Pass Me Some New York Loan Modifications…

Dear Daniel:

I make approximately $50,000 a year and have two mortgages totaling $600,000 and the house is worth approximately $400,000.  Should I consider a loan modification?  

 

Dear Daniel:

I make approximately $50,000 a year and have a mortgage of $310,000 and the home is worth $340,000.  It is also an interest only mortgage which is set to reset in one year.  Should I consider a loan modification?

These questions are just two examples of the type of questions on loan modifications I hear on a daily basis.  My answer to the first question is a resounding NO and the answer to the second one is a maybe (you cannot have a “resounding” maybe).  Here’s why:

The first person has to figure out that they are not keeping that house.  Its $200,000 underwater and no loan modification is going to help them.  Again, I should say that there are tons of variables here (savings, cc debt, family size, jobs, etc.) but overall what I believe would make the most sense is to walk away from the house altogether.  What I am finding is that many people have such an emotional attachment to these “things” that they refuse to move under any circumstances.  And these arent people that were in that house for 20 some years.  They are people that purchased in the last few years and now, almost subconsciously, refuse to admit a mistake was made.  Even if these people did modify, a $600,000 mortgage, with property taxes and upkeep, would swallow most of that person’s take him income.  Given that the house is $200,000 underwater as it is, it simply DOES NOT make sense to modify.  If you walk away from the home, you can be sure that the difference owed after it sells can be wiped out by filing a Bankruptcy.

 

The second scenario is a bit trickier because the mortgage amount is lower and the house isn’t as deep underwater.  The homeowner can potentially convince the lender to lower the principle amount and also modify the terms of the loan.  And even if the principal remains the same, it is much easier for a home to appreciate by 10% in a few years, then 33%.  Again, a ton of variables have to come into play here when making the decision, but the one variable that shouldn’t come into play is emotion.  This house is a “thing”.  It’s not a person.  It’s a home that you expected to go up in value, but which is now depreciating and is taking you with it.  Financially speaking, it doesnt make sense to keep throwing money that you don’t have at a depreciating asset.  

If you purchased a new car for an interest only loan at $30,000 and the car was consistently dropping in value and you knew you couldn’t afford the car anymore, would you continue to struggle and go deeper into debt to pay for the car for years, or would you realize you overpaid for the car and give it up?  Most people would realize that they made an error in valuation and move on.  For some reason homes dont have the same effect on people.  Like I said previously, take emotion out of the equation and do whats financially sensible for you and your family.

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