Every day there is a new story about how banks are dying to keep people in their homes ,and we have given them billions of dollars under TARP to do so. However, we're also hearing that Paulson lied and the TARP money isn't buying anything. What's really going on?
Well, I'm taking the high road on this one. My political opinion will remain my own for now, because what most people really want to know is if their bank will work with them. The answer looks to be a yes across the board. Most major banks have announced a willingness to work with people, and even the ones that haven't must be seeing the light by now. Citigroup, Chase, HSBC, Countrywide and Bank of America have all dedicated new departments to working out loans and trying to save them from foreclosure. The goal is to get payments into an affordable range so folks remain in their houses. In fact, the main article I'm quoting is right here.
The real question is how far will they bend to keep you in your house? I'm not really sure on that one. I've heard of a number of options, but not how much they will drop the payment to keep you in your home. I read one woman's story who was trying to get her payment reduced by about $400 and she had no end of troubles getting it done. Granted, I don't know what percentage of her payment that is or how long that would take her to repay at that level, but it seems like some banks might want to try harder to keep folks in their homes. I mean, they either made or bought these bad loans, so accepting some fiscal responsibility doesn't seem out of line.
If you do the math the choice becomes simple. If you foreclose on a home that has a $100,000 mortgage at 6% interest, not only do you lose that $100,000, you also have to pay for foreclosure. The cost of foreclosure is a pretty slippery number, and I've read some of the craziest takes on it. The funniest was the guy who posted that "PMI will pay for all the foreclosure costs, so the bank isn't out any money." Really? Maybe you should read the fine print! PMI only insures a portion of the loan, not the whole thing. Typically PMI only covers the top 20% of the loan if you finance 100%. Let's assume in this case that the foreclosure will cost about $30,000, which was the lowest number I found in my search. Let's also assume that the PMI pays the bank back 20%, which would be $20,000.
Now for the fun part. Normally costs start adding up after foreclosure, because the home has to be winterized, repaired and the like. Also, foreclosures typically fetch far below market price because they are in below average condition. However, just to make this simple, let's assume the home is livable if not perfect, it is summer so no winterization is necessary and the bank finds a buyer who can close in a month. Let's also assume the home sells for $60,000, or about 60% of its mortgage value. Once we do that, we can figure out what the bank lost. I'll add credits first, and then subtract debits.
(Home sale + PMI payment) - (Amount owed + Foreclosure cost)
or
($60,000 + $20,000) - ($100,000 + $30000) = - $50,000
So the bank just lost $50,000, right? Wrong. The bank also lost nearly 30 years of interest on 100,000. Let's assume these folks had 25 years left on their mortgage and they had a nice 6% rate giving us a payment amount of $599.55. After generating a quick amortization schedule, I see the total of interest in that remaining 25 years is $112,845.71! Granted, the bank has to pay people to service the loan and such, so its not pure profit. However, that is still quite a chunk of change. That brings the bank's total loss to $162,845.71. Are you kidding me?
Let's look at some alternatives. If the mortgage company had given a rate modification of 2%, the payment would have dropped to $477.42. Granted, they would have lost some money on the interest, as their profit would have dropped to $70,207.67, but they would have kept the $50,000 in principal and not had to pay for a foreclosure or file a PMI claim! That turns a $162,845.71 loss into a $42,638.04 loss! Doesn't that make sense?
Another option is to extend the term. I don't like this one as much, because going from a 30 yr to a 40 year term doesn't make that much difference, but let's take a look at it anyway. I know banks like this one because it keeps more interest income, but it doesn't seem to offer as much help as a rate mod in my opinion. Still, if we draw it out to 40 years, the payment drops to $550.21, which is still $50 a month! When looked at as a percentage, this option lowers the payment by nearly 10%. On a larger mortgage, the percentage would make a bigger difference. Let's say you pay $3000 a month for your mortgage. A 10% savings would be $300, or a car payment for most folks. However, if you managed to get the rate mod, you are looking at over 20% of your payment, or $600. Doesn't this option make sense to you as a consumer? It should make sense to the bank.
If you're looking for foreclosure help, these are some options your bank may offer you. If they don't, then ask about them. These options could help you save your house. Some banks are also participating in the Hope for Homeowners program run by HUD. Here is the link, so check it out and see if you qualify. Good luck!
DISCLAIMER: The numbers used are estimates. Payments would be slightly different if the remaining loan balance was $100,000. However, these figures give you a rough idea of what your bank may be able to do for you.
Comments(1)