So, here is an idea for mortgage companies.
Instead of foreclosing on a property, what if you rewrite the loan in the following way:
1) keep the principle amount the same.
2) lower the rate to today's lower rate.
3) and ammortize for 40 years.
Why?
1)A) principle of the note stays the same for the future payoff.
1)B) Keeping the principle the same means that the borrower needs to stay in the property until the market re-appreciates to the value of the principle to avoid selling at a loss.
This means more people will stay put, and at the same time, be able to pay for their house.
2) and 3) will make the payments easier to afford.
More Why?
Most loans are paid off by sale or refinance within the first 7 years of the loan.
By making the payments affordable, but keeping the principle amount as is, the loans will perform longer and mitigate much of the loss.
Good for the owner (of course):
$100,000 @ 10% = $877/month on a 30 year ammort.
$100,000 @ 6% = $550/month on a 40 year ammort.
This allows a reduction of $327/month in payments.
Better than foreclosure for the Investor:
The future values are dramatically lower for the "new" loan, but ONLY if they go to final payment.
In reality, they will both be paid off by the seventh year based on average ownership statistics.
That would mean a "loss" of about $45,000* on paper versus an actual loss in the event of an actual foreclosure.
*(the 7 year FV of the 10% note - FV 6% note = $194,871.71-$150,363.03 = +-$45,000)
A foreclosure loss will include:
- 12-24 months of no payment ($877 x 24 = -$21,000)
- legal fees (-$4000)
- broker fees (up to -$6000)
- loss of value of this property and other properties in the neighborhood (-$15,000 min)
- REO staff increases (-$10,000)
$21 + 4 + 6 + 15 + 10 = more than $56,000 in actual loss over 2 years
By re-writing the note, the Investor reduces their loss:
The "new note" performs over the next 84 months instead of costing actual money over the next 24 months.
84 x $550 = $46,200 that the note returns over the next 24 months as it performs versus $0 durring 24 month foreclosure.
$46,200 - 45,000 = $1,200 positive OR Straight $56,000 loss over the next 2 years.
Other useful benefits incude:
Property values do not decline as dramatically as when many foreclosures take over a market.
The loss numbers get much larger much faster when the face loan value increases.
Hmmmm.....
Heath Coker, Associate Broker
Robert Paul Properties
www.CapeGroup.com / capegroup@capegroup.com
508-274-5613 Licensed in MA
Its a beautiful day on Cape Cod!
@CapeGroup Skype: heath.coker
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