PART 1 of 2

by wayne robison, www.foreclosureu.com , senior writer

The real world question that hundreds of thousands (if not millions) of property owners are asking themselves  is:

“Should I continue making my mortgage payments”?

This is a very complex question with a plethora of answers.  But there are clear answers. 

A common property owner theme when faced with mortgage payment challenges goes something like this:

Joe and Mary Jones with their 3 young children purchased a $425,000 in April of 2006.   Joe works as an engineer making $70k per year and Mary is a stay at home Mom.  The Jones’s financed their home through the Wells Fargo “NINA” (no income no asset) program with an 80-15-5 (5% Down, 15% 2^nd, 80% 1^st) – 3 year adjustable rate loan product.  

The Jones’s had intended on refinancing during the “fixed” period of their 1^st, but their home value took a precipitous drop.  The once $425000 home is now worth $275000, and is still falling.  The Jones’s have yet to make a late payment but Joe is now dipping in to his 401k every month to make ends meet. 

The $150000 loss in value is obviously a big concern for the Jones’s.  What’s even more pressing is in April of 2009 the interest rate on their first mortgage adjusted “up”, from 6% to 8.5%.  The rate hike has taken the payment on their 1^st mortgage from the introductory amount of:  $2,040 to $2,600.  The Jones’s total payment including both mortgages, property taxes and insurance is now:  $3277.00 per month. 

The Jones’s want to keep their home and the motivation to do so is predominately based on emotion and isn’t taking any form of fiscal logic.  They have made a lot of memories in it, planned on raising their children and growing old in it.   They have also spent a significant amount of time and money making it “their own”.  Their children’s school is less than 3 blocks away and they are surrounded by many friends that live in the neighborhood they love.  It is their home.

However a relentless list of issues spin through the minds of the Jones’s, they are:

1)      Should Mrs. Jones give up the stay at home mom gig and start looking for work?

2)      Even if this boosts their income up enough to make their mortgage payments, should they stay  boarded on a sinking ship?

3)      The Jones’s can rent a home similar to theirs for $1600 per month (almost as nice).  That would be a monthly savings of  $1700. Should they walk away and rent?

4)      They could live in their home for “free” for roughly 9 months before the bank forecloses; avoiding roughly $30,000 in mortgage payments.  Is this an option?

5)      Is just giving the home back to Wells Fargo (the 1st lien holder) via a Deed in Lieu of foreclosure an option?  This would certainly avoid foreclosure, marginally save their credit rating and possibly avoid a deficiency tax liability.  BUT will the 2^nd mortgagor ever go for this?

6)      Is selling their home as a short sale an option?

7)      Joe can apply for loan modification(s) with his lender(s) but what are the factors in getting approved? 

8)      If  Joe is going to pursue a loan mod should he stop making his payments first?

9)      If yes, does he stop making payments on both his 1^st and 2^nd Notes?

10)  What will happen if Joe stops making the payments on just his 2^nd?  Will the 2^nd foreclose?

Dealing with these conflicting options is a real quagmire.  The fact that the Jones’s are “emotionally involved” poses the most complex aspect of their decision.  It is important to understand that the vast majority of families (note I said families and not investors or single owners) are going to want to stay in their homes.  That said, a loan modification is they only way to achieve that. 

To that end, two new pieces of national legislation are making loan modification increasingly more likely.

They are:

1)      The Obama Plan or the Making Home Affordable Plan.  This plans objective is to modify loans that are owned or backed by Freddie Mac or Fannie Mae.  It was made possible when the government took over ownership.  About 50% of all outstanding loans are under the Freddie/Fannie umbrella.

2)      “Helping Families Save their homes Act  S. 896”.  This gives mortgage servicers carte blanche to modify loans.  This was a landmark bill in that loan servicers are now allowed to ignore the legal contracts with end investors that once prohibited them from modifying loans without the express permission of the actual owner of the loans.

In next weeks part 2 of the BLOG I will discuss these 2 new pieces of legislation, address the 10 questions outlined above and detail which professions are best suited to assist this peaking segment of the real estate market.  Until then!

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