Mortgage Modifications

For several years now, the home sales market in Greater Lowell has been sluggish, at best.  One big reason for that is the number of existing homeowners who are underwater on their mortgages.  Most in that position continue to make their monthly payments in the hopes of riding out the price trough and eventually regaining lost equity.  Others have no recourse but to endure foreclosure of the home.  But there's a third group and that's underwater homeowners who succeed in reaching a mortgage modification agreement with their lenders.  Quite a few such agreements get recorded here so I thought I'd scrutinize one and share some of the details.

First, the context: The property in question is a single family residence in a Greater Lowell community that was purchased by a married couple in 1999 for $169,000.  They financed that purchase with a mortgage of $135,200.  Like so many other American homeowners at the beginning of the 21st century, however, they began extracting cash from the rising value of their residence, refinancing four times: in 2001 for $200,000; in 2003 for $247,800; in 2004 for $352,750; and in 2005 for $409,500.  That last loan had an adjustable rate that began with 6.65% but which was permitted to rise in 2008.

That last loan was apparently too much for the home owners and they fell behind on their mortgage payments.  Unlike so many others, they were able to reach a Loan Modification Agreement with their lender earlier this month.  The agreement bundles all amounts owed (excluding late charges which are waived) into a new principal balance of $430,000.  That balance is divided into a "interest bearing principal balance" and a "deferred principal balance."  In our example, the "interest bearing principal balance" is $240,000 which is to be paid in monthly installments with interest at 5% until 2035 (thirty years from the initial loan).  The "deferred principal balance" was set at $190,000.  This amount is due on the maturity date of the loan or when the property is sold, whichever comes first. 

This certainly seems like a reasonable method of keeping underwater borrowers in their homes, but whatever the value of the house now, it seems unlikely that the value will claw back to something that exceeds the total amount owed any time soon.  That means the homeowner is effectively tied to the house for the foreseeable future.  Magnify this situation by everyone else in a like situation and you can better understand why the real estate market remains so sluggish.