Capitol Hill Blue Forums Political Issues Finance, the economy & Economics Fixing a bad Mortgage

My daughter has a mortgage that is underwater. As a result she cannot refinance. Her mortgage is not insured by fanny or freddy. I think that the proposed mortgage thing might address this but I can find no information. This may not be a place to post thing but I am wondering (some of you folks seem to know things!)

My daughter is making her payments, she is not broke and has a job. Unless there is a solution, reasonably quick, I am going to tell her to buy another place and then simply let this one go back to the bank, especially since they have refused to even talk about refinancing let them have it back. Except for her mortgage she lives on a cash basis so, if she buys first, and then abandons, this will not hurt her. She is not whining about being underwater but cannot understand why the existing mortgage cannot be refinanced due to the property being worth less than the mortgage amount (she believes that she borrowed the money, is willing to pay it back, but also feels that she should be allowed to refinance just like anybody else).

Her current interest rate is around 7%. Not allowing her to refinance down to 4-5% is just crazy. The bank is not using good judgment but I see no reason for her to be held hostage by their greed and intransigence. I suspect there are some that might have thoughts on all of this?

Sadly, there is no such thing as "giving it back to the bank".

As I understand it, the debt remains, as a result of the signed "contract".

Some years ago a friend bought a house for $180M. Being unable to pay, because of illness in the family, he left the house and moved into an apartment, telling the bank that he could no longer afford to pay. In time, the bank took back the house, sold it for $130M, and left my friend with... not only the $50M loss, but fees, charges, and interim maintenance of another $20M, an actual total responsibility of more than $70M debt (plus interest) and nothing to show for it.

I hope that someone here can give good advice, or point a direction. In any case, "letting it go back" may not be the best choice.

Not much help here, but a little more about the actual plan.
Mortgage Plan

Unless your daughter bought the property from the bank, it would not be a case of "letting it go back to the bank". That aside, if she has a non-recourse mortgage and she took your advise and stiffed the bank, then they would have to rely on the resale of the property bringing enough to cover the full amount of the note. Of course, these laws change so much and can be different in different states, so it would be wise to consult a local lawyer with expertise in this area before acting.

Unless she has an income high enough to cover two mortgages, I suspect she will have difficulty finding another bank to loan her the money to purchase a second home. Besides, that fixed 7% may be looking pretty good in a year or so.

Since she is in a position to meet her obligation to the lender, it is probably in her long term interest to do so. Just my opinion.:-)
Yours,
Issodhos

I'm far from a mortgage expert, but I posted the following in the thread, "Funny Mortgages".

There are a couple of things that a Mortgagor can do. Now these don't always make the lender's smile, but none the less, it might be worth a try...rather than just throwing up one's hands and believing it's an impossible situation.

From my posting:


The other possibility is as mentioned above, approaching the lender with "Short-Sell" agreement. The bank agrees to sell the property at a loss in order to save in much the same ways that one would suspect from a buyer asking for a "Deed in Lieu of Foreclosure".

To repeat a little of the above...

Banks do have to weigh out the cost of holding on to a property and having to deal with a possible larger loss from processing the foreclosure, the expense of selling a foreclose, and the chance it will go up for auction and they can't get their minimum asking price...and lastly...if someone that is forced into bankruptcy, it could really get costly for a lender.

I don't know, just something to think about...check state laws as to whether or not these are even options.

Better yet, ask to bank for the original loan papers - if they can find them.

One doesn't ask a bank to re-adjust a car loan payment because the value of the car has gone down - everyone expects car values to go down.

The fallacy in this recent housing market is that everyone assumed that housing prices would simply go up and never down and certainly never thru the basement floor.



The rule of thumb of "refinancing" is that there needs to be 20% in equity first.

Your idea of buying a house and then letting it go is already a phenomenon and the underwriters are on the "lookout" for these types of transactions.

The loan will not be approved on the new house if the mortgage on both houses can't be met.

One option, however, is that YOU buy the house, your daughter lets hers go, and then you quit deed the house over to your daughter. You'll still have to be on the mortage and loan docs, because her credit will be ruined for at least 3 years.

Thanks for the link, cousin it. Very helpful. Very interesting. Very encouraging!

There is currently a memorandum on foreclosures and banks are encouraged to work with borrowers that are current on payments but the loan amount is higher than the value of the property.

How about this. Get the bank to refinance for the current amount of the loan. This is what they normally do only the value of the home is usually not underwater. What I do not understand is why a bank/servicer would fight this kind of refinance as the borrower is simply asking for a lower rate, based on the current rate, just as would normally happen under other circumstance. My son, for instance, just refinanced his house and had no problem as his value had not gone down very much.

Now, one more step. How about refinancing with fanny or freddy for the current amount of the home? I would think that if a home owner admits the debt, plans to pay it back, and simply wants to refinance, because of the lower current prevailing rates, should be able to do that.

What's the incentive for the bank to forgive the debt?

Don't get me wrong, I think the bigger banks are more willing to work with the borrower if there is not a huge difference in value vs loan amount... but if it's too big of a difference they won't budge (especially if you have a second mortgage).

You can always refinance up to 96.5% LTV with FHA loans. A lot of people are doing this and paying what is over with cash in order to get a lower rate.

Conventional loans (Fannie or Freddie) have lower limits like 90%LTV or some loan programs have a max of 80%.