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About mortgage 'bailout'

Let's say Joe buys a house for 800k, then discovers he can't afford it. He puts it on the market, and learns he cannot sell it for more than 500k. Assuming he put 20% down, his mortgage is 640k, so he comes up 140k short. What's wrong with the bank holding his note at the rate he was paying on the mortgage?

If he was paying 5% on 640k = 32k a year (in interest). On 140k @5% 7k a year. Surely he can pay that and have money left over for rent? (He also gets out from under property taxes of probably > 12k and insurance of probably > 4k. So his cash flow, which is the problem, increases by 41k a year.)

Why do the rest of us have to bail him out by reducing the principal and / or the interest he pays just so he can continue to live in a house above his standard of living?

Reply to
dapperdobbs
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Reply to
Alvin

A 5% loan would be for someone who hit the mortgage rate at practically the perfect time. It would also be for someone with excellent credit and collateral for security. Joe can't afford his house, so he doesn't have excellent credit anymore. The house would no longer be collateral so this would not be a secured loan. A more reasonable interest rate for an unsecured loan for a person with poor credit would be 9%. Remember there would be a $30,000 real estate commission on the sale of the house. This brings the loss to $170,000. It is interest only, so it would have to be paid for the rest of Joe's life, say 35 years. So Joe would pay $15,300 a year for

35 years ($535,500) and die still owing $170,000. Joe wouldn't be happy and his creditor wouldn't be happy with the loss of his principal.
Reply to
camgere

Extreme cases as your example would not qualify for bailout. Only slightly underwater mortgages (105% LTV) qualify. The program is punishing those who didnt have down payments.

Reply to
rick++

There's a bumper sticker out that reads "Honk if you're paying my mortgage"

Reply to
Rubaiyat of Omar Bradley

On Mar 6, 9:11 am, "rick++"

?

"In theory, there is no limit on the so-called loan-to-value ratio for a modified mortgage. In other words, people are eligible for help even if the value of their house is far less than the outstanding amount of the mortgage, as is the case for about 14 million people who bought houses at the very peak of the market and often put no money down. Administration officials have said, however, that people who owe more than 150 percent of the current market value of their homes will probably have a harder time persuading their lenders to modify the mortgage."

Reply to
honda.lioness

Joe should sell before missing payments, and let the bank know. The mortgagor has a lot of incentive (170k note at original rate and a sold house, is better than foreclosure at 450k). They wouldn't mind allowing principal payments as Joe crawled out.

But after reading your scenario, I'm not sure I ever want a mortgage :-)

Reply to
dapperdobbs

Rick - Thanks, I missed that wrinkle :-) It also punishes sub-prime, no?

Reply to
dapperdobbs

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