Can buyers in default 365 days or longer be saved?

[sdrealtor]

There is a lot of talk thrown around about how long some homeowners are in default (over 12 months) and that there is no way they could ever recover after being late for a year or two or even a few months. I got curious and ran some numbers to test that hypothesis and here is what I found. Love to hear rebuttals to this.

Let’s take a homeowner with a $500,000 loan taken out in 2005 at 6% fixed for 30 years with a monthly payment of $3,000. Suppose they could never refinance out of the loan and after 4 years (2009) stopped paying (strategic default, unemployment etc). At that point the principal would be $480,000. Its now 2 years later and they are 730 days late (far beyond the average).

Can this loan be saved?

Most argue no it can’t but lets look at the numbers. Take 24 missed payments of $3,000 and you get $72,000. Throw that on top of the $480,000 balance when the borrower stopped paying and you got $552,000. Give that person a new 30 year fixed loan at current rate of 4% and its $2635/month. Without forgiving any principal, adding all the missed payments to the balance and refinancing it all into current rates the borrower could have taken a 2 year payment vacation and still have a loan that costs them $365 less per month than their old loan.

Still think its not possible to save these borrowers?

[NotCranky]

So now instead of being 150k upside down they’re 222k underwater. That will motivate them.

[NotCranky]

So now instead of being 150k upside down they’re 222k underwater. That will motivate them.

[NotCranky]

So now instead of being 150k upside down they’re 222k underwater. That will motivate them.

[sdrealtor]

Who said they were 150K upside down?

[sdrealtor]

Who said they were 150K upside down?

[sdrealtor]

Who said they were 150K upside down?

[NotCranky]

[quote=sdrealtor]Who said they were 150K upside down?[/quote]
O.K, we aren’t talking about upside down owners here. So they have that 72k and then some in equity. Then sell it.

[NotCranky]

[quote=sdrealtor]Who said they were 150K upside down?[/quote]
O.K, we aren’t talking about upside down owners here. So they have that 72k and then some in equity. Then sell it.

[NotCranky]

[quote=sdrealtor]Who said they were 150K upside down?[/quote]
O.K, we aren’t talking about upside down owners here. So they have that 72k and then some in equity. Then sell it.

[Coronita]

Most likely they are also behind in property tax, HOA/toilet ruse (sic) too.

Forget what the penalty of the prop tax would be, but I believe it’s 10% penalty for each installment missed and 1.5% each month starting in july.

Any other costs missing?

[Coronita]

Most likely they are also behind in property tax, HOA/toilet ruse (sic) too.

Forget what the penalty of the prop tax would be, but I believe it’s 10% penalty for each installment missed and 1.5% each month starting in july.

Any other costs missing?

[Coronita]

Most likely they are also behind in property tax, HOA/toilet ruse (sic) too.

Forget what the penalty of the prop tax would be, but I believe it’s 10% penalty for each installment missed and 1.5% each month starting in july.

Any other costs missing?

[Anonymous]

Small nit: You can’t just count the late payments and add them to the total due.

You have to calculate interest on the outstanding balance. For $480K at 6%, that would be $2400/month accrued interest due per month. So after missing payments for 24 months, the total due would *roughly* be a little more than $480,000K + $57,600 = $537,600.

The reason I say “roughly” is because we really should calculate interest on the accrued interest as well (compounding), but I’m not going to bother because it doesn’t change the conclusion.

So your $552 number may even be a little high.

Calculations aside, it makes sense that two years of missed payments would not make a big difference on a 30 year loan that is refinanced to a another, full 30 year term at a 2% lower rate.

Of course this all this ignores late fees and the tax collector, but throw in another 3-5% onto the loan amount and the numbers are still close.

But it only works for people who, for some reason, can afford $2700/month now when they couldn’t afford $3000/month two years ago. Might be a small population.

[Anonymous]

Small nit: You can’t just count the late payments and add them to the total due.

You have to calculate interest on the outstanding balance. For $480K at 6%, that would be $2400/month accrued interest due per month. So after missing payments for 24 months, the total due would *roughly* be a little more than $480,000K + $57,600 = $537,600.

The reason I say “roughly” is because we really should calculate interest on the accrued interest as well (compounding), but I’m not going to bother because it doesn’t change the conclusion.

So your $552 number may even be a little high.

Calculations aside, it makes sense that two years of missed payments would not make a big difference on a 30 year loan that is refinanced to a another, full 30 year term at a 2% lower rate.

Of course this all this ignores late fees and the tax collector, but throw in another 3-5% onto the loan amount and the numbers are still close.

But it only works for people who, for some reason, can afford $2700/month now when they couldn’t afford $3000/month two years ago. Might be a small population.

[Author]

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