Loan Modifications Make Payments Affordable

The current government loan modifications programs offer borrowers true payment affordability — if borrowers want to take advantage.

111 HILLCREST   Irvine, CA 92603  kitchen

Irvine Home Address … 111 HILLCREST Irvine, CA 92603
Resale Home Price …… $3,188,000


I watch the ripples change their size
But never leave the stream
Of warm impermanence and
So the days float through my eyes
But still the days seem the sameAnd these children that you spit on
As they try to change their worlds
Are immune to your consultations
They’re quite aware of what they’re going through

(Turn and face the strain)

Changes — David Bowie

Changes. Borrowers and lenders both want changes; borrowers want payments they can afford, and lenders want borrowers to make payments. There is supposed to be a meeting-of-minds before a loan is funded, but now in our era of retroactive loan qualification, lenders are forced to cope with lax underwriting standards of the bubble through loan modifications.

The Coto Housing Blog recently featured an excellent post on loan modification programs simply titled Loan Mods:

“The loan modifications in the news and brought forth as the second coming are government sponsored loan mods. The government wrote the qualifications and the government wrote the terms and the government is paying both the lenders and the borrowers to modify their loan according the terms the government has decided is best. HARP is government sponsored loan mods for Fannie and Freddie guaranteed loans. HAMP is for non Fannie/Freddie loans. But there are qualifications. The loan must have originated before January 1, 2009. The borrower must be able to prove they are having difficulty making their payments. The amount owed on the first mortgage must be equal to or less than $729,750. The loan must be for your primary residence. DTI must be more than 31%.

There are three terms that HARP or HAMP may modify and those three terms are approached in a specific order. The second term will only be modified if the first modified term does not bring the DTI equal to or below 31%. And the third term will only be modified if the second term mod does not bring DTI below 31%. The first term is the interest rate which will be lowered to bring DTI to 31% with a minimum rate of 2%. Not bad, eh? Wouldn’t you like you have your interest rate lowered to 2%. If the modified interest rate is below the market rate, the modified rate will be fixed for a minimum of five years as specified in the modification agreement. Beginning in year six, the rate may increase no more than one percentage point per year until it reaches the rate cap indicated in the modification agreement. The cap is equal to the prevailing market interest rate on the date the modification is finalized as published by Freddie Mac based on a survey of its customers. This cap means that your rate can never be higher than the market rate on the day your loan was modified. If the modified rate is at or above the prevailing market rate, the modified rate will be fixed for the life of the loan. Simply, after five years, the interest rate will increase 1% per year until it gets to about 5.2%. …

The 2nd term that can modified is the length of the loan, and it can be extended up to 40 years to bring the borrowers DTI under 31%. …

The 3rd term that can modified is the principal, although under the conditions of HARP and HAMP, the principal may be foreborne, that is, the principal can be reduced for the period of the loan, but must be paid back when the house is sold, or foreclosed on, or borrowed on. … It changes a non-recourse portion of the loan into recourse.

Borrowers are enrolled in a three month trial period paying an amount equal to or less than the amount agreed upon in their loan modification agreement. If the borrowers do not make their new payments on time during the trial period, their trial period is extended. If the borrowers do not turn in the appropriate documentation necessary to qualify for the loan mod, the trial period is extended. If the borrower fails to meet the requirements of the trial period is any way, the trial period is extended. Currently, no borrower who is enrolled in the loan modification program may fail. On January 31, some of the trial loan modification extensions will end, unless they are extended again. If the maximum time period for a foreclosure proceeding is reached while a trial loan mod is in effect, the foreclosure is canceled.”

I appears that amend, extend, pretend is an integral part of the system.

Notice that the first loan amount must be under $729,750. That means every loan in Irvine in excess of $729,750 is ineligible, and since our median peaked above this number in 2006, it is fair to assume many loans in Irvine are over this threshold.

If you have a loan under $729,750, the 2% interest rate is a sweetheart deal. In 2006 at 6.5% interest, the payment on $729,750 is $4,612 per month, but at 2%, the payment falls to $2,697 — the ridiculous payment of 2006 is affordable. However, if this is not affordable enough, the term can be extended to 40 years which takes the payment down to $2,210 — less than half the original payment. If that is not enough, principal forbearance can lower payments to whatever level is necessary for a few years (sounds like an Option ARM).

When you look at how the terms can be modified and how significant the reductions in payments really are, it is surprising that everyone is not successfully modifying loans. Of course, if you are 30% underwater, you probably don’t see the point, but payment affordability is not a legitimate borrower excuse.

