that loan. Finally, as I mentioned earlier.....the true equity you build in a home is when it increases in value and NOT by making small contributions every month.

If you find yourself in a situation where your home is seriously declining in value due to local economic conditions, your principal payments are NOT going to help you. Your home will be so far underwater that it would not have made any difference whether you were making interest only payments all along or P&I. In fact, I am sure there are thousands of homeowners in California who WISH they were making interest only payments for the past 5 years now that they are about to find themselves in foreclosure, or simply walk away because they are $100k under water.

Finally, interest only loans give you flexibility to make a lower payment. It is also great for people whose income is not stable. People who work on commission and may have a few rough months. This is NOT a bad thing.

I am just amazed in my market how first time buyers, paying 350-400K for their first home, only have to come up with 3.5% down, then ask for 3% closing costs, or borrow money from mom or dad. then they spend other credit $$$ to buy new furniture or remodel the kitchen (because tile is not cool), and this is called "smart", this is called "approved", this is called "Ooh, I can afford a house"

Americans will never learn how to live within their means as long as we allow them to become house poor just so they can own a home. Many of this generation still buys things they do not need, with money they do not have to impress people they do not know.

Not everyone can afford a home....sorry. Come up with some down, have some reserves and then talk to me about looking at a small first home that you can afford comfortably.

Just sayin.......

Not everyone can afford a home....sorry. Come up with some down, have some reserves and then talk to me about looking at a small first home that you can afford comfortably.

Just sayin.......

The key phrase was WHO was asking. BoA and Chase, Notice other banking institutions are reporting profits while BoA is still reporting losses. I have never experienced a good closing with BoA nor have I heard of anyone else in the business around our area or others for that matter speak of a no problem closing with BoA. I'm thinking maybe it's not the economy but the institutions that had the problem and they just steered our attention away from the real problem because they got too big too fast. All the small town locally owned banks watched their P's and Q's and kept business smart and paid their leaders what they were worth without huge bogas bonuses that were not earned. They are all still taking care of business and having to pay higher insurance premiums on the account of the big banks blunders. Let these big banks fail and give the power back to the locally owned banks where it belongs.

Also I have to say Very well put Kathleen!

My obligations to a clients is to educate them to make the right decision. Modification is just another Banks and Government scam. If you will like to understand what the future of the clients that enter on a loan modification will be, you must understand what happen in the great depression and see what happen to the farmers in those days.

You are all a bunch of pesimists. If anything will delay or sustain the market from collapsing slower or at an absorbable rate then any true American should be for it. Reality is not always reality and none of you can predict the future. Although some of you do see the light on modifications being a success and good for us because I am all for success for the home owner, the lenders took the risk, we GAVE THEM ALL the $$ they need to fix it, so fix it with it. It's really that simple..............

Well put "Dream Home Financing" !!!

OCT

I think you are off base here. The borrowers signed up for a loan and they can't pay it so the banks are talking about modifying the loan for them. The banks are willing to modify for an average of 5 years at a time, they are not trying to fix it forever. I am not real sympathetic to the banks but you guys want the banks to take all of the brunt of this economy? People who bought homes a few short years ago should just stay in them and wait for the market to turn around. They should have taken loans that they could afford long term. I am a mortgage banker/broker and I did not put people in irresponsible loans, I said no to them and they went down the street to my competitors and got these crappy loans. Why are they not responsible for theior actions?

You are telling me that if the borrower paid a couple thousand dollars a year in principal that everything would be OK? hmmmmm..... if you are $100,000 underwater on your house, how does a few thousand a year fix it? Are you saying the banks should lower the P&I payment and give the people who lied on loan applications a better loan because they are telling the truth about their income now?

The banks offered too good to be true financing options, that is true and that was irresponsible but the public gobbled them up without thinking also. This is a 2 way street.

I just posted and realized I was not logged in. I am an active member of active rain and I approve of my message above.....

I just thought we should look at both sides and people should take some responsibility. I did not read all comments but everything I read was agreeing with you and you have valid points but people need to take responsibility for themselves and we can't always make money on our investments.

I just read Diane Schubach's comments. I am with you Diane. You make some great points

Apparently they have not learned anything and are hoping that we all had our memories erased.

It might give reprieve to someone who recently lost a job, is looking for another job, for a few months while they are picking up the pieces. But I would not think it'd be a good long-term solution, nor a good solution for someone who simply mismanages money or bought too much house in the first place.

I think it is a great idea that is what i have been saying all along. We want to reduce foreclosures and give people who want to stay in their home for the long haul the best chance at doing that. If they are having trouble why force them to pay principal? I think a 30 year fixed, 10 year interest-only is the way to go. 10 years should be enough time for property values to recover even in the hardest hit markets.

Another myth is that ARMS in general have caused this crisis. 2 year subprime ARMS were the main problem. Option ARMs are ticking time bombs that will have a lot more problems when short term rates go up. Conventional 5 and 7 year ARMs have not created any problems yet. They have been adjusting down.

Reading more of the comments in this thread I am more and more amazed how little so many of you know about mortgage products. A typical interest only loan I have done in the past is a 5 year interest-only where they put 20% down. Sometimes we would do it on an 80/10/10 too. The strategy then was for them to pay interest only on the lower rate balance and they could use the extra money to pay down the higher rate 2nd. Of course 80/10/10's have gone the way of the dodo, but this was not a high risk strategy. Also, is it better to pay down principal or fully fund their 401k's or otherwise invest?

There is a huge difference when you look at Option ARMs that have negative amortization. The 1.9% teaser rates were massively oversold and were only good for 1 or 3 months. Then People could continue to make that same payment and "defer" interest. That is the only way many people afoorded those massively inflated home prices in California. They rationalized the balance growing by the idea that their property value would grow faster than their loan balance. That mistaken reality has been shattered.

