Thursday, January 15, 2009

Before good loans go bad

A friend of mine has been talking with his mortgage company in an attempt to work out a win-win solution on a potential problem.  Much to his dismay, the mortgage company doesn't want to work with him.  Here are the particulars:
The property is an investment, rental home.

The property is worth 15% less than the current loan balance.  (and that's only because he made a significant down payment when he bought it 2 years ago.

The current mortgage payment is slightly over $2,000 per month.

The current rental rates in the area are about $1,000 per month.

The property is vacant on the advice that the home would be extremely unlikely to sell if tenant occupied.  Unfortunately, this means my friend has the choice of losing $2,000 in an attempt to sell the home, or $1,000 with the guaranty that he'll be losing that amount for the next year or two.  He doesn't like either option!

My friend is willing and able (barely) to write a check at the closing table if the property sells.  However, in losing $2,000 per month on a home that's probably falling in value, this won't be the case for too much longer.

My friend has outstanding credit and a good, secure job.

Here is my friend's proposal to the bank:
I don't want to walk away from the house, even though it's in my financial best interest to do so.

I've been making a concerted effort to sell the home, but there aren't any buyers.  (which means, if I give the home back to you, you're going to take a large loss!)

Let's modify or refinance the loan so that I can make interest-only payments.  Or even better, let's allow slightly less than that and have any unpaid interest accrue as negative amortization.  I can then rent the home out and come within striking distance of break-even on cash flow.

We'll wait a couple of years for the market to strengthen, at which point I'll sell the home at then-market prices and make you whole.

If you're not able to, or willing to, work with me, there is a very good chance I'm going to run out of savings and give the house back to you.

image of savings

Here is the bank's response:
We'll let you talk to the loan mitigation department when you're at least 90 days behind on your mortgage.  But there's no guaranty they're going to work with you, especially  if the rest of your credit is good and you make good money.

This seems to me like a no-brainer for the bank.  It offers them a terrific upside with very little downside.

If you were the bank, what would you do?

Your getting more frustrated every month with the banks' lack of big-picture common sense Realtor,

Chris Butterworth