OT-What a loan modification with principal reduction really looks like

[Anonymous]

The bank is taking a loss when they make a principal reduction. Before the loan was funded, the bank had $440K in cash or other assets on its balance sheet. When it funded, the cash became a note receivable (no gain or loss.)

If you have a note receivable for $440K on your balance sheet and you write down that amount to $400K, the equity of the balance sheet will be reduced by $40K. This, by definition, is a loss. One can call it a “paper loss,” but in the end, the bank is out the $40K. (Interest payments will count as income, but the principal reduction is still a loss.)

Of course the accounting rules for mortgage lending and long-term notes may not be quite so simple. Perhaps the lender can amortize the loss over several periods or perhaps they already accounted for the loss earlier when they realized the note was at risk. They may have insurance or other arrangement that can allow them be compensated for the loss from another entity (i.e. the government.) But these details don’t change the fact that, when they made the principal reduction, the bank lost $40K.

[sdrealtor]

Still disagree.

Across the life of the loan the banks borrowing costs are and will be well below the interest rate he is paying. The risk of not getting principal back has been lowered by reducing the borrowers rates, it hasnt gone up.

Wow, that 2nd one was a wacky twist on my analogy. I dont know many individuals whose personal income is underwritten by borrowed money. You cant lose money you never had. Making less than you hoped for or were promised does automatically create a loss.

[sdrealtor]

Still disagree.

Across the life of the loan the banks borrowing costs are and will be well below the interest rate he is paying. The risk of not getting principal back has been lowered by reducing the borrowers rates, it hasnt gone up.

Wow, that 2nd one was a wacky twist on my analogy. I dont know many individuals whose personal income is underwritten by borrowed money. You cant lose money you never had. Making less than you hoped for or were promised does automatically create a loss.

[sdrealtor]

Still disagree.

Across the life of the loan the banks borrowing costs are and will be well below the interest rate he is paying. The risk of not getting principal back has been lowered by reducing the borrowers rates, it hasnt gone up.

Wow, that 2nd one was a wacky twist on my analogy. I dont know many individuals whose personal income is underwritten by borrowed money. You cant lose money you never had. Making less than you hoped for or were promised does automatically create a loss.

[sdrealtor]

Still disagree.

Across the life of the loan the banks borrowing costs are and will be well below the interest rate he is paying. The risk of not getting principal back has been lowered by reducing the borrowers rates, it hasnt gone up.

Wow, that 2nd one was a wacky twist on my analogy. I dont know many individuals whose personal income is underwritten by borrowed money. You cant lose money you never had. Making less than you hoped for or were promised does automatically create a loss.

[sdrealtor]

Still disagree.

Across the life of the loan the banks borrowing costs are and will be well below the interest rate he is paying. The risk of not getting principal back has been lowered by reducing the borrowers rates, it hasnt gone up.

Wow, that 2nd one was a wacky twist on my analogy. I dont know many individuals whose personal income is underwritten by borrowed money. You cant lose money you never had. Making less than you hoped for or were promised does automatically create a loss.

[sdrealtor]

pri_dk
Go back and read the thread more carefully. The prinicipal reduction I described was not written off. The borrower is paying principal and interest on a reduced amount but the “reduced principal” is due upon sale so there is no loss unless the property gets sold at some point in time and the full principal is not repaid.

[sdrealtor]

pri_dk
Go back and read the thread more carefully. The prinicipal reduction I described was not written off. The borrower is paying principal and interest on a reduced amount but the “reduced principal” is due upon sale so there is no loss unless the property gets sold at some point in time and the full principal is not repaid.

[sdrealtor]

pri_dk
Go back and read the thread more carefully. The prinicipal reduction I described was not written off. The borrower is paying principal and interest on a reduced amount but the “reduced principal” is due upon sale so there is no loss unless the property gets sold at some point in time and the full principal is not repaid.

[sdrealtor]

pri_dk
Go back and read the thread more carefully. The prinicipal reduction I described was not written off. The borrower is paying principal and interest on a reduced amount but the “reduced principal” is due upon sale so there is no loss unless the property gets sold at some point in time and the full principal is not repaid.

[sdrealtor]

pri_dk
Go back and read the thread more carefully. The prinicipal reduction I described was not written off. The borrower is paying principal and interest on a reduced amount but the “reduced principal” is due upon sale so there is no loss unless the property gets sold at some point in time and the full principal is not repaid.

[Anonymous]

From the OP:

> He also thinks that if he ever sells he has to pay back the foregiveness if he sells for a gain.

If he has to pay it back upon sale, then it’s not a principal reduction. It’s just an indefinite, 0% loan on the $40K.

Of course he can game this by never actually selling:

http://piggington.com/modification_madness

If it is true that he still owes the $40K, this is unusual. The example in the above thread is more typcial. I know a few people that have had loan mods (most of us do), and the principal reductions have been just that — the borrower simply owes less money (there are plenty of other old threads here with examples).

But why not put your money where your mouth is? You can loan me $440K at 5% interest. A year from now, we will simply reduce the amount I owe you to $400K. I’ll pay off the $400K the years, and you won’t lose anything, right?

[Anonymous]

From the OP:

> He also thinks that if he ever sells he has to pay back the foregiveness if he sells for a gain.

If he has to pay it back upon sale, then it’s not a principal reduction. It’s just an indefinite, 0% loan on the $40K.

Of course he can game this by never actually selling:

http://piggington.com/modification_madness

If it is true that he still owes the $40K, this is unusual. The example in the above thread is more typcial. I know a few people that have had loan mods (most of us do), and the principal reductions have been just that — the borrower simply owes less money (there are plenty of other old threads here with examples).

But why not put your money where your mouth is? You can loan me $440K at 5% interest. A year from now, we will simply reduce the amount I owe you to $400K. I’ll pay off the $400K the years, and you won’t lose anything, right?

[Anonymous]

From the OP:

> He also thinks that if he ever sells he has to pay back the foregiveness if he sells for a gain.

If he has to pay it back upon sale, then it’s not a principal reduction. It’s just an indefinite, 0% loan on the $40K.

Of course he can game this by never actually selling:

http://piggington.com/modification_madness

If it is true that he still owes the $40K, this is unusual. The example in the above thread is more typcial. I know a few people that have had loan mods (most of us do), and the principal reductions have been just that — the borrower simply owes less money (there are plenty of other old threads here with examples).

But why not put your money where your mouth is? You can loan me $440K at 5% interest. A year from now, we will simply reduce the amount I owe you to $400K. I’ll pay off the $400K the years, and you won’t lose anything, right?

[Anonymous]

From the OP:

> He also thinks that if he ever sells he has to pay back the foregiveness if he sells for a gain.

If he has to pay it back upon sale, then it’s not a principal reduction. It’s just an indefinite, 0% loan on the $40K.

Of course he can game this by never actually selling:

http://piggington.com/modification_madness

If it is true that he still owes the $40K, this is unusual. The example in the above thread is more typcial. I know a few people that have had loan mods (most of us do), and the principal reductions have been just that — the borrower simply owes less money (there are plenty of other old threads here with examples).

But why not put your money where your mouth is? You can loan me $440K at 5% interest. A year from now, we will simply reduce the amount I owe you to $400K. I’ll pay off the $400K the years, and you won’t lose anything, right?

[Author]

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