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do lenders ever modify under-water loans?

snigletsniglet
edited July 2008 in Housing Bubble
I know this is a really basic question, but does anyone know if lenders will modify mortgages on homes that are under-water (i.e. where the mortgage is worth more than the value of the property)? We have been hearing that more lenders are agreeing to modifications these days, but I just don't have a good understanding of what these modifcations entail, and which types of borrowers would be eligible (e.g. do lenders require that there still be equity in the home).

I wonder how many loan modifications are simply re-jiggering of payment terms (i.e. keeping a lower interest rate) vs an actual reduction in the principal owed?

Comments

  • snigletsniglet
    jillayne wrote:
    There are very few loan modifications being granted if the homeowner is seriously underwater. The loan modifications that are granted are often done by lowering the interest rate on the note to say, 3% for a fixed period of time such as three years, but with NO principal reduction.

    http://www.raincityguide.com/2008/07/23/the-housing-crisis-is-like-hurricane-katrina/

    This is SCARY! From what I understand it seems as if most borrowers going into delinquency are already under-water, and if having equity is a virtual pre-requesite to a loan modification, then the prospect of many struggling borrowers finding relief is slim to none.

    One other thought that occurs to me is whether there are some lenders who literally can't afford to do a loan mod by reducing the principal? Doing a modification, with a principal reduction, would require an IMMEDIATE write-down of the value of the mortgage on the lender's books. Unfortunately, some lenders might be in such dire straights that a forced write-down of large numbers of delinquent loans would put them in conservatorship.

    Far better to dawdle in bringing an under-water home to foreclosure, and even sit with masses of unsold REOs listed at ridiculous prices, rather than taking write-downs (i.e. acknowledging that they will never recover the value of their mortgages). If the choice is between going into conservatorship tomorrow or waiting for 9 more months, most lenders would choose the latter option. Hey, there could be some sort of miraculous market recovery that winds up making their investments whole again...
  • Lake Hills RenterLake Hills Renter
    Or a fat government bailout. :x
  • mukohmukoh
    Loan mods are hard to track unless you are tracking a particular property or an area.

    What I see from lenders though is getting the mods into the territory of FHA/FNMA GSE guidelines, thinking that they will take these loans to them.
  • snigletsniglet
    mukoh wrote:
    What I see from lenders though is getting the mods into the territory of FHA/FNMA GSE guidelines, thinking that they will take these loans to them.

    How could any loan that is already under-water meet GSE guidelines? Wouldn't the original under-writer have to write down the principal first before they could pass it to a GSE?
  • SeattleMooseSeattleMoose
    "Or a fat government bailout. "

    Luckily for us our elected officials are bright, cannot be bribed, and carefully weigh the long term financial and ethical effects of their every vote. Therefore, I can assure you that they would never do something as stupid as rewarding those who caused the bubble with a "fat bailout" that penalizes all of us financially conservative and prudent folks who played no role in the madness.

    I mean we are talking about our public servants, men and women of high ethical and moral values, men and woman who......uh just a minute.....seems they just passed a fat government bailout :(
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