Reply #47: No, it helps in any case. Both sides profit from the plan. [View All]

[Xithras]

Let's say a house is in danger of foreclosure with a $300,000 mortgage balance on a residence worth $150,000. The bank refinances the home for $150,000, places a $150,000 levy against the home, and lets the owner keep it. 10 years later, with $100,000 still outstanding on the mortgage, the owner sells the home for $150,000.

If they repossess today, they recover $150,000 of the original loan and take a $150,000 loss.

If they refi and lien, they recover the $100,000 outstanding on the mortgage, PLUS the $50,000 & interest paid during the intervening 10 years, PLUS the $50,000 in excess monies generated during the sale. They have gained $50,000 in profit by deferring collection activities. By keeping the loan active throughout the downturn, they also stand a much better chance at realizing even higher profits if the market recovers some of its lost value.

The homeowner will walk away with no money in his pocket, but his credit will be unharmed and no losses will be incurred during the sale. The bank would still take a loss in this example, but it would be a 33% smaller loss than they would have otherwise realized, and could be much smaller than that. More importantly, it would end the glut of bank-owned homes on the market, stopping real-estate depreciation in its tracks.

The problem with your suggestion is that the homeowner is still paying on the original mortgage amount, even if it's "silent" and has a low rate.

Lets say the original loan adjusted to 8% with a $300,000 principal.The mortgage payment in this case would be $2,201 a month.

In my example, the refi and lien of $150,000 at the current 5% rate with a 30 year fixed would give the owner a payment of $805 a month.

In your example, the positive value at current rates would give them the same $805 a month payment, but with an addition $150,000 tacked on at 1% to cover the negative equity. This "silent second" adds $482 a month to the loan and results in a final payment of $1287 a month. That's nearly $900 a month off their original loan, but it's still $500 a month more than a "forgiveness lien" would cost them. Both ideas work, but mine helps more people. In addition, that silent second would still be due, IN FULL, when the owner decides to vacate the property. Since homes probably won't recover their 2006 values for a few decades, this will result in a huge amount of financial hardship later on. The lien concept limits homeowner liability to profits seen during the homes actual sale.