Heath's Blog


Is this a Foreclosure Solution?

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.

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.


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

REindex.com, The Site Engine®
508-274-5613  reindex@reindex.com
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James Heath Coker | Create Your Badge


Good points made here. It is going to be interesting to see what changes will be made in the near future. I am certain we will all be watching.
Posted by Mark Archer, Realtor, (Fathom Realty ) over 12 years ago

It will be interesting.

(By the way I looked at your site. If you'll put the Point2 button in your menu that is for "My Listings", I'll be able to link to you from REindex in the towns your listings are in.)


Posted by Associate Broker Falmouth MA Cape Cod Heath Coker, Heath Coker Robert Paul Properties Falmouth MA (http://www.CapeGroup.com & http://www.REindex.com) over 12 years ago

Heath interesting stuff. Were you a banker in another life before being a realtor? Have you offered this info to any mortgagors by the way? what mortgagor do you use?


Steve white http://www.activerain.com/sdw1

Posted by Stephen D White, E-Pro, ABR Cape Cod Real Estate (SDW Realty of Cape Cod) over 12 years ago

Hi Steve, I have written loans, had a title company, I'm a crtified paraegal, .....  The guy at tour this am was pretty good.  Most buyers these days have some financing ready.  If they don't, I try not to spin my wheels until they do.  The guy today has some innovative programs, but I work with individuls that have closed deals before.

Posted by Associate Broker Falmouth MA Cape Cod Heath Coker, Heath Coker Robert Paul Properties Falmouth MA (http://www.CapeGroup.com & http://www.REindex.com) over 12 years ago