111 HILLCREST   Irvine, CA 92603  kitchen

Irvine Home Address … 111 HILLCREST Irvine, CA 92603

Resale Home Price … $3,188,000

Income Requirement ……. $668,398
Downpayment Needed … $637,600
20% Down Conventional

Home Purchase Price … $2,150,000
Home Purchase Date …. 4/12/2008

Net Gain (Loss) ………. $846,720
Percent Change ………. 48.3%
Annual Appreciation … 21.7%

Mortgage Interest Rate ………. 5.11%
Monthly Mortgage Payment … $13,863
Monthly Cash Outlays ………… $17,770
Monthly Cost of Ownership … $12,650

Property Details for 111 HILLCREST Irvine, CA 92603

Gourmet Kitchen Award

Beds 5
Baths 3 full 2 part baths
Home Size 5,475 sq ft
($582 / sq ft)
Lot Size 15,023 sq ft
Year Built 1987
Days on Market 5
Listing Updated 1/20/2010
MLS Number U10000273
Property Type Single Family, Residential
Community Turtle Rock
Tract Cs

Exquisite family home perched on an oversized double lot at the top of Turtle Rock Crest featuring sweeping views from Catalina Island to the San Bernardino mountains. Recently completed remodel offering customized finishes and quality craftsmanship throughout. Dramatic entry with soaring cathedral ceilings leading to formal living and dining rooms, each with their own fireplace. Gourmet kitchen with dual island work stations with granite counters, custom cabinetry, walk-in butler’s pantry, built-in refrigerators and top of the line stainless steel appliances. Extensive use of hardwood and stone flooring, custom wainscoting and moulding throughout. Large family room with French doors opening to side courtyard with cascading fountain.Upstairs bonus room with panoramic views, balcony, custom built-ins and private bath. Gracious master suite with dual walk-in closets, exercise room and luxurious master bath. This is truly a rare offering and must be seen firsthand to appreciate.

First, I want to recognize the excellence in photography shown in these listing pictures. The photographer would probably lament the poor lighting caused by the gray sky outside, but the photos themselves are outstanding. These were obviously taken with a wide angle lens, but there is barely a hint of distortion. The angles the photographer selected took advantages of interesting reflections and shadows making for beautiful photographs that display the property very well.

Second, I have to wonder WTF the owner was thinking when he (1) overpaid in 2008 and (2) over-improved a property he overpaid for. If someone steps up and pays $3,188,000, then Orange County must have infinite capacity for supporting high end real estate, and everyone should start flipping those.

20 thoughts on “Loan Modifications Make Payments Affordable

  1. Making Homes Cost More Programs

    “It appears that amend, extend, pretend is an integral part of the system.”

    That has always been an integral part of economies.

    The housing bubble was an extend and pretend tactic.

    People make a lot of money by predicting the next extend and pretend tactic. People also lose a lot of money by believing the fantasy of the pretend market, or not understanding that a new extend and pretend tactic is always in the pipeline.

  2. lowrydr310

    Loan mods are great! But where’s my free money?

    I guess the whole point of loan mods is to keep people in their homes, but why? Who exactly is being helped by loan mods? People who bought more house than they could afford? People who had income to support their mortgage initially but now have a reduced income because of job loss or reduced hours? People with an option ARM who now suddenly realize they can’t afford the fully amortizing payment?

    I don’t have much sympathy for anyone really. It seems more likely that the people being bailed out with loan mods were speculators. It’s unfortunate for anyone who lost a job or had their salary reduced, but that’s something that should be planned for with a rainy day savings fund.

    I guess this is the new America; there’s no need for any personal responsibility as Uncle Sam has your back, but how long can this game go on and what are the long term costs?

  3. Making Homes Cost More Programs

    “That means every loan in Irvine in excess of $729,750 is ineligible, and since our median peaked above this number in 2006, it is fair to assume many loans in Irvine are over this threshold.”

    This is only on the first loan. Down payments or second loans put this number over $900,000 for price when you are comparing versus the median.

    The market above will be sorted out by the wealthy, and you can bet there will be some principal reductions in that market as well, they just won’t be subsidized by the government.

  4. awgee

    It seems the reason many of the failures of trial loan mods occured because the borrower could not produce the documentation necessary to close. but, no worries, the government is going to fix that. They are going to change the qualifications so that the requirements for documentation will be waived for those borrowers who can not produce the required documentation. Reality is so much funnier than fiction.

    My guess is that if ” no doc” does not produce enough “sucessful” loan mods, the requirement to pay on time for three months will be waived.

    1. Making Homes Cost More Programs

      It’s very diificult for many responsible people, young and old, to accept what is happening.

      Once you accept the farse that is our economy, it’s easy to laugh about it and continue on with your life without anger.

      Do you have food on the table?
      Do you have a roof over your head?
      Are you relatively healthy, enough to enjoy life?

      If the answer to these questions is yes, extend and pretend works perfectly for you. Thank Big Brother.

    2. AZDavidPhx

      It really honestly is hilarious watching the government fight one fire after the other using these “The Matrix” style techniques.

      It always reminds of The Spoon

      Don’t try to bend the documentation standards, that’s impossible. Just realize the truth – there are no standards.

    1. .

      Beautiful home, but I would have liked to have seen more done to the backyard. I would prefer the Turtle Rock Crest to Shady Canyon any day.

      SoOCOwner, you can see the front of the house on google street view since it’s not a gated community. IrvineHomeOwner would be salivating.

  5. winstongator

    I read something yesterday saying how great an investment housing was (it was written around peak housing) and to think about how much your parents paid for their house. I think this was more targeted towards my parents generation who bought their home in say the 60’s and either still live there or sold sometime in the naughts.

