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

[jpinpb]

I’m glad to hear some people are benefitting from modifications. I do think 40 year loans are tough, IMO. I just see that as mortgage slavery. But I read this and everything else I read just continues to make me think that modifications are not very successful.

Borrowers exit troubled Obama mortgage program
More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That exceeds the number of people who have managed to have their loan payments reduced to help them keep their homes.

Last month alone,155,000 borrowers left the program — bringing the total to 436,000 who have dropped out since it began in March 2009.

But analysts expect the majority will still wind up in foreclosure and that could slow the broader economic recovery.

As more people leave the program, a new wave of foreclosures could occur. If that happens, it could weaken the housing market and hold back the broader economic recovery.

Even after their loans are modified, many borrowers are simply stuck with too much debt — from car loans to home equity loans to credit cards.

“The majority of these modifications aren’t going to be successful,” said Wayne Yamano, vice president of John Burns Real Estate Consulting, a research firm in Irvine, Calif. “Even after the permanent modification, you’re still looking at a very high debt burden.”

Credit ratings agency Fitch Ratings projects that about two-thirds of borrowers with permanent modifications under the Obama plan will default again within a year after getting their loans modified.

[sdrealtor]

You should be just as skeptical of these articles as you are of the positive ones.

No more hypothecating. He just emailed them to me and I’ll be reading them tonite. I should know what they really say soon enough.

FWIW he does not live in SD County.

[sdrealtor]

You should be just as skeptical of these articles as you are of the positive ones.

No more hypothecating. He just emailed them to me and I’ll be reading them tonite. I should know what they really say soon enough.

FWIW he does not live in SD County.

[sdrealtor]

You should be just as skeptical of these articles as you are of the positive ones.

No more hypothecating. He just emailed them to me and I’ll be reading them tonite. I should know what they really say soon enough.

FWIW he does not live in SD County.

[sdrealtor]

You should be just as skeptical of these articles as you are of the positive ones.

No more hypothecating. He just emailed them to me and I’ll be reading them tonite. I should know what they really say soon enough.

FWIW he does not live in SD County.

[sdrealtor]

You should be just as skeptical of these articles as you are of the positive ones.

No more hypothecating. He just emailed them to me and I’ll be reading them tonite. I should know what they really say soon enough.

FWIW he does not live in SD County.

[ucodegen]

[quote sdrealtor]
I disagree that the 1st statement is not accurate. The bank is not recognizing a loss and it is not taking a loss. Are they making as much money as they hoped when the loan documents were first signed? Absolutely not!

Please show me where the bank is taking a loss.
[/quote]
Quite easily done. Remember that what the bank is lending out, is not their money. They have borrowed money to loan out to others. The banks have to pay interest on those notes. These notes are also ‘long term’ commitments, whose rates were set when the mortgage was first made. If it is costing the bank 3% on the money they borrowed to make the loan, and they are lending it out at 2% for the ‘new mortgage’.. they are taking a 1% loss per year on the mortgage.

This also does not factor in risk of never getting all of the principal back, the risk of the banks borrowing costs going up while still supporting the 2% mortgage.

[quote sdrealtor]
If I had a contract to earne $1M this year but got injured and only made $500K would you say I lost $500K?
[/quote]
If the contract was underwritten by borrowed money costing you $750K/year.. you would lose money.
If inflation ate away more than 0% of the value of the money per year.. you would lose money.

[ucodegen]

[quote sdrealtor]
I disagree that the 1st statement is not accurate. The bank is not recognizing a loss and it is not taking a loss. Are they making as much money as they hoped when the loan documents were first signed? Absolutely not!

Please show me where the bank is taking a loss.
[/quote]
Quite easily done. Remember that what the bank is lending out, is not their money. They have borrowed money to loan out to others. The banks have to pay interest on those notes. These notes are also ‘long term’ commitments, whose rates were set when the mortgage was first made. If it is costing the bank 3% on the money they borrowed to make the loan, and they are lending it out at 2% for the ‘new mortgage’.. they are taking a 1% loss per year on the mortgage.

