After Modify Your Home Mortgage You Are Effectively Renting The Home From The Mortgage Company
Many homeowners with upside down mortgages have told me they are seeking a mortgage modification in order to lower their monthly mortgage payments. Under the government’s HAMP program, mortgage modification usually involves lowering the interest rate to 2 % intially and adding deferred interest and past-due payments to the loan principal.
I find that most people do not comprehend the practical reality of a mortgage modification. If you continue to live in a currently upside down house with a modified mortgage payment you are essentially renting the property from the lender. You are renting because it is unlikely you will see any profit when the house is sold unless there is an explosive recovery in real estate value. Even if real estate values were to inflate at a 10% annual rate very few people will break even on their modified mortgage because the deferred interest and arrearage is continuously increasing the mortgage balance.
“Renting” through a modification still makes business sense for homeowner and lender. If the homeowner did not modify the mortgage payment and could not afford to pay the mortgage the homeowner would face foreclosure, and after foreclosure the owner would have to rent an apartment or rent someone else’s home. It will take several years before the homeowner will qualify for a new home mortgage. From the lender’s standpoint, permitting the current homeowner to remain in the property in what is effectively a rental status is better than taking back the property in today’s real estate market.
To be clear, I am not criticizing mortgage modifications. If you like your home and want to live in your home then you should modify the mortgage payment to something you can afford. Just be aware the for practical purposes you are on the same position as a tenant because you it is very unlikely that you will retain any home equity.
Where is the Homestead act in all of this mess? All of the title companies must be called in and produce their insurance and original searches as well as continuation and extension of mortgages and question of rights of HO Associations and Condo Assoc.? It is to say the least a horroble screwed mess with title in every situation and priority of lienors in question in all of these factory type mortgage deals, extensions and modifications made.
What strikes me about the loan modifications is that these owner/borrowers still have the responsibilities of ownership (repair/maintenance/liability) but no equity build-up in the foreseeable future. It is possible many will retire in 20 years and when they try to sell their homes to move to wherever, they realize that they have to pay a big chunk of their saving to the lender to payoff the loan. And maybe even the second mortgagee who has been silently waiting.