Friday, June 26, 2009

Just a little common sense

I’ve been watching the growing mortgage crisis with awe and admiration for the consummate stupidity of the entire banking industry. If that sounds harsh, look at what they are doing.

People who were paying their mortgage on time until the adjustable rate mortgage (ARM) adjusted up now can’t pay. So rather than adjust it back, they foreclose and loose even more money by selling the house at a huge discount.

As job loss grows, homeowners who had been paying their mortgage and need a quick fix can’t get bankers to work with them. All they need is a one or two or three month mortgage holiday. So allow them to skip the payment for a month or three and add those payments on the end so it’s not a 20 or 30-year mortgage, it’s a 20 or 30-year plus the extra payments that were missed. The lender misses a very small amount of interest but they don’t have to foreclose.

How about a homeowner who gets fired and takes a lower paying job because that’s all they can find? Better to cut the interest (the biggest part of your monthly payment) and keep the loan active than allow it into foreclosure. Don’t believe me that interest is the biggest part of your payment?

If you have a $200,000 home loan for 40 years at 7% your payment is 1330.60. Divide $200,000 by $1330.60 and you will pay off that house in 151 months. 30 years times 12 is 360 months and that means it will take you 209 months to pay the interest. So, the interest is $ $278,095.40 or just over doubling the cost of the house. The higher the rate (8% versus 7%) the more you pay in interest.

What does that interest get you? The use of the banks money for a long, long time and that’s a valuable thing. The point is that you’re paying more in interest than you are paying for the house so that’s the easiest place to cut. If you change the interest rate to 6% your payment is $1199.10, savings of $131 a month. Drop your rate to 5% and you save $256 - making the payment $1080 and that just might be the difference between your keeping the house or foreclosure.

There is an old saying - “When you’re in a hole, stop digging”. When the banks add late fees or demand an interest payment to “skip” a payment, they are digging the hole deeper and making it that much more likely that the loan will default!

Any banker that can’t see that taking a $1,000 loss in fees and interest is so much better than taking back a house mortgaged at $200,000 and selling it at a foreclosure auction for $125,000 shouldn’t be allowed to walk around with out adult supervision!

Making money is better than loosing money, but when the choice is between loosing $75,000 and loosing $25,000, which would you pick? And, are you sure that you want to trust your savings account to a banker that thinks foreclosure and a big loss is better than a small loss to work out a way for the bank’s customer to keep paying?

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