Underwater, Sans Swim Fins

(Via Felix Salmon)

Rortybomb has an excellent two part illustration of the brutal economics working against underwater homeowners. This is the same guy who pointed out that the startling majority of loan mods for underwater borrowers result in increasing the amount of principle owed.

He offers a cautionary tale (in two parts)to those who believe an interest rate is the way to go:

[The underwater homeowner applies] for a modification.

There’s two ways this can go to get the mortgage payment down to around 31% of your income. The first is to simply reduce the interest rate to 2%. That looks like this:



Not bad. It decreases the time underwater.

But there’s another way to do the modification. Let’s say the servicer simply reduces the interest rate to 3%. They also add 5% to the principal through fees, taxes, etc. Then, in order to make the mortgage payment fit your budget, they add 8 years to the term of the mortgage, putting you from 27 out of 30 years to 35 out of 35 years. (I think that is how it is done with term extensions, from the Treasury documents I’ve seen).

Your mortgage payment is still the same as in the first example. But that looks like this in this model:

In other words, while a simple interest rate drop can giveth- mods to the principle can more than taketh away.

Moral: Banks have never had your interests at heart - and recent events and government actions have not altered their behavior one little bit.