Can anyone save this loan?

One of the best reporters I ever worked with told me that, whenever a headline asks a yes-or-no question, odds are pretty good the answer is "no." Otherwise, you wouldn't pose it as a question, would you?

Today's L.A. Times profiles a housing counselor who works with homeowners who are struggling to pay their mortgage, and are looking for ways to refinance or restructure their loans. The first anecdote in the story struck me as a hopeless case right off the bat. You tell me, though: Can this loan be saved?

The borrower, a 47-year-old woman, purchased a three-bedroom North Hills home for $355,000 in 2004, then refinanced in 2005 and again in 2006. The story doesn't say how much she now owes, but I'm going to guess $400,000. She can't afford her current payment, which is $3,700 a month. She told the housing counselor she's hoping to refinance into a fixed-rate loan and is hoping to pay about $1,600 a month.

So here's the math the way I do it (on a mortgage calculator at Bankrate.com): To pay off a $400K loan on a 30-year-fixed, with a payment of $1,600/month, she'll need an interest rate of 2.6%. Give or take.

Alternatively, if she gets a very good rate -- say 5.5% -- her $1,600/month will service a 30-year loan of about $280,000.

One more way to look at it: If she gets a very good rate -- 5.5% -- her payments on a $400K loan will be about $2,271 a month.

But lastly, and most important, let's forget about the math entirely. As sunsetbeachguy points out in comments below, the question of whether the loan can be saved "conveniently sets aside the question of underwater valuation." Of course -- the borrower probably owes more than the house is worth. A loan like that is unlikely to be refinanced. Period, end of story. Right?

So here is where I ask your advice: In the real world, could that loan be reworked? How? Remember, it's probably underwater. E-mail story tips to peter.viles@latimes.com.

Comments

[Laker]

Peter, I'll tell you how it will be reworked.
Option1) the bank will forgive $80,000 from the loan balance. Then she will use FHA and get the government to guarantee the loan. They will give her a 40 year. she will default in a year or two.
Option2)Helicopter Ben will drop 0% rate from the sky...inflation will sky high, but heck who cares, she could get a payment less than $1600...
Seriously, foreclosure...or walk away...win the lottery and pay off the loan...same thing...deferent odds...

[Ann]

Well, alternatively she could do a fixed rate interest-only (and yes they exist and no they are not the same thing as a negative option ARM.)

Even at a 5.5% rate, she would be paying $22,000 a year or $18,33 a month.

That thing would also carry a balloon of 3-5 years so she would have to refinance it again. (And as for the chances of that, the phrase using the words 'snowball' and "hell" comes to mind.)

And of course, no bank is going to lend to her unless she has at least 10-15% equity.......

Basically, she is in la-la land, is completely delusional and needs some serious psychotropic drugs for her mental illness.

Then again she may some rich relative whose will makes her a beneficiary and their demise could be hastened.......

[Big Fella]

I have no idea if that loan can be re-worked but what these stories and countless others we read about just drive home to me is the sheer stupidity of consumers when they allow their greed to overcome any common sense they might have.

You can't buy diamonds if you can only afford sand and gravel.

What are the odds that in a few years down the road John and Jane Consumer will have forgotten all about this, as will all the mortgage bankers, and the cycle will start again. What will this type of recklessness do to our country's ability to economically sustain itself over the long term?

[Robert F]

A current single payment of $3700.00 would indicate a debt of around $500,000.00 at about 7% . If the interest is any lower you're looking at a loan balance closer to 600K. This is another tapped out ATM heading for foreclosure story. Asking for a $1600 payment is just not realistic.

[Nick]

Monthly payment: 100 Years
Interest rate: 5.500%
Loan amount: $ 400,000.00

$ 1,840.95 a month

[toby]

No. It can't be saved.

It's amazing, did they even make you do paper work to get these loans?

[debrap53]

Problem is where are the amounts for taxes, maintenance, utilities, etc. Doubt that the 47 year old financial wizard included any of those in her plans either. Please let me know where I can borrow $400k for $2200 per month. Bora Bora beckons.

[Cal]

Even at $1600 her PITI would be over 2k and the FHA guidelines of 29% front end ratio would mean a ballpark income of 82k required.

Looking at it from one POV:
But if the home value declined the lenders could just milk the client for some more money to mitigate some of the damage. Fix the payments for 2 or 3 years and foreclose after the heat has died down. She obviously wont be able to sell for a very long time. Whether this lady knows it or not she is just renting this home. But hey, she can paint her walls at least right?

Now looking at if from another POV:
So many of the second liens are going to get nothing and are smart enough to recognize it so they go away without much of a fight. So, unfortunately, many of these bubble participants will get the loans modified and the second liens will write off the loss. 80% of 355k, is 284k and then get the first to modify the rate.. she might just get her $1600 mortgage payment (but not PITI). Nothing like getting rewarded for incompetence.

[sunsetbeachguy]

Peter:

The short answer is no.

The longer answer is not without taking a bite out of the s$!t sandwich the housing market has served itself.

