As we mentioned yesterday, a bit of a fight has broken out over whether it is irresponsible for journalists and others to advise homeowners about the options that the government’s bailout programs are opening up to them. But the fact is for a lot of homeowners it makes perfect sense to stop payments on mortgages…and it may even pay to stop any overtime work or have one of the earners in your household quit.
Kathleen Pender, writing in the San Francisco Chronicle, recently explained to home owners how to take advantage of recent government programs to restructure loans. Basically, anyone who qualifies and finds themselves paying more than 38% of his or her yearly income or has a home worth less than they owe should think about applying to have their loan restructured.
The savings could be amazing. Under a restructured loan, your payments will be capped at 38% of your income and your loan willl be reduced to the market value of your house. You can knock thousands of dollars off your debt load, and reduce your monthly payments by a lot. Since just about everyone expects massive inflation in the not-so-distant future, you are better off spending those dollars now than later.
There are some tricks to this. If you’d still be paying more than 38% of your income after your payment is extended out to 40 years, your principal is reduced and your interest rate is lowered, it might be harder to qualify for restructuring. But banks are getting more flexible, so you might as well try anyway.
So check out whether you qualify. Here’s what you need.
- You must be at least 90 days delinquent and live in the home as your primary residence.
- You must owe at least 90 per cent of the home’s value.
- Your loan has to be guaranteed by Fannie Mae or Freddie Mac
Pender quotes Peter Schiff, who thinks a lot of people are going to make sure they qualify by stopping payments and reducing income.
Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.
“This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.”
The government is offering loan servicers $800 for every homeowner they get into the plan.
Will stopping payments hurt your credit rating? Of course it will. But so will missing auto-loan, student loan and credit card payments. What’s more, a foreclosure will hurt your rating even more. A personal bankruptcy will ruin it. The savings you get from restructuring your loan may more than make up for the additional costs of borrowing later you’ll incur by missing a few payments. In time, your score will bounce back.
Is this immoral? Of course it’s not. We live in Bailout America, with lenders getting billions in taxpayer dollars. You are gaming the system here; you are playing by the rules. The rules may reward irresponsible behaviour but if moral hazard doesn’t stop Citigroup from getting $25 billion, why should it stop you from restructuring your loan.
Not everyone agrees. As Joe pointed out here the other day, some paternalistic journalists think Pender shouldn’t even be sharing this information with the public. But that’s just silly. With the government paying mortgage companies to restructre the loans, they’re going to be cold calling homeowners and selling them on this anyway.
Felix Salmon gets it right:
“Remember that it’s not a crime to default on your mortgage. The banks are perfectly happy scraping around in the fine print of credit-card agreements to screw their customers; the customers should be perfectly happy similarly to optimise their own situation with respect to the banks. It’s an unfortunate situation all round, but it’s not something you can blame the financial press for.”
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