Posted on 06/08/2011 8:01:42 PM PDT by Jim 726
PANAMA CITY BEACH — Lindsay Hall took out a $200,000 loan in 2005 on her paid-off beach house with the understanding that her $600 monthly Social Security check would cover the mortgage payments.
When her interest rate jumped more than a year ago, it raised her mortgage payments to $1,500. At that point, Hall started the fight to save her home.
“I want to say I did my best to fight for the American dream,” said Hall, 70.
Hall has negotiated with her loan servicer, IndyMac Mortgage Services, to modify her loan payments multiple times. Each time she negotiates payments within her $600 budget, the modification is rejected and the mortgage payment jumps back to $1,500 a month, she said.
To begin loan modifications, lenders often advise or suggest homeowners miss three payments to send up a red flag and initiate the modification talks. When payments are missed, loan modification talks may begin, but banks, meanwhile, also will start foreclosure proceedings.
After loan modification talks failed, Hall tried to change her loan through the Home Affordable Modification Program (HAMP) offered by the U.S. Department of the Treasury. For the past three months, she was able to make payments of $585. Hall, who continues to work, received a letter informing her that she no longer qualifies for the program based on her income and that her payments will jump back to $1,500 a month.
“I’m back on hold; I’m waiting for the lender to let me know what I need to do next,” Hall said. “This is the first time I have thought it’s over and I’m going to lose the house.”
The bubble burst
Hall purchased her two-bedroom beach house in 1970, paying $38,000 for the property with the income she generated from owning and operating a dance studio in Dothan, Ala. At the time, her mortgage payment was $103 a month. When Hall semiretired in 1994, she moved to Panama City Beach as a full-time resident.
Hall took out a $50,000 loan in 1994 to update the property, which she paid off. In the 2000s, Hall’s elderly mother moved into the home, and in 2005 following the advice of a friend, Hall took out a $200,000 loan on her beach house, which was valued at $400,000, to convert the garage into a mother-in-law suite, add central heating and air, reroof, pay off credit cards and purchase a vehicle.
“I didn’t have a fixed rate, which I know all about now,” she said. “I’m one of those dummies that should have known better. Now, my $400,000 house is worth $180,000 — if we were lucky.”
As her mortgage servicer kept increasing her monthly payments, Hall took her work ethic to the phones and started calling her lenders and representatives. She calls her lenders every Monday and logged her discussions and paperwork.
“I’ve just bugged the heck out of them,” Hall said. “I wanted this settled. I’m not trying to get out of making payments. I just want to pay what I can pay. I’m not going to die over this and I just don’t want to be sleeping on a park bench after working my entire life.”
The News Herald wrote a story about Hall and several other local individuals dealing with foreclosure in March 2010. After the article appeared, Hall said her borrowers started calling her and working toward a loan modification, a task that has yet to be completed.
“I goofed up and borrowed more money than I should have,” Hall said. “It would be much easier to give up. I need some help, people.”
IndyMac was acquired by OneWest Bank in 2009; officials from the bank said last week they would look into Hall’s situation.
Delaying, preventing foreclosures
A common problem or misperception for many homeowners in trouble happens when borrowers try to get a loan modification. Lenders often require borrowers to go into default, missing three payments, before engaging in a discussion about modifications.
“If you miss three payments, the bank passes off the case to a law firm to begin foreclosure proceedings,” said Florida foreclosure defense attorney David C. Hicks. “People are getting a false sense of security from banks.”
Mediation, like in the case of Hall, does not typically produce a positive outcome for homeowners.
“What we have seen is that mediation has not done a great deal,” said Hicks, who is based out of Tampa. “For one reason, there’s no principal reduction, so if you are upside down in equity there is no way to get out from under it.”
The federal government has two programs aimed at helping homeowners. The first is HAMP, a loan modification program designed to reduce delinquent and at-risk borrowers’ monthly mortgage payments.
“One of the problems with HAMP is that there are guidelines for who is eligible and it can be a catch 22 for many homeowners,” Hicks said. “You have to prove income, and for many people they don’t have enough money or they have too much money. HAMP does not really help.”
The Home Affordable Foreclosure Alternative Program (HAFA) was created to provide an option for homeowners who are unable to keep their homes through HAMP. HAFA exists as an exit strategy when homeowners know they will lose their property and they want to avoid a deficiency judgment, Hicks said.
Both HAMP and HAFA are voluntary programs for lenders; they do not have to agree to allow the loan holder to participate. When a homeowner knows they will lose a property, the best thing to do, according to Hicks, is to make sure there is no deficiency judgment.
Hicks explained that homeowners are still responsible for the outstanding loan, even if a property goes into foreclosure and is sold. Banks and collection agency have a window of several years to try to recoup the balance on a loan.
“The biggest mistake you can make is getting a deficiency judgment,” Hicks said. “The loan follows the person, not the property. The property secures the loan, but that does not stop banks from being able to garnish wages and other assets.”
A big misunderstanding with loans is that the institution to which a mortgage payment is made out does not own the loan; it is servicing the loan. In many servicing agreements, there are clauses that allow banks to make more money on a foreclosure than on servicing a 30-year loan, Hicks said.
“They don’t care about loan modifications,” Hicks said.
In the cases where loan modifications are granted, 60 percent of the homeowners are in default again within nine months, Hicks said.
“You want someone negotiating on your behalf from a position of strength,” Hicks said. “It might sound like a sales pitch, but you should hire an attorney. Most homeowners are not educated on the process.”
Hicks recommended legal aid or hiring a professional attorney.