Banks don't wont debt destruction and won't do a whole lot of it voluntarily.

So it is either jingle mail or BK & foreclosure for this FB.

Your question conveniently sets aside the question of underwater valuation, which is likely and in most instances preclude a refinance.

One other thing to note, refinancing moves this FB from non-recourse loan status into recourse loan status.

[taylor]

the way this loan gets reworked is simple: she mails in the keys to the lender and finds a rental unit that is appropriate for her level of income. in 5-7 years, when she has rebuilt her savings and home prices have corrected, she can once again contemplate ownership.

why are so many people (politicians, regulators, homeowners) in denial about what has to happen to correct this mess?

[David]

Hey you forgot one.

I put $400K @ 5.5% (making only $1600 minimums) into one of those "how long will it take calculators?" and got:

"By only making minimum payments it will take 841 more payments or 70.1 years to pay off the remaining balance. Interest will amount to $3,664,514."

I think a lot of peolpe just didn't understand the concept of "refinance."

[Inland Empire]

I think that the 5.5 rate is a bit low and would opt for 5.75 assuming she has a good credit score. But either way, it would give her a payment considerably lower than she has now. If she cannot make the lower payment, she needs to shed the house.
Since she thinks she would like a $1600 a month payment on a fixed rate, she is either horrible at math or out of touch with reality. My guess would be that if she was able to get a loan like your outline, she will lose it eventually due to more bad choices.

[Jerry Rioux]

The real question is not whether this loan can be saved but how it got approved in the first place.

Greed and stupidity on the part of both lenders and borrowers got us where we are today. They both deserve what they are getting.

[Susan]

I don't know the answer to the question, but really hope that the Times checks back with these people in a year or so, so we can find out what happened.

[Rick]

My question is once the borrower walks away, do bankruptcy laws make the "owner" liable for any of the debt that they couldn't afford in the first place?

I think the borrower should get stuck with a 100 year loan. If they walk away, they should have to pay back the amount that was lost on the loan and the bank should have to eat all fees.

And the "stimulus" package is sheer insanity. I knew the folks that are paying their bills would eventually have to pay for the folks that don't. How in the world is more spending going to fix the problem of overspending?

[Michael Snyder]

Why?

[left of lefty]

this is what will happen in the next few years.

banks, fed up with losses, will make negative amortization loans more or less 'standard'.

think about it. i charge $1000 on my credit card last month. my 'minimal payment' is only $15. what happens to the rest?

and credit cards are unsecured debt. mortgages at least have something to back them up.

banks will just charge us 25% interest on the mortgage. in the meantime, there will be no default, and the banks can report fantastic paper profits to wall street. the chinese will snap them up. don't underestimate the creativeness and brain power of wall street.

sure, it'll eventually come crashing down. but that will be a problem for the next ceo/president/congress/fed chairman.

in the meantime, cheap credit will drive prices back up again. i was at the hudson & marshall auction at anaheim yesterday. the bids are higher than they were at the same auction last nov (as a percentage of the listing price), and more people showed up. there is a lot of pent-up demand. people want to buy houses. get in now before prices shoot out of reach again.

[Jonah1979]

Sorry but anyone only looking to pay 1,600/month in Southern California is called a RENTER!

[mbob]

This time I agree w/Cal. His theory is consistent with our gubmit's responses to fiscal crises since WWII.

Way back when chickens had teeth, I worked on promoting the first 60 month car loans. Buyers jumped on 'em like fleas on a freshly washed hound. Now they're kinda normal, 72's aren't unheard of.

A waggish colleague who is in the business of chucking widows and orphans into snowbanks (foreclosures) wryly observes that the only question the great unwashed ask any more is "how much a month?"

Inflation is the politicians' friend. That's how we frogs get boiled alive, one degree at a time.

[peteviles]

Sunsetbeachguy writes, "Your question conveniently sets aside the question of underwater valuation, which is likely and in most instances preclude a refinance."

Thanks, sunset. As Ed McMahon would say, you are correct, sir. I have updated the post accordingly.

[kanank]

Another idea: She should marry a real rich guy if she is not already married , who would be willing to bail her out. Then the story would end like this 'she lived happily ever after'.

[caliguy2699]

Yet another example of ridiculous entitlement. She wants the house, but doesn't feel she deserves to have to actually pay for it fairly. Gag me.

[Rip N Tear!!!]

We can speculate all day, but one thing we do know.... she is wont be living in that house 90 days from now.

Ofcourse she is upside down, And I think she owes over 450K on that property, I have seen more forclosures in North HIlls for over 500K easily.

Cheers!!!!!

[dudeman1961]

YES!

She pays $1,600/mo, but I live in the house and pay the residual balance of the monthly mortgage as rent.

It's a win-win, baby!!

[Ace]

Newly divorced parents ask me this exact same question all of the time.

Only they ask 'how can I keep the house that I could barely afford with $120k per year of income... now that I only make $50k per year?'

I would like to say 'find a new spouse TODAY!' but they always have their kids sitting with us.