Terry Mitchell

Should Upside-Down Mortgages Be Adjusted?



Posted: Thursday, September 22, 2011

by Terry Mitchell
http://commenterry.blogs.com

Some people are now suggesting that mortgage companies should consider adjusting their customers’ upside-down mortgages down to the amount that the homes are actually worth. For example, let’s assume that someone still owes $300k on a house that is now only worth $230k. Under what is being proposed here, the mortgage company would reduce the amount owed to $230k and adjust the customer’s monthly payment accordingly, which would save that person hundreds of dollars each month. Proponents of these kinds of adjustments argue that they would ultimately benefit mortgage companies as well, as they would prevent foreclosures.

However, what would happen if the homes recovered their values a few years down the road? Who would benefit? Using the example above, what if that home increased in value several years later and the mortgagor subsequently sold it for much more than the $230K mortgage they had been paying off since the adjustment? Would it be fair for them to profit like that? I say no, because it would not be fair to those who did not receive an adjustment.

So, to prevent such unfairness, any amount received by the mortgagor at the time of the sale that is in excess of the adjusted mortgage amount, but less than the mortgage balance prior to the adjustment, would have to be paid to the mortgage company. Going back to our example, if the home sold for $290k, $60k would be owed to the mortgage company at the time of the sale. If it sold for $320k, $70k would be owed to the mortgage company, while the seller would get to keep the additional $20k in profits. However, if it sold for $230k or less, no additional money would be owed to the mortgage company (in excess of the balance at that time).

By accepting the adjustment, the mortgagor would also being accepting some risk. That risk would be that their home would eventually increase in price and they would therefore lose the opportunity to benefit from it. But the opportunity to have their mortgage adjusted in such a way that will allow them to stay in their home in the short term may justify that risk. It would be their call.
Terry Mitchell is a software engineer, freelance writer, amateur political analyst, and blogger from Virginia, USA. He posts a least one article a day to his blog - http://commenterry.blogs.com - on subjects such as current events, politics, technology, society and culture, religion, health and well-being, self improvement, personal finance, trivia, and sports.

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Top-level comments on this article: (1 total)
» left by Christofer French
 216 days 21 hours ago.
71 fans.
I am being considered for a loan modification now. I like the theory of your article. Not sure who is going to make it happen like that, but good thinking.
» left by Terry Mitchell 214 days 4 hours ago.
91 fans.
Christofer, actually I can't take credit for the idea. I was offering my opinion about and how it should be implemented. Thanks for reading and commenting.
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