What’s the answer?
October 15, 2011 at 2:31 pm 5 comments
Problem:
Once upon a time someone buys a house valued at $190,000. They put 10% down ($19,000) and finance the remaining $171,000 at 7%.
A few short years later the economic system stumbles… unemployment is over 9%, raises are not given, bonuses fade away.
Now $168,000 is owed on the house now and it’s only worth $150,000… it’s upside down.
Things are tight and rates are now under 4%. Moving the rate from 7 to 4% would save over $350 a month… this would help.
When refinancing is discussed the bank states that the house is only worth $150,000 and, if you qualify, they’ll refinance up to 90% ($135,000).
You explain that you don’t have the $33,000 ($168,000 owed less $135,000 proposed) to put in to cover what the loan won’t cover… not to mention the $3,300 the bank wants in fees.
You state that you can no longer afford the house and that you’ll be forced to walk away…
Solutions:
A) The banker holds the door open so that it doesn’t hit the borrower on the way out…
B) The bank refinances the $168,000 balance at the sub 4% rate. To do this they’d have to overstate the value of the house at $168,000.
Reality:
The person is moving out in two weeks.
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1.
Stephen Fisher | October 18, 2011 at 1:50 pm
Sheldon,
Hope you are well and business is good.
I disagree with your conclusion that “the person is moving out in two weeks”.
I believe that the reality of the situation is that the person will terminate any further payments to the bank and continue to live in the house “rent free” until such time as the person is evicted or there is a determination that the bank no longer has standing to enforce the loan.
Again, hope you are well.
Stephen Fisher
2.
vslblog | October 18, 2011 at 10:17 pm
Hmmm it has been two weeks…
Hope all is well with you too Steve.
3.
Richard Martino | October 18, 2011 at 10:13 pm
The answer is that a house is an investment and the economy changed around it. Invest in a “safe” S&P 500 index fund lately? Depending on when you invested, you are losing money on that, too.
But, you don’t realize the loss until you actually sell (house or fund).
4.
Richard Martino | October 18, 2011 at 10:15 pm
Who knows, the price may actually increase in the future?
5.
vslblog | October 18, 2011 at 10:19 pm
I guess that I was thinking that it may be more prudent for the bank to “adjust” the rate on the balance due as opposed to being stuck with the house.