It happens more often than not: a homeowner wanting to modify his home mortgage loan despite the many reasons not to. The fact that most find themselves owing more to the lender than the home is worth is lost among the few reasons they find to save it. Due to the decline in market value, the single most crucial element of a mortgage loan modification is a principal reduction – yet it is rarely offered. Despite this, the homeowner usually jumps at the chance to temporarily reduce his mortgage payment. And temporary it is.
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The initial interest rate provided under the HAMP program, as well as in-house modification programs, gradually rises after the modification is finalized until they reach a predetermined ceiling. Every case is different, but for the most part, that initial interest rate of, say, 2½% simply won’t stay there for long. Inevitably, the interest rate will continue to rise and that initial monthly payment will rise right along with it. Albeit, the overall terms may end up being better than the original, but homeowners can not ignore the fact that they remain underwater (the loan amount far exceeding the current value of the home). A short-term reduction in the monthly payment, without a substantial reduction in principal, will not provide enough of an economic benefit to offset the negative equity in the home.
A recent article in CNNMoney.com found that lenders have come to the realization that, just like with short sales, modifying a mortgage loan is a less costly option for them than going through the foreclosure process and taking title to the property. The government’s HAMP guidelines, however, are not flexible – leaving many homeowners out in the cold. Lenders, though, are now more amenable to approving in-house modifications where guidelines are less rigid and even allow for principal reductions (though don’t bank on a sizable reduction) which are not permitted under HAMP. In fact, as CNNMoney.com reported, far more in-house modifications have been approved by lenders than those under the HAMP program.
“Banks are doing nearly twice as many modifications under their own foreclosure prevention initiatives than under the Obama administration’s signature Home Affordable Modification Program, known as HAMP.” Surprise! Banks help more homeowners than Obama, CNNMoney.com, By Tami Luhby, August 30, 2010.
Data released months ago shows that lenders lose 20-30% less money when they approve a short sale as opposed to foreclosing on the property owner. And 10-20% less money is lost when they modify a loan. A short sale, though, is not always appealing to a homeowner that wants to stay in his or her home. Owners are far more likely to choose the short sale option when it concerns second homes and investment properties (which, by the way, do not qualify for modifications under HAMP, no matter what cousin Ed tells you). Unfortunately, everything learned in Economics 101 goes out the window when it comes to a principal residence. This leaves a large number of homeowners wanting a loan modification even though they shouldn’t.
Because homeowners are not as rational when evaluating the investment aspect of primary residences, they seem to be less concerned about owing more to the bank than what the home is worth. While most will acknowledge that they are underwater (indeed, sometimes more than twice the value is owed), they dread the loss of the home even more.
Ignoring the hard facts masks the most sensible option: a short sale. With far smaller rental payments for homes equal in size – if not larger – and in the same neighborhood, homeowners are nonetheless compelled to save their current homes despite the cost. The old mindset that everyone should own their home is difficult to shake. Since the homeowner does not have to face the music for a few years, they cling on to the hope that their financial situation will improve and quite possibly find that that their home’s value has increased enough to have made the saving of the home worthwhile.
The future is unpredictable, but the numbers do not lie. Saving a home worth far less than what is owed, is not always the answer. Unless there is equity in the home or some other compelling reason, the homeowner should seriously consider a short sale and forget about a temporary modification.
Filed under: Foreclosure, Investment Property, Real Estate and Business, Short Sale Tagged: Mortgage Modification, Real Estate, Short Sale Image may be NSFW.
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Image may be NSFW.
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