Help a Reader: Mortgage Relief

Here's a question a reader left on my post titled How to Get Mortgage Relief:

A friend of mine - no it's really not me - asked about getting relief even though he is able to make his payments. He reasons that the banks are striking workouts with others, why not with him? He is currently on an adjustable at 6% plus - with a pre-pay penalty. He told me that his plan is to stop making payments for a few months and then plead poverty with the bank to get them to deal. Do you have any experience or info or thoughts on this? I know nothing about this subject.

I know nothing about it either. Anyone out there with an informed opinion on this issue/idea?

Comments

[Trent D.]

The bank will require complete financial disclosure. Pay stubs, employment records, bank account statements, credit card bills, EVERYTHING. If incomplete, they won't talk to him.

They'll easily determine from this information that he's able to pay, and will deny him assistance. He'll have tanked his credit for the next 7-10 years for nothing. Even if it DOES work out, he'll have damaged his credit badly.

If he wants to take care of this legitimately, he'll pick up the phone, call a bank or two, and refinance through traditional means like a responsible grown up.

Banks may be greedy, but they're not stupid. His plan won't work.

[Miss M]

This seems like a bad idea, one it is going to drop his credit score. Two, what if the banks don't play ball, now he has ruined his credit for no reason. It takes a lot of effort and luck to get a loan mod. Three, I believe they do check your finances if you plead poverty. They are going to want proof of why you can't make your payments (job loss, injury, divorce etc), and will check your bank statements. When they find out you were hoarding the cash they definitely won't deal with you. I don't know the guy's circumstances, when does the pre-pay penalty expire, is he underwater etc? Either do a regular refi and pay the penalty, wait till the pre-pay clause expires or if you are underwater, hope that "no-appraisal" refinances are allowed.

[Kelly Rusk]

I think he should thank his lucky stars that he isn't *realy* in trouble and forget about it!

[spivey]

I agree with Trent and Miss M. Why not just refi to a fixed rate loan, deal with or get around the penalties, and move on?

[calgirlfinance]

I think the friend should just suck up the pre-payment penalty and just refinance the loan. As the previous commenters mentioned, it's not that easy to get a modified loan. It's not worth the headache if you don't need it

[Whit]

The ethical implications alone make this a problem to me. If we as a society are going to get out of this (recession/depression), we have to make the tough decisions, even when there are easy wrong ways out. We have a trust problem more then a financial problem at this point.

[Travis D]

I agree with Whit completely. How much is he willing to sell his integrity for? Even if he successfully completes his plan he has to look in the mirror every day. When enough people pull this same stunt - who will he blame for his stock accounts dropping an additional 70%? Himself? I doubt it - but his actions would be helping the downfall...

[Big Cheese]

If he wants a loan modification unfortunately he does have to stop making payments.

This is the problem with the moral hazard issue of the bailout that is going on by Washington.

It encourages everyone to stop making payments ultimately. Think about it.

The first people to stop making payments are people about to go bankrupt. Then the people who put zero down by taking two mortgages, they see the house is 'under water' and stop making payments or mail in the keys. Then the people who made a small downpayment but are under water and see that their mortgage will reset to a higher level decide to stop paying. This will only get worse when the Alt-A adjustment and re-set bomb kicks in in 2010 for all the 5 year ARM's that were made in 2005.

Finally you have people like your reader who feels that since the bank is modifying other loans, why not his (or hers)? This is the moral hazard issue. If Obama really starts using TARP funds to reduce the principle on mortgages you can expect many, many more people to stop paying. A moratorium on foreclosures will stimulate demand for people to stop paying.

The solution. Do nothing. Let houses get foreclosed. Let the property market tank until it's attractive enough to enter because it's affordable. Let people go bankrupt and start over. If the reader wants to stop making payments then so be it. Suffer the consequences- a trashed credit score (no big deal if you have savings and positive cash flow) and a foreclosure on the property.

It's ugly but necessary. After inflating the bubble all these years it always hurts for it to pop.

-BC

[Education Works]

Two words to remember from someone who has been in the mortgage industry: Sales pitch!

As a former payment processor, a majority of the payment during the first 21+ years on a 30-year loan goes to interest. Also, it does not take a genius to be a payment processor. Generally, the payments go first to fees then late charges then escrow (also called "impound") with only amounts above the predetermined amount going to principle UNLESS, of course, the individual clearly states otherwise. Do payment processors have to know how to read? Not necessarily. Most of us did.

As a former delinquent loan counselor (aka collector), the idea of "skipping a few months then claiming hardship" sounds good to someone OUTSIDE the industry with most delinquent loan counselors often relying on "gut instinct" more than actual training to identify (and whether to "buy") this borrower SALES PITCH. See above paragraph. Much depends on the LENDER'S guidelines, so one borrower's (hardship SALES PITCH) might work with one but not another.