This also does not factor in risk of never getting all of the principal back, the risk of the banks borrowing costs going up while still supporting the 2% mortgage.

[quote sdrealtor]
If I had a contract to earne $1M this year but got injured and only made $500K would you say I lost $500K?
[/quote]
If the contract was underwritten by borrowed money costing you $750K/year.. you would lose money.
If inflation ate away more than 0% of the value of the money per year.. you would lose money.

[ucodegen]

[quote sdrealtor]
I disagree that the 1st statement is not accurate. The bank is not recognizing a loss and it is not taking a loss. Are they making as much money as they hoped when the loan documents were first signed? Absolutely not!

Please show me where the bank is taking a loss.
[/quote]
Quite easily done. Remember that what the bank is lending out, is not their money. They have borrowed money to loan out to others. The banks have to pay interest on those notes. These notes are also ‘long term’ commitments, whose rates were set when the mortgage was first made. If it is costing the bank 3% on the money they borrowed to make the loan, and they are lending it out at 2% for the ‘new mortgage’.. they are taking a 1% loss per year on the mortgage.

This also does not factor in risk of never getting all of the principal back, the risk of the banks borrowing costs going up while still supporting the 2% mortgage.

[quote sdrealtor]
If I had a contract to earne $1M this year but got injured and only made $500K would you say I lost $500K?
[/quote]
If the contract was underwritten by borrowed money costing you $750K/year.. you would lose money.
If inflation ate away more than 0% of the value of the money per year.. you would lose money.

[ucodegen]

[quote sdrealtor]
I disagree that the 1st statement is not accurate. The bank is not recognizing a loss and it is not taking a loss. Are they making as much money as they hoped when the loan documents were first signed? Absolutely not!

Please show me where the bank is taking a loss.
[/quote]
Quite easily done. Remember that what the bank is lending out, is not their money. They have borrowed money to loan out to others. The banks have to pay interest on those notes. These notes are also ‘long term’ commitments, whose rates were set when the mortgage was first made. If it is costing the bank 3% on the money they borrowed to make the loan, and they are lending it out at 2% for the ‘new mortgage’.. they are taking a 1% loss per year on the mortgage.

This also does not factor in risk of never getting all of the principal back, the risk of the banks borrowing costs going up while still supporting the 2% mortgage.

[quote sdrealtor]
If I had a contract to earne $1M this year but got injured and only made $500K would you say I lost $500K?
[/quote]
If the contract was underwritten by borrowed money costing you $750K/year.. you would lose money.
If inflation ate away more than 0% of the value of the money per year.. you would lose money.

[ucodegen]

[quote sdrealtor]
I disagree that the 1st statement is not accurate. The bank is not recognizing a loss and it is not taking a loss. Are they making as much money as they hoped when the loan documents were first signed? Absolutely not!

Please show me where the bank is taking a loss.
[/quote]
Quite easily done. Remember that what the bank is lending out, is not their money. They have borrowed money to loan out to others. The banks have to pay interest on those notes. These notes are also ‘long term’ commitments, whose rates were set when the mortgage was first made. If it is costing the bank 3% on the money they borrowed to make the loan, and they are lending it out at 2% for the ‘new mortgage’.. they are taking a 1% loss per year on the mortgage.

This also does not factor in risk of never getting all of the principal back, the risk of the banks borrowing costs going up while still supporting the 2% mortgage.

[quote sdrealtor]
If I had a contract to earne $1M this year but got injured and only made $500K would you say I lost $500K?
[/quote]
If the contract was underwritten by borrowed money costing you $750K/year.. you would lose money.
If inflation ate away more than 0% of the value of the money per year.. you would lose money.

[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.

[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.

[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.

[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.

[Author]

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