Observations about Mods II

Posted by kevin on February 27, 2014 under Foreclosure Blog | Comments are off for this article

How can Homeowner A get a better deal? “A” is saving $1056 per month on principal and interest payments while “B” is saving only about $264 per month. So, from a cash flow basis, “A” is saving more. Moreover, without the suspense account of $200,000, “A” probably could not meet the monthly nut. It is almost impossible to scrap up another $1056 per month every month. An extra $264 per month is no piece of cake, but it is a lot more do-able than $1056. So, “A” is getting the better deal. Right?

But, let’s look at it another way. “A” has to come up with $200,000 at the end of the term while “B” only has to come up with $50,000. Advantage to “B” but that is potentially 25 years off. If the fair market value of the house is $300,000 and prices increase an average of 5% per year, at the end of 25 years, the house could be worth about a $1,000,000. “B” walks away with more money if he is still able to walk. But “A” still has a health chunk of change. In effect, neither A nor B are out there breaking their backs to earn money to make that balloon payment. Why? Because inflation pays the balloon.

What if prices never go up. Well, at the end of the term, you pay or don’t pay. If you do not pay, you get foreclosed. “A” saves $200,000, “B” saves $50,000 and both are looking for a small apartment in Florida.

How bout looking at it another way. “A” does not pay interest on $200,000 for 25 years at 4%. That is a savings of $116,000 while “B” saves only $29,000.

Enough already. There are many ways to analyse this mod scenario. Some ways seem jaded, but I am sure that the lenders, with the NPV calculations required under HAMP, are looking at your home in the same cold blooded way.

While all the above analyses should be considered by the homeowner who has been presented a modification with a balloon payment, any analysis should begin with same question. How long do I intend to live at my current house? Why? Because the balloon is due at the end of the term or when you sell. If your kids are in their late teens or early 20’s, chances are that they are going to move out in 5-8 years. Why keep a big house if there are only two of you. The problem is, however, how are you going to come up with $50,000 or $200,000 in 8 years. Maybe, the house may increase in value by $50,000 over 8 years, but you are going to need much more than a $50,000 increase because you have to cover the closing costs including the broker’s fee. $200,000, in most cases, is a “bridge too far”.

Bottomline, the longer you intend the stay, the less the balloon payment is an issue.