Banks lent money out to people that couldn't afford to make the payments and now foreclosures are going through the roof. To help fix the problem, several banks have created Mod Squads (*I* did not make up the term). These Mod Squads go around to people who are looking at foreclosure and try to modify the mortgage in a way that people will be able to stay in the home. They are doing this, as the article I read states, to help the home owner.
Is it true that they are helping the home owner? Technically, yes, they are. It is a very misleading statement though because most people don't have a good understanding of the process involved in owning a home.
Most of the people living in these homes consider themselves to be home owners. In fact, they've been told that they are. When they fill out credit applications, they check the box that indicates they are home owners. The truth of course is that they are loan-owners. Mortgage companies own most of the homes in the US.
You go around shopping for a house and find the one that is perfect for you (or that you think you can mark up and flip) and you tell your mortgage company. They buy the house so that it's reserved for you. You then make payments to them plus interest. If you are able to come up with two to three times as much money as the mortgage company paid, they sell the house to you. You are then a home owner.
Let's look at the situation that the banks created. Houses are being foreclosed upon. Who loses money? The loan owner loses whatever they have paid to the mortgage company, right? Most of that was interest and lost anyway. The amount of principle they paid in the first year or two barely amounts to a couple of grand. They can walk away and rent an apartment for half the cost of the mortgage payment.
The mortgage company, the home owner, on the other hand is stuck with a house that will appraise somewhere between 10% and 30% below what they paid for it. Some mortgage companies are trying, with little success, to sell their homes at the same price they paid for them. While they are holding them, they have to pay taxes and upkeep on the homes. Other mortgage companies are dumping the houses at a loss because no matter how you look at it, it's going to be a loss.
So, these Mod Squads *are* going out and helping the home owner. They do this by modifying the mortgage for the loan owner in a way that the mortgage company won't lose money. Awfully nice of them. And they tell these people that they are doing them a huge favor by letting them stay in the house when they could just go ahead and foreclose. They are *letting* the people stay. People are so convinced of this that they don't see who is in the power situation here. Mortgage companies should be begging people to stay in the houses but they pull this Jedi mind trick on people of being the kind benefactor and people buy it.
Let's look at an example of how they helped the family in one article. I'll give you the short version (you can read the entire article at the end if you like). Mr. and Mrs. Borrower purchases a loan for a house. The initial payments were $1,200 a month. Mr. Borrower lost his job but got another one a few months later. To stay out of foreclosure, the Borrowers refinanced with a crap loan (ARM) with a payment of $1,500 a month. Mr. Borrower lost his job again. He got another job though. Enter the Mod Squad to save the family from foreclosure. The bank sets up a 30 year fixed rate loan (which is better than an ARM) with payments of $1,600. The Borrowers *get* to keep "their" house.
Someone out there that is smarter than me, tell me how continually raising the monthly payment is going to make it easier for the Borrowers to keep the home.
See, not only is the mortgage company not willing to lose money, they try to make more. The article doesn't say this is what happened but it's typical in situations like this. The Borrowers default on their first mortgage. They start to accrue interest and penalty fees. A bank comes in and offers to help them. They take all the interest and late fees and add them into the new mortgage so the mortgage payment goes up. If the Borrowers had a house worth $200,000, they now owe more, say $210,000. They default again and the Mod Squad comes in. They take the interest and late fees and add them into the mortgage and start the loan over. Let's say the Borrowers now owe $215,000.
The mortgage company *lets* the Borrowers keep the home and make any extra 15 grand for being nice plus 30 years of interest on 15 grand. The article doesn't say what the interest rate is but you take a guess at what rate the Borrowers are paying after being in foreclosure twice in as many years. Yikes!
Mr. Borrower has lost his job twice in the last couple years. How sure is he that he's going to keep his job for the next 30 years? What if the Borrowers decide they want out? The housing market has dumped so the selling price for the home, depending on the area, is between $140,000 and $180,000. If they were able to get someone to pay $180,000 for the house, where are they going to come up with the $35,000 to pay off the rest of the mortgage. You thought being upside down on a car was bad?
What the Borrowers in this article need to do is pay the home loan down as quicly as possible so that they have an escape route if they need it. They need to get the debt lower than the value of the house and they need to quit letting the bank "help" them.
Full Article: Lenders Offering Help To Homeowners Yes, that's the actual title of the article. Another example of what a piss-poor job our media does of informing people of the truth. They are just another part of the programming tool to help get people to part with their money.
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Today's Chronicle post is a short description of how we used to talk when I was a cop.