Interest Only Loan Modifications? How about Rent to Own?
by Tom on October 19, 2009
in Market Musings, banks
Okay, this is kind of scary. The “large banks” want to set up a proposal where borrowers who need a loan modification are given the option of making interest only payments. Let’s look at this a moment:
- Due to either poor financial planning or bad things happening to good people, these borrowers are the true definition of struggling borrowers. I’m not going to get into a discussion of the reasons now.
- They aren’t able to make the payments on their mortgage.
- The value of the property has dropped, in many cases, substantially.
So what do the banks want to do? Let them make interest only payments for 5 years and then what?
Let’s call it what it is, it’s a rent to own scam and it has one true purpose:
Kick the can down the road and put off having to deal with a likely foreclosure.
If a borrower can’t afford to make a payment that includes principal and interest on a 30 year term, then they really can’t afford the house and other alternatives should be looked at and they should be looked at sooner rather than later.
It’s a tough situation but doing an interest only payment for 5 years will help very few people out of the whole scheme of things. It will help the banks in the near future though, because they won’t have to put the foreclosures on the books.
Tom Vanderwell
The Mortgage Investors Coalition called on the Treasury Department to reject a proposal to offer distressed borrowers interest-only payments for a certain length of time as part of the terms of a Making Home Affordable Modification Program (HAMP) workout.The coalition said a proposal being formed by large banks to allow borrowers the option to make interest-only payments as part of a new HAMP workout plan fails to address the issue of negative equity. Such a proposal is not in the best interest of the housing industry and consumers, said the coalition, a recently formed trade group of asset managers holding more than $100bn in residential mortgage-backed securitizations (RMBS) on behalf of pension funds, college endowments and other investors.
Seems to me, at least math-wise that this approach is a no-go from the start. A family who borrowed $200K at 6%/30 yr fixed, has a payment of $1,200/mo. An interest only payment would reduce that a lousy $200/mo. Gotta think that’s not gonna infuse Mom and Dad with Happy Feet.
Bingo – you’re right on for a couple of reasons: 1) The difference in payments between principal and interest vs. interest only is not enough to make a substantial difference in people’s ability to stay in their homes 2) The difference is so nominal that investors aren’t excited about it either.