I agree with you one hundred percent, Why are lenders still getting away with the same predatory practices?

How is an interest-only loan "predatory"? How is a lender who is fully exposed to the risk now offering that as a life preserver "predatory"?

Personally I think the banks proposing any idea to forestall another foreclosure on the market is a good idea. Smoothing out the big peaks in foreclosures would have a positive effect on the economy and allow for some of the people facing foreclosure to survive once employment numbers come back.

Kendall, I'm not sure that an interest only loan modification is the evil many of the responders are making it out to be. On a $200,000 loan at 5% the difference in payment between an interest only loan and a 40 year fixed (the term of choice for most loan mods) is $131.06, which over a fiver year term makes for a difference in principal balance of $7863.

Even if values stopped declining today, I'm not sure the $7863 would be enough to make a difference should the homeowner face a hardship five years from now.

Negative equity poses a far greater risk to the health of the real estate market than does an interest only loan. If a homeowner is $50-$200k underwater, how much difference will the $7863 make? It's barely enought to cover closing costs, let alone any type of Real Estate commission.

I know I'm in the minority on this but I'm not sure that option have contributed to this as much as many responders believe. I have an option ARM and have had for almost 5 years. During that time I have made the minimum payment (sometimes a little more) and my principal balance has increased about $30k.Now my minimum payment is greater than the 30 year payment so I'm making headway. My home has decreased in value over $300k, so how big a problem is that $30k?

If a loan mod is a true solution which allows the homeowner to avoid foeclosure and not just a band-aid that postpones the inevitable, then the banks need to quit screwing around and say either "yes" or "no" and not leave everyone hanging.

Hi Kendall,

My husband and I actually had an interest only mortgage for 5 years and just refinanced it. We had equity down at the time we got into that loan. The loan in itself was not the problem but the qualifying that went along with those loans, ie. stated income. Some of those people may indeed benefit and I wouldn't rule it out for everyone.

DeeDee Riley

There are people out there that want to stay in their homes and banks are way behind in their loan modifications. If IO loan modification, at 5% or less, is a way they can hang on until things get better, than I am for it.

OCT

True to a point Kendall. However, if the term is long enough for the market to recover...then they could sell at a modest profit rather that Short Sale it now as a loss

I feel like we are just going around in circles.. It wasn't a good idea before, that's what got us into this mess..it's not a good idea now!

Interest only loans might be a good idea but the banks would have to be watched in how they do it. The banks, in particular BofA, are now talking about raising interest rates & lowering credit on credit cards if you don't use at least 50% of your limit monthly (ie 5K limit; $0 current balance for past 6 months; reduce limit to $2,500 and interest raised to 16% plus non usage fee of $250/month).

A past customer just put his home on market as short sale. They had a interest only ARM loan for 2 years then P&I fixed for 3 years before adjusting. His hours were cut back from 40 hours to 30 hours per week and wife laid off (unemployment benefits expired month before the new benefit package kicked in) and with 2 children in middle school are having trouble to make ends meet. If the banks are going to trot out an interest only loan then they need to make it last at least 5 years and then before going to full P&I reevaluate the people's income to debt using the same criteria as if they were applying for a loan, otherwise, this program will only be a stop gap to the inevitable foreclosure on the home. More foreclosures on market = lower home values.

OCT

Life has happened to fast for me.

In just five months starting in late 2003, I was a computer technician for a nationwide bank, got married and bought a house in St. Paul, Minn. my wife gave birth to a baby boy. The next summer we dove into a complete remodel of the two-story home built in 1911 that we bought for $129,000. With the help of professional friends, we began to tear out walls, remodel bathrooms and replace windows. And Kerry's wife, who worked for a local college, started graduate school.

Despite the zaniness, life was pretty good and we were financially stable, our annual income was $105,000.

Everything changed in summer of 2006. After just 3 years of the mortgage, my My payment adjusted. It kind of threw me for a loop.

My grief soon was compounded by financial trouble.

We had bought the house together for well under market value, but in order to fix it up, we had refinanced to withdraw some of the equity. our credit was much stronger, so we refinanced for $145,000. "I didn't even think twice about it. We'd given our word that it was a fixed rate.

Unable to handle the $1,789 monthly mortgage, I put the home on the market in April 2007. The timing wasn't good. "In my neighborhood in St. Paul, that week I put my home on the market, in a five-block radius there were 13 homes for sale."

Worse, worst part of it was, my home was only halfway remodeled. Most of the material was already purchased, anybody who wanted to buy a house immediately knew they would have to put a lot of time into it.

I called my lender, Wells Fargo. But with his reduced income, the options the bank offered didn't help. "They couldn't get me a payment at which I could live." And still, the house didn't sell.

In the span of just eight months, I saw my life go from wonderful to disastrous. "I was really overwhelmed," he says. "It got to the point in June where I started seeing a therapist" and started taking antidepressants.

In July, I received a foreclosure letter, I knew I had to do something. My friend had referred me to www.foreclosurepreventionplan.com.

Immediately, I felt relieved. I called late at night and a representative was there to assist me.

I had given him basic information. Long story short, within 100 days, I had my mortgage payments cut in half!

NOV

Great Article!
My mother's loan modification was a nightmare when she went directly through her lender.

Then after they denied it, she was scammed by a loan mod company out of Florida.

She finally got the loan modification through an A Rated BBB company called Mortgage Assistance Group out of Glendale, AZ. They helped her stop foreclosure and extend the auction date.

Her payment was reduced by 30% and they used government funds paid off all her arrears.

Its important as consumers to point out the good guys with all the scams out there.

Here is their information if you know anyone that needs their loan modification programs.

Mortgage Assistance Group 7055 West Bell Road, Ste 22 623-486-4505 www.mag-az

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