If you think mortgage loan modifications are a good idea … read this

Ken’s Take: Is this a great country or what ?

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Excerpted from WSJ, “Don’t Let Judges Tear Up Mortgage Contracts”, Feb 13, 2009

Imagine the following situation:

A few years ago a borrower took out a $300,000 loan with nothing down to buy a new house.

The house rises in value to $400,000, at which time he refinances or takes out a home-equity loan to buy a big-screen TV and expensive vacations. He still has no equity in the house.

The house subsequently falls in value to $250,000, at which point the borrower stops making payments and defaults on both the mortgage and the home equity loan.

The home equity loan gets written off and the mortgage gets modified: the principle gets written down to $250,000.

The homeowner keeps all the goodies purchased with the original  home-equity loan.

Several years from now, however, the house appreciates in value back to $300,000 or more — at which point the homeowner sells the house for a $50,000 profit.

Bottom line: By defaulting, the stiff gets $100,000 in goodies and walks away with $50,000 in cash.

Full article:

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One Response to “If you think mortgage loan modifications are a good idea … read this”

  1. BJ Says:

    From an article on economist.com: “Of 73,000 loans modified in the first quarter of last year, 43% were again delinquent eight months later (see chart [at http://media.economist.com/images/na/2009w08/CUS018.gif%5D)

    So while the ‘owner’ may walk away with $100,000 in goodies, the chance of him sticking around long enough to get the $50,000 profit on the home is pretty small… just like the consolation this observation provides me.

    Full article on the ‘debate’ on cramdowns: http://www.economist.com/world/unitedstates/displayStory.cfm?story_id=13145239

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