Feedback requested

[Timshel]

Bah, I messed up writing out the formulas a little.

Still at a 325K sale price, the borrower has to come up with 20k to sale. Even if you changed it so that the lender only gets 325K, in my scenario, it discourages sale. The borrower is not going to want to sale until it gets above 350k, and who is to say it will.

 

[Cancel 2016.2]

I disagree.

And thank you for clarifying the issue. I was confused by your use of Lender A and Lender B.

It seems to me like it would be better for both parties to simply renegotiate the terms of the loan. Say the monthly payment is $2,500 and the homeowner can afford $1750. It would make more sense for both parties to spread out the terms of the mortgage and lower the interest rate rather than gamble on the future outcome. IMHO.

Immie

I am not opposed to the above, but the risk is thus all on the lender in your example. The borrower has no added downside and the lender has no potential upside (other than keeping the loan out of foreclosure). Obviously we disagree, but I think both parties should share the risk.

 

[Cancel 2016.2]

The owner loses 50K in the second scenario and 45K in the first. But there is a bigger problem.

You should modify the calculation to make selling more attractive. Your formula as you explained...

Lenders Take=Greater of Original Loan Amount+(Original Loan Amount*.15) or Sale Price or New Loan Amount

With your figures...

345k=300k+(300k*.15)

If you change the sale amount the homeowner becomes trapped. For instance, say the sale amount is 325k. This amount is still greater than the original loan and more than the modified loan, so lender gets original loan plus 15%. The lender would be glad to have a sale at this price, not the borrower.

The lender still gets 345K, ends up making $45K and the homeowner has to come up with $20K to cover the difference between the lender's take and the sale price.

The formula should be...
Lenders Take=Greater of Original Loan Amount+((Sale Price-Original Loan Amount)*.15) or Sale Price or New Loan Amount

You could play with the percentage now to make it more attractive for the lender, but increasing it will tend to discourage the homeowner from taking action that might benefit the lender.

Sorry, I should have clarified that. I meant that they could take UP to 15%, not that they would get 15% regardless if the home sold. But this is why I wanted to discuss. I knew there would be errors in there somewhere.

So to clarify, in your example the lender would get the $325 and the borrower would walk away from the deal with no equity and no debt.

Thanks for catching that.

 

[Cancel 2016.2]

Bah, I messed up writing out the formulas a little.

Still at a 325K sale price, the borrower has to come up with 20k to sale. Even if you changed it so that the lender only gets 325K, in my scenario, it discourages sale. The borrower is not going to want to sale until it gets above 350k, and who is to say it will.

True, the borrower won't want to sell. In which case, as long as they are able to make payments on the new loan, they don't have to sell. If however they get in trouble... they are able to walk away without debt or an adverse effect on their credit.

It is my belief that many of these people (NOT ALL) took out more loan than they could afford in the first place (especially applies to those that took out ARMs when interest rates were at 40 year lows). So they pay a penalty should they participate in this loan modification.

I don't know... just trying to come up with a way that will stabilize the market, spread the risk among borrower and lender, and not penalize those who played by the rules and are able to keep up their payments without assistance.

 

[Immanuel]

True, the borrower won't want to sell. In which case, as long as they are able to make payments on the new loan, they don't have to sell. If however they get in trouble... they are able to walk away without debt or an adverse effect on their credit.

Why would the bank do this?

The borrower knows he is about to lose his job. He knows he can't afford the payments. He renegotiates the loan as you discussed and waits for the inevitable. When that happens, he simply packs his bags after waiting until the bank has to throw him out, in the mean time he can live rent free and if he is nasty can literally destroy the home and walks away from it free and clear.

The lender then has to sell the home to recover its costs.

Sorry, I realize I must sound dense, but that is what I see here.

Immie

 

[Cancel 2016.2]

Why would the bank do this?

The borrower knows he is about to lose his job. He knows he can't afford the payments. He renegotiates the loan as you discussed and waits for the inevitable. When that happens, he simply packs his bags after waiting until the bank has to throw him out, in the mean time he can live rent free and if he is nasty can literally destroy the home and walks away from it free and clear.

The lender then has to sell the home to recover its costs.

Sorry, I realize I must sound dense, but that is what I see here.

Immie

That is the worst case scenario... and if the borrower is going down no matter what then the bank loses nothing by refinancing the deal. Because all of the above would happen whether they did or not.

 

[Immanuel]

That is the worst case scenario... and if the borrower is going down no matter what then the bank loses nothing by refinancing the deal. Because all of the above would happen whether they did or not.

Except that given the incentive to avoid the negative credit reporting the potential of being prevented from buying again, might just keep the owner from throwing his hands up and walking away. If you remove that incentive, then when all hope is lost the homeowner will be given an easy way out. What it seems to me that this would do, would be to actually encourage the homeowner to walk away from the deal. If there is the threat of foreclosure (i.e. suddenly being thrown out of your home and having to scramble for a new place to live) and negative credit reports, then the homeowner has the incentive to do everything he can to sell the house for as much money as he can get even if he ends up a little short in the long run.

If it only makes it easier for the homeowner to walk away, it will only end up costing the banks money. If I own a home that I can't afford the payments and/or maintenance on and the bank won't foreclose or affect my credit rating, I might as well just walk away from it leaving the bank with the hassle of selling the property for whatever it can get and in the meantime, take all the appliances and goodies not nailed down with me. I can then go to the next bank down the street and try again.

Immie