NorCalSavant

There was an interesting article in the New York Times detailing the plight of Eileen Ulery, a homeowner in Mesa, Arizona caught up in the delinquency/foreclosure crisis. She basically owes $143,000 on a house worth only $122,000, a loan to value of about 117%. She lost her job at Arizona State University with an income of about $26,000 per year, while her house payment has gone up to more than $1000 from about $600 per month.

She originally bought her condominium for $77,500 in 1997. As her condominium appreciated in value, she refinanced a couple of times and took out a home equity loan adding to her mortgage balance. Cashing out of her condominium as the condominium price appreciated during the inflating period of the housing bubble allowed her to retire some credit card debt, and pay for a new car and a new roof on the house.

After losing her job, she struggled hard to keep making her house payments for a while, but she pulled it off somehow. Finally, when it was clear she wouldn’t be able to do that anymore, she called the bank for a loan modification.

Even though she was eligible for it, the bank turned her down. The bank very cleverly asked her to hand over $18,000 including $5,000 in fees after which the bank would be able to cut down her monthly payment from $1046 to $967 or by $79 per month.

It appears the bank was taking the extra money, putting a large part of it into paying down the balance to bring loan to value within the 105% requirement of the Making Home Affordable Refinance Program, and then offering a refinance to Ms. Ulery. Of course, the bank’s solution doesn’t help or solve Ms. Ulery’s looming delinquency problem because the new mortgage payment would still not be affordable for her even if she could somehow find $18,000.

This example is pretty typical of how rational decisions are made by lenders and mortgage servicers. Ms. Ulery is eligible for loan modification as per Treasury’s guidelines for the loan modification program, but of course, the lender/mortgage servicer is NOT REQUIRED to offer it to her.

Offering loan modification to her would mean taking an immediate financial hit for the lender, which they could delay or at best avoid altogether. Ms. Ulery has been regular with her mortgage payments so far. She seems to want to keep her house and credit score, and might find a way to keep making those payments. If she were to stop making her mortgage payments and foreclose, then the bank would take a hit. But obviously, she is not at that stage yet.

That brings up a discussion of Ms. Ulery’s attempts to stay current on her mortgage and seek relief. The Making Home Affordable Program can help her some, but only when the lender/mortgage servicer finds helping her to be a better option (less costly) than not helping her and allowing her to foreclose on the house. It would seem the rational thing for Ms. Ulery would be to move toward foreclosing, because that could be an incentive for the lender to work with her.

It is unfortunate that the two parties seem to have to game their response to make the system work in their short and long-term benefit.

Ms. Ulery should also look into the Hope for Homeowners (H4H) Program. If she has a good credit history to qualify for a FHA mortgage, she could have her principal balance reduced to 96.5% of her home value. She will have to pay mortgage insurance, but at least in theory she could have a lower payment schedule. In practice however, looking at the history of H4H, the likelihood of her actually getting a H4H refinance are not very high.

What do you think? Should she stop paying her mortgage and then try a loan modification with the bank?

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