Wednesday, December 12, 2007

Renegotiating a Mortgage – Why Not?

Everyone knows you can't renegotiate your mortgage with your current bank, right? But why not?

Contracts are re-negotiated all the time, and as long as both parties consent, the new agreement replaces the old one and is legally binding. The banks have an opportunity right now to pull off an awesome public relations move, while increasing their own long-term profits and at the same time saving homeowners from losing their homes. Here's my plan:


ARMS & Heavily Depreciated. This is available for properties which have depreciated in value significantly, and which are carrying an Adjustable Rate Mortgage. (basically, many homes that were purchased in 2005 and 2006 would qualify.)

Good History. Borrowers must have been on-time with their mortgage payments before the interest rate adjusted upward.

Find Market Value – Use a combination of Realtors and Appraisers to determine the market value, with at least one party being hired by the bank and the borrower. Average the opinions to arrive at a current market value.

Write down the mortgage. If more is owed on the home than the current value, the mortgage can be written down to that value, and the loan can be re-amortized (on fixed-rate terms) to create a lower payment. The borrower must be able to qualify for the new, lower payment. (note – in cases where there is a 1st and a 2nd mortgage, I would use a formula to determine how much each one gets written down. )

Credit Reporting. Build a new credit reporting entry called "Renegotiated", so that borrowers' credit scores (their predictive ability and willingness to repay debt) is addressed appropriately.

This does not give the borrower an easy "out", since selling the home will still cost an additional 5-7% and require them to pay out of pocket in order to complete a sale. It also has an adverse effect on the borrower's credit report.

This does, however, remove both of the major contributors to foreclosure – people are most likely to walk away from their home when the payments are too high AND there is negative equity in the property. The banks will lose a few dollars quickly, but will end up with a happy, long-term borrower who can afford the mortgage. This should beat the alternative of getting the property back, usually in less-than-desirable condition, and trying to re-sell it in a declining, ultra-competitive market.

Your looking for solutions Realtor,

Chris Butterworth

[tags] ARMs, Adjustable Rate Mortgage, renegotiating mortgage, foreclosure, Fletcher Heights [/tags]