Also, please keep in mind that, a GOOD loan officer only averages about 15-19 loans per month because he or she takes great professional pride in providing good, solid, accurate information and educating individuals who come to him or her. Why? Because a good loan officer wants the borrower's BUSINESS, which comes from getting the right KIND of loan that best serves the person's or persons' OVERALL long term goals and purpose.

With interest rates being where they are, your friend might prefer following the example of others as reported by MarketWatch's article although you might have to copy-and-paste the weblink below into your browser:

www.marketwatch.com/news/story/consumer-credit-drops-record-79/story.aspx?guid={31BA941E-9F94-4120-ABB9-D5CF7C1F7C13}

So, rather than focus upon refinancing or remodifications, your friend might be interested in taking advantage of lowering possible credit card debts before the credit card regulatory actions go into effect in July 2010.

The truth is that your friend's business is his or her own personal business, and there was not enough information provided in the proposed question to provide a good, solid, accurate assessment. Much less a good, solid, possibly helpful insight or feedback.

[Wendell]

I would tell your friend to wait and see if Congress changes the bankruptcy law. If the law changes and debtors are allowed to "cram" down their home mortgages in a Chapter 13 Bankruptcy then the holder of his note may be willing to negotiate with him. The reason is the mortgage finance companies are going to lose so much money when all these additional people are going to file for bankruptcy that they may be willing to deal with those who are looking to refinance.

Hopefully the bank will foreclose on him, "lose" his payments when he tries to make them to clean his mess up, and then take the house before he knows what was happening. Then sue him and garnish his wages (since he obviously has some) afterward to make up for any loss. Yes, I know, won't happen, but seems reasonable given his idea of fairness under a signed contract.

[headknocker]

Whatever happened to personal responsibility and integrity? When a person agrees to a certain set of rules and then decides they don't like that game and want to change the rules, I think "spoiled little kid".

[Strick]

Thank goodness this post came along, I was starting to question my compass when I didn't see the moral issue some commenters were bringing up with eating lunch off of samples at Costcos...

[Brent]

Seriously though, most of the homeowners that have stopped making payments on their house awhile ago are still in their homes due to banks a) not being able to pursue the foreclosure process from having so much backlog and b) not being able to sell the homes when they are in short sale/foreclosure

I know someone who hasn’t paid on their house for over a year and still live in it rent free... do you seriously think that this trend is going to change as these ARM's reset in the next year or two?

I guess I don't see the moral hazard in stopping making payments when you signed a contract that says what 'could' happen when you stop paying your mortgage. If the bank doesn't follow up on their end and evict you, that is there problem.

If everyone stopped paying their mortgage, nothing would happen

[Strick]

Even if you see the "stop making payments" part of this situation as "amoral" because the scenario is spelled out in the contract, I'm guessing the "plead poverty" part is gonna mean a commission of fraud at some point to be effective, which I assume most folks think is wrong. Or do banks really just rework a payment because you say you're not gonna pay?, maybe thats the way it works now, but I assumed otherwise.

[J Ferreira]

I am sorry, but if getting your employment records, paytubs etc (and is readily accessible) will help you get a couple of hundred bucks off your debt BY ALL MEANS DO IT.

This country is like it is not because of lack of ethics, but because financial institutions are SHARKS, and unless we learn how to play their game we will not survive.

I assure you that if you deffault, the will lose all type of ethics and integrity and sue your ass, sell your account to a collection agency, harrass you and do anything in their power to get their money back, and then some. AND AFTER THAT THEY WILL ASK FOR BAILOUT MONEY.

I suggest you gather whatever documents you have and be slick; just like every other financial institution nowadays.

[Frank]

As J Ferreira said...

The fact that a lot of you think the banks have ethics is beyond me (I am assuming you do since you think everyone should play nice with them). Do you think as they are giving mortgages to 13 year olds with an outstanding salary of $20/week from babysitting (facetious..) they are acting in a righteous way? No, they are putting money over morals.

As a few have said, these are contracts. They explicitly state what happens when you stop paying. That is a choice you are given as a home buyer. There are no morals about that.

And no where does the original post show that the homeowner would falsify documents and commit fraud. Just that he would plead poverty. And that is a subjective term, anyways.

If the bank wants to play ball, good for him.

If not, then he will pay for it in other ways (credit, esp.).

Why people bring "ethics" into this argument... le sigh.

Frank

[Blaine Moore]

I wouldn't do it on a moral basis.

Then again, I would never agree to a loan that I couldn't prepay. I'm currently in the process of refinancing.

[Phil]

Forget the crazy scheme. Your best option is to pick up the phone and call the bank, and tell them you want to refinance your loan into a fixed mortgage. The rates for a fixed mortgage are lower than the 6% you are currently paying. So you would wind up saving money in a legitemate way.

[fathersez]

I agree completely with Whit and Travis. It is an issue of integrity. No matter how unfair the Government or the Bank's policy is, your reader has to answer the question "can he, or can't he make the payments".

And he has to live with the choice he makes.