As the unemployment rate rises, more mortgage borrowers must choose
between default and making the payment out of savings. That can be an
agonizing decision.
“I was laid off recently but am reasonably hopeful of finding another
position soon... We have stayed current by drawing down our IRAs, but
there is only about $4,000 left, enough to cover us for one more
month..Our family is counseling us to keep the $4K left in our IRA’s and
not make the next monthly mortgage payments. Do you agree?”
Not
making the payment will hurt your credit, but if the choice is between
missing the payment this month and missing it next month, I would miss
it this month and keep the cash. I would only use the rest of your cash
to make the payment if you manage to get a job before 30 days after the
payment due date. In that event, you have a reasonable hope of being
able to work your way out of the jam you are in, so using your remaining
money to save your credit makes sense.
This question is heavily value-laden, which is why I answered it in terms of what I would do, which is not necessarily what someone else with different values might elect to do. Some, and especially investors, could take the position that a borrower is morally obliged to make the payment if there is any possible way to do it. This is a defensible argument, but it assumes that the borrower’s only duty is to the investor. The borrower in question has a family to consider as well.
Requirement to Pay Out of Savings Under MHA
The issue of a borrower’s
obligation to continue making payments out of savings after their
income-generating capacity has been impaired arises in connection with
the Government’s Home Affordability Modification Program (MHA).
“I have applied to have my
loan modified, and am in process of filling out the financial
questionnaire that my servicer sent me. It asks for the amounts in my
bank accounts. Although my income has dropped, I have enough money in
the bank to cover the mortgage payment for 3 years. Should I take it
out, and where should I put it?”
To be eligible to have your
payment reduced under this program, you must document not only that your
income is insufficient to meet the payment, but also that you do not
have “sufficient liquid assets” to make the payment. I have scrutinized
the specs for this program issued by Treasury, and could not find a
definition of either “sufficient” or “liquid assets.” It is a thorny
issue that Treasury elected not to deal with. In effect, this leaves it
up to the servicers to decide, raising the prospect of widely divergent
approaches.
Don’t expect me to advise
you on how to avoid the intent of this regulation, but I am willing to
advise Treasury on how it might have created greater certainty in the
rule by defining terms. I would define “liquid assets” as deposits
without a specific term plus money market funds, and “sufficient” as an
amount exceeding 6 months of payments.
My guess is that few if any
borrowers are going to get caught by the “sufficient liquid assets”
rule, that Treasury knows this and put the rule in to cover its
backside. It does not want to read press reports about a borrower with
millions in the bank successfully obtaining a rate reduction. If it
happens, it can be blamed on the servicer. From this standpoint, leaving
the rule undefined makes perfect sense.
Modification Not a Remedy
For Unemployment
“I had been making 130K annually, but I was laid off in February and now
draw unemployment insurance of $1420 monthly.
Our mortgage company says that we don’t qualify for a loan modification
and to come back after we are 60 days past due. Why is that?”
The purpose of a loan
modification is to lower the payment (including property taxes and
homeowners insurance) to the point where it is affordable, defined as
comprising no more than 31% of the borrower’s gross income. But there is
a limit to how far the payment can be reduced, arising from the
requirement that the modified loan must be worth more to the investor
than it would if it went to foreclosure. Because your only income now is
from unemployment insurance, the servicer concluded that your mortgage
would be worth more if it were foreclosed.
Working backwards from the
figures you sent me, a modification that reduced the rate on your first
mortgage to 2%, which is the lower limit to a rate reduction, would
result in a payment-to-income ratio of 31% if you had an annual income
of about $55,000. This is less than half of what you were making, and
suggests that one way to save your house, and perhaps the only way, is
to lower your sights on what you are prepared to accept in the job
market.