When the first wave of loan modifications were offered, we saw some tremendous deals. We saw an adjustable rate mortgage go from a range of 11% to 18% get modified to a fixed at 2.45%. We saw principal reduced over $120k. We saw arrears of $50k put to the back end of the mortgage with 0% interest. These were true modifications in the strictest sense.
What we are seeing now is not good. My opinion is that the new loan modifications are just a glorified attempt by the mortgage companies to report to Congress that EVERYONE is being offered a loan modification. With NO exposures to the type of modification being offered or the terms, no one understands that these are “deals with the devil, in the truest sense.”
We have a client that is 11 years into her note. She was offered a loan modification with an interest rate deduction of only .50%. A silent second note (known as a subordinate note) offer from HUD took the back arrears and some principal of $30k and carved out a new subordinate note. Like all of these deals, it was offered with 0% interest and would only come due upon sale or maturity of the first mortgage. It wasn’t a great deal, but it was not bad. Reducing the interest rate .50% does not really do anything to help with relief. You want to see at least a 1% reduction.
With most of the outstanding delinquent loans already modified, to achieve any sort of new relief for Debtors, the mortgage companies are now offering loan modifications with extended terms to lower the monthly payments. What is the current term offering? 40 years! Think about this. Our client that was 11 years into her original note was offered a loan modification with ANOTHER 40 years added onto the original maturity date. This would turn this mortgage into a 51 year note!
We did the math on a mortgage loan amortization schedule. By going an additional 40 years onto her current 11 years, she would end up paying over ANOTHER $100k in interest. Yikes! Is this a good deal? No. Is it a modification? Yes, because it still MODIFIES THE LOAN. Just remember that there is no requirement that it be a good modification.
Of the last ten modifications our office has received, we recommended eight of our client to NOT accept the modification. It was either a very bad deal or wasn’t any better than the chapter 13 bankruptcy payment plan we were already in. Unfortunately, debtors in bankruptcy can be a desperate bunch, and of those eight, three still took the deal.
I made sure they understood that they were (literally) mortgaging their future for today. Two of them made it clear that they understood that, but had to take it based on their particular circumstance. Naturally I understood, but it didn’t make the deal any better. My job is done when I render advice and you choose to take it or reject it.
Remember, just because you get an offer doesn’t mean you have to accept it. Just because it’s an offer, doesn’t mean that it is a good one. Remember, one way to lower you payment is to extend your term. If you have bought a car lately, they will show you your loan cost over 4 years, 5 years and 6 years (72 months). The payment over a longer time is ALWAYS lower. More time to repay means lower payments, but higher interest costs. MOST loan modification not only reset your maturity date PAST 30 years, they ADD ANOTHER 40 YEARS onto your note.
Using the example above, take a $100k note at 4.5% over 30 years, you will pay back $182,000 with interest. Take that same $100k over 51 years and you pay back $225,000 in interest. That is 1.5 times your investment. It’s a horrible deal.
If you are over seven years into your original mortgage loan note, you REALLY need to consider if you want ANOTHER 40 years on your loan. If you run the numbers, you will see it normally isn’t worth it.
Are you unsure about what makes a loan modification good or bad? We offer our clients a no obligation consultation to discuss their loan modification offers. If you are not yet a client, we would be happy to review your modification against your mortgage obligation. We would only charge you for an hour of time. We’ll let you know if it’s a good or bad deal.
The law firm of Busby & Associates has helped bring peace of mind to thousands of clients and seen just as many reestablish their credit after bankruptcy. If you need help with your debts, please give us a call.