I know someone who, like millions of others, had the misfortune to borrow too much against *their* home during the recent housing bubble.
Owing over $500,000 on what's now worth, supposedly, $350,000 he did the rational, best-interests-of-his-family thing and strategically defaulted on the mortgage (400k) and HELOC(150k).
His first mortgage, 395k, was issued by the long-since-bankrupted IndyMac bank. So now the note is held by Goldman Sachs cronies....er, I mean it's owned by us taxpayers and it's being *managed* by and to the financial benefit of Goldman Sachs cronies!
Seven months after deliberately missing his first mortgage payment, *IndyMac Federal Bank* - as it's been reincarnated as - offered him one of those so-called loan mods.
They, speaking for taxpayers and future generations, are offering him a deal:
They will transform his 395k adjustable (to LIBOR + 2.25%) loan to a fixed rate loan of 426k (includes late fees, taxes, etc.) at 3 1/8%.
3 1/8% for 30 years? Are you freakin' kidding me???!!!
The way he figured it, it came to $1,950 per month ("1556+395 for taxes and insurance").
BUT that wasn't precisely the loan *IndyMac Federal Bank* offered him via FedEx today. The numbers seemed off, too low.
Closer inspection revealed that IndyMac was actually offering him a fixed 3.125% mortgage for FORTY YEARS!!!
I have a question - can any of you Morons out there land such generous mortgage terms today?
Can any of y'all get a 426k, 3.125% 40-year loan on a house that, at the fleeting moment anyway, has manifest market value of $350,000???!!!
Realize that money, cheap as it is these days for those with access to the printing press, still isn't that cheap. So the government/taxpayers/IndyMac Federal Bank is offering a deal that's a guaranteed loser for itself.
Sure they can presently borrow short-term at less than 1% to fund these *mods* but that won't last forever - at least not for forty years. Once interest rates spike, not only will IndyMac become insolvent yet again, it will unleash another whole round of strategic mortgage defaults.
This guy asked me to calculate for him his net savings over the next ten years should he accept the loan mod versus, I guess, buying another place at today's market mortgage rate of 5.125%. I'll need some more clarity on the question/scenario to calculate anything at all.
But my hunch is that these hypotheticals are all quite beside the point. Since he'll always retain the capacity to simply re-default, I think he needs only to compare the $1,950 monthly number with what he'd be able to rent for that same monthly nut.
I told him that my hunch is still that the 40 year loan reset is a sucker's play. It's better to default now, and get one's good credit restored within 5 years than to prolong the agony. A loan mod, IMO, would merely delay the inevitable foreclosure as interest rates are all but guaranteed to rise significantly within the next 40 years. In other words, another leg down in the housing market will just, as I mentioned above, force him into another strategic default down the road.
Long-time readers well know my I'm probably not the person to ask about 40 year debt slavery sentences. I'm the one who thinks people should only buy/mortgage what they can afford on a 15 year term.
I'll have more on this one later on, for sure.
See also:
More On Goldman's IndyMac Thievery
The Cheapest Rent
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