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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: MoneyPenny who wrote (213349)	7/30/2009 3:11:22 PM
From: Elroy Jetson	Read Replies (4) \| Respond to of 306849

I have a friend who just received his "Home Affordable Loan Modification" proposal from Fannie Mae. From what I see the taxpayer money is not flowing too freely, which is good. But this likely means more bank problems and failure down the road. My friend bought his home in Palm Springs for $440k in 2005 with a 20% down-payment and a 5.4% 30 year fixed mortgage from the USAA Credit Union. They in turn sold this $350k mortgage to Fannie Mae. His home is now worth $200k, which is $150k less than the mortgage. If Fannie Mae foreclosed they would most likely lose $210k. Due the loss of his $150k income he stopped paying his mortgage almost three months ago. He was fortunate and starts a new job for $130k next week. The loan modification proposal lowers his mortgage rate to 2% for five years. After five years the rate rises 1% a year until it returns to the lower of the current rate or his old rate, so an additional partial subsidy for 4 years. If is not late on his payments more than twice over the five year period, Fannie Mae will reduce his loan balance by $5k. All told this is about $10k worth of concessions to induce him to start making mortgage payments again, so Fannie Mae could avoid a $210k loss. It's a great deal for them if he pays. They're hoping real estate prices turn around over the next eight years and this foreclosure problem simply fades away. The problem for the home owner, as I pointed out to him, is that it makes the payments affordable for him for 7 years, but he still ends up with $145k more mortgage than if he simply bought one of the many foreclosed homes on his street for $200k. Being age 63 he could take $200k from his SEP-IRA. Even if he took only $100k I'm sure someone would lend his $100k for a mortgage with 50% down, even with a foreclosure the month before. If he raids his SEP-IRA account and other savings to pay his current mortgage, he'd be left with perhaps only $80k in savings since the value of his stock portfolio took a swan dive. Even if he walks from his home and buys one down the street for cash, he would only have $230k in savings plus a paid for home. Not too glamorous, but better than the alternative. So I don't think he'll be taking the loan modification.