    I wonder how much of the price change is due to interest rate and inflation fluctuations which have been quite severe over that time frame. If you have an asset purchased with a fixed debt, but the value of the asset is inflating (with general inflation) will the investment yield better returns as inflation gets worse?

    Take a home at $100k, with 10% inflation, 4% cost of funds, 14% mortgage. Your calc says payment is $1065/mo. Look at the cases of 8%, 6%, 4%, and 2%. Keep 4% CoF, then adjust initial price to adjust for lower payments with lower rates, 12% mort gives initial price of $113k. Assume 20% down, and the 5 inflation rates, your return on your investment would be 32.30%, 27.33%, 21.90%, 15.81%, 8.74%. Adjusting for inflation, isn’t 32% in a 10% inflation world better than 8.7% in 2% inflation? I’m looking at it as a pure inflation vs. leverage. I would think that there would be some way to arbitrage this type of return out – maybe % cost of funds increases with inflation.

    Obviously from a capital appreciation point of view, if mortgage rates drop so that buying power doubles the purchaser after prices doubles does well, and the opposite can hurt the buyer at peak buying power. This seems like a fundamental price instability brought on by interest rate fluctuations, but the fed is supposed to use interest rates to keep prices stable! /headexplode.

    Also, comparing geography, if mortgage rates are 5%, you’re much better off buying in the market that’s appreciating at 15% than the one appreciating at 5%. More buyers to the area, higher prices, more buyers. Some markets were, in hindsight, much riskier than others, but all markets paid pretty much the same rates. If you put the risk premium at 0, doubling or tripling risk still leaves the premium at 0.

  6. alles_klar

    IR – Thank you for bringing this topic up. I find it very interesting.

    I have a couple questions/comments about the reduced payment example you provided:

    “In 2006 at 6.5% interest, the payment on $729,750 is $4,612 per month, but at 2%, the payment falls to $2,697 — the ridiculous payment of 2006 is affordable. However, if this is not affordable enough, the term can be extended to 40 years which takes the payment down to $2,210 — less than half the original payment.”

    It appears the new payment at 2% includes principal, as you later mention the term can be extended to 40 years, correct?

    If so, I suspect one of the other major problems associated with this program – other than the document and unemployment hurdles – is that many of these people likely took out ARMs or Option ARMs. (I think it is fair to say that a very high percentage of people that cannot afford their loan now were not financially conservative enough to get a 30-year mortgage.) So people with ARMs or Option Arms would probably see little reduction in payment because their payment would now include principal. In other words, the reduction due to a lower interest rate would be largely negated by now having to pay principal.

    This leads to another question. Does the principal forbearance part of the program mean that the now debt slave does not have to pay some or any of the principal part of the payment? Or does it work by ignoring a portion of the loan when determining the payment? To illustrate the scenario in the latter question, say the loan is $600k, the bank forebears $100k of the loan, so the debt slave’s payment is calculated based on a $500k loan.

    The former situation where the principal portion of the payment is forebeared (effectively making it an ARM loan) would be much more effective in reducing payments than forbearing a portion of the total loan amount. So I am curious as to how it works.

  7. Soylent Green Is People

    I believe Fannie / Freddie must own the loan in order to he HAMP’d. Most 2005-2008 loans were capped at $417,000 so I doubt you’d find many that would qualify for $729k mods.

    The real issue: Per the US Treasury’s own report on HAMP mods – the average Debt To Income, post modification is……. 55.1%. Yes, after all the hoo-ha the Government wants to tell you about HAMP, starting 72% DTI’s were reduced to 55.1%.

    I’m sure modded homeowners are stocking up on Top Ramen, beans and weenies, or blue box Mac ‘n Cheese now that they’ve lowered their payments thanks to Dr. Hopey McChange.

    My .02c

    Soylent Green Is People.

    1. Soylent Green Is People

      Whoops. HARP is for FNMA and HAMP is for non Agency loans. I need to read what I write before posting….


      1. AZDavidPhx

        Oh and get ready for the JOBS talk! Obama’s gonna get me ah jawby jawb! I’ve always dreamed of being a census worker!

        1. AZDavidPhx

          Maybe we can up the census sampling rate to every year instead of every 10 years – to better serve the folks of course!

    2. AZDavidPhx

      Tonight’s show will be interesting. After all the hootin and hollerin 30 seconds Worship by the Democrats – we get to find out all about this bold new discretionary spending freeze or as I like to call it ‘soak the middle class’.

      They will not stop spending money on mortgages, militarism, or clunkers – I guarantee you that.

      What’s left? Oh yea, schools, medical care, etc – the stuff that people actually care about.

    3. awgee

      Yeah, but if they can’t get their DTI below 55% with the three term changes, they have to go to “credit counseling” in order to be approved. That oughta make everything ok.

  8. GrewUpInIrvine

    Ok, am I reading this correctly? Paid 2.1 Million in 2008, and now thinks they can get 3.1 two years later? What am I missing? Evil genius? Why the hell do I work if I could make 500k/yr by flipping a house?

    I don’t know what I hope for more: to hear that some wealthy moron buys this place, or to hear that this evil genius finds his way to the financial guillotine.

Comments are closed.