Thursday, January 28, 2010

Drink the kool-aid: Mortgage Matters

Today in our first instalment of Drink the Kool-Aid, we discuse the current hot topic in the housing market: Should homeowners default on their mortgage just because they feel uncomfortable with the tyer,ms of the loan?





As always there are to sides to every story...








Homeowners:
They belive that they should not be obligated or pressured into keeping a house if, in their eyes, it is a bad investment. Many homeowners are upside down on their mortgage, meaning that the value of their home, is less than what they owe on it. This means that they would have to pay tens, if not hundreds of thousands of dollars, just to sell their home. The solution? Default, give it back to the bank, it's their problem now.


Banks:
The general consensus in the banking comunity is this: TOO BAD! So what if your house is worth less than what you agreed to pay for it. We have a written agreement, and you as a homeowner have a legal and moral obligation to pay for what you buy. It is not our fault that it has become an chore. Besides, we are helping homeowners in distress by offering loan modification, which lowers the monthly payments by as much as 50%.

Whats in the Kool-Aid:
When the banks make poor decisions its ok, the government will bail them out (using your money). But when homeowners make poor financial decisions, the bank is quick to babble some non-sense about moral obligation and legal agreements. The fact is, the bank agreed to lend money using the house as collateral. If the owner defaults, then the bank keeps the house. That is the agreement. Home owners are simply doing what is best for them and their family. What about working with the bank under a loan modification program? Sounds nice in theory, but the devil is in the details fine print. Under most loan modification programs, your loan term will be reset to zero. So if you where already 15 years into a 30 year mortgage, thats too bad. You have to start all over, from zero, beginning a new 30 year loan agreement on the remaining balance. Whats more there is often a large (possibly more than $100,000) balloon payment due at the end of the 30 year term.  In short: buyers will dump their bad investments, and banks will be mad about it. Thankfully for them,  as a taxpayer, you'll be paying for it.




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