“Victory depends on the equity status of the house,” Hicks said. “You can’t expect miracles. … Do not expect the federal or state government to help.”
” in 2005 following the advice of a friend, Hall took out a $200,000 loan on her beach house, which was valued at $400,000”
Because she thought that would push the value to at least $700k and she could sell and profit even more from the paid-off house before the higher payments kicked in. She was 64 when she played this greed game—a year from collecting her SS. She had no intention of ever making the higher payments.
She may not of really understood the risk. Even Ben Bernanke didn't think there was a housing bubble back in the fall of 05. One was labeled a crackpot for suggesting that housing prices could fall substantially here on FR. Unfortunately for her, it appears she decided to suck all the equity out of the property near the time property values were peaking in PCB.
“I simply don’t understand it. How can anybody be that big of a financial disaster?”
They are not concerned as to how high the price is...they are only concerned as to “how much a month does it cost.”
The majority of people have absolutely no idea just how much the total price on their homes or vehicle adds up to when the bill is finally paid. In most cases they could have bought at least two cars or houses for the total combined cost of the purchase price plus total interest for the life of the loan.
To borrow on a paid off house to piss the proceeds of on good times, goodies you always wanted, and not for expansion of the home or major repairs to the house is the dumbest things a person could do.
When the financial world ends (and that may possibly happen soon) your PAID OFF HOUSE is your only sanctuary and assurance that you will not end up sleeping under a bridge.
I own two houses. One was built in 1951 and the other much newer. The old one is paid off and the other has an active mortgage on it. If the economy fails, the bank can have this one back and I will move back to the safety and security of my old house. It kind of gives me a “warm fuzzy feeling” to know that I’ve not squandered the financial safety that the old house provides.
It won’t be long that housing in the U.S. will resemble that of England. Council houses, owned by the city councils of each town will own and lease the majority of all housing within that city. Private ownership will diminish to the point that a majority will not be able to own private property.
Here is an explanation I sent to a short sale guy. Long and boring if you are not really interested in the mortgage thing.
Repeat: Long and boring if you are not really interested in the mortgage thing.
Negative amortization loan
This will not explain, nor will it theorize the blame, philosophy, or legislation pertaining to the loans. This is just a theoretical example of the way it is. (or was)
Example home: Florida, 2005, typical loan. (could be almost any state)
Value: 250K Appraisal: 300K (This is an illustration. Of course high appraisals didn’t really happen) Loan: 80% LTV 240K (for now, make believe there was no 2nd for 30K)
Interest rate: 7.5 Insurance and taxes 8K a yr. (remember, this is Florida, where insurance on the coast is extreme) Principal and Interest on a 30yr loan @ 7.5%=1678.11 Interest only pmt= 1500.00 Total PITI pmt= 2344.11
Now the good part. Wamu, Countrywide, IndyMac, World Savings, etc (all gone, btw) would allow you to pay back at a 1.5% rate for 5yrs or until you got to 125% of the original loan. Then the loan would “re-cast”. Then you would have to pay principal and interest to pay back the balance in 25 yrs, not 30. Here is how it worked.
The interest only payment on the original loan would have been 1500. At 1.5% payment rate, not loan rate, you are only paying 828.29. That is 671.71 less than the interest only payment, so you are adding that amount (671.71) to the back of the loan every month. In effect, you are borrowing every month, so at the end of 5 yrs, you have added 40302.60 to the loan. Now you will be at 125% of the first loan, and the loan will get recast.
In this example, here is a picture of the new loan. (if this sounds too crazy, ask a Florida Real Estate Broker or a recovering mortgage broker)
2010 Value: 150K Appraisal: 140K 80% LTV loan= 120K
You now owe 300K at 7.5% on a 150K property. You have 25 yrs to pay it off. The 25yr loan of 300K at 7.5% brings a new payment of 2216.97, plus the escrow, for a new total of 2882.97. An increase in your payment of 1388.68.
You owe 300K on a 150K home, and you are shopping around to see if you can qualify for a refi. Did I mention in 2005, you got a stated income, no or low doc loan? Now you will have to verify the income you lied about. And your credit score hopefully is still very high. (of course, with the value being what it is, it may be a moot point.)
This is why the mortgage crisis may not be as close to being over as many think. The heyday of the neg am loan was 2005, 2006, into 2007. The 5 yr clock from those loans is ticking, and many savvy people may just decide it is not worth an increased payment of that much to save a home that has decreased in value rather than increased as expected when the loan was originated. Of course, it is also possible many of the well intentioned homeowners won’t have a choice, as they can’t pay even if they want to.
Remember back in the beginning about the 2nd loan? Many equity loans were interest only for a given amount of time. Even if the homeowner can get a 5.25% new loan, the equity loan has to be paid off. With the new loan, plus the equity loan, you are looking at 330K. At 5.25, the loan payment is 1822.27, plus escrow, which is still higher, but palatable, but nearly impossible to get with the new LTV, and documented income.
Who changed the borrower requirements, and why, is a whole different thing. And why an individual would want a negative amortization loan is also a far more complex thing to get into. Hopefully this example will help you understand some of the dynamics to the neg am loan.
Thanks, I know how that all works. I was just pointing out that people didn't think property values would fall in any meaningful amount.
I suspected from your posts you knew. I should have indicated it was for those who were curious about the so called “Exotic” mortgages. For most people, this would be good reading material if one was having a hard time falling asleep. Or maybe were just curious. Probably would be good for Katy Couric, as she doesn’t seem to know the difference between a neg am mortgage and a default swap. For that matter, the differnce between AIG and Agway.
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