Last week I received a curious package via UPS at my doorstep. I hadn't ordered anything so I was surprised that somebody would overnight something to me.
I opened the package to find a giant over-sized envelope that read "Don't Delay. Return your modification agreement today!" Hmmm...I don't remember ever requesting a modification of any of my mortgages. Here is the cover letter I found inside (click to enlarge):
This particular loan is on an investment property we own. It appears they have sent us this package just as our ARM is due to start adjusting. The question I have is why would CitiMortgage offer this? One of my favorite real estate industry blogs is CalculatedRisk. I emailed Bill (CR) and posed this question:
What incentive does Citi have to do this? If inflation is really in the cards, fixing a 5.5% rate is going to kill them when rates increase to 9%. However, if a rate reset increases my payment, they would take a haircut on the property in the off chance that I foreclose due to cash flow constraints.
Is CitiMortgage betting that low interest rates are foreseeable for the next decade? (betting on a Japanese style real estate market?)
Bill responded:
When I called CitiMortgage, the gal on the line confirmed this approach. They are more concerned with loans staying current and performing than they are with interest rate risk. I accepted their terms and we should be well on our way to a recasting of amortization and a rate reduction.Hi Jeremy, I've heard similar stories (but with different details). This sounds like one of those blanket mod programs with the bank offering to modify all loans that meet certain characteristics (like ARM, non-owner occupied).
Citi has probably decided that the losses will be less for the loans as a group if they offer this program.
Also - Citi might be able to sell the loan easier after this mod (seems weird, but it could be).
Here is a copy of their agreement they sent me (click to enlarge):
I find it interesting that they make a fuss about the property needing to be in my name and not sold to another party as would be the case if I had sold it in a seller-financed transaction. Most mortgages have an acceleration clause regardless of this modification agreement. I find it interesting that they recognize the possibility that I may have seller-financed the property to a buyer and therefore cannot qualify for the modification but they don't threaten to call my existing loan either. Perhaps this is recognition on their part of a credit deprived housing market?
Another interesting side note here is that because our loan was interest only, I have been paying about $100 a month more on the loan to pay down the principal. If I continue to do this with the new rate and term in place, the mortgage payoff on the home goes from 30 years down to about 20 years from the present day. This modification will save me 5 years! Wohoo!
AND, the government is paying for each loan mod package and for each forbearance agreement. Making both a potential revenue stream AND the bank is insured against loss when you accept a mod. yay for more debt!
ReplyDeleteRobert, so what you are saying is that the banks make a transaction "fee" that is paid for by Uncle Sam each time they induce a borrower into a modification? I haven't heard this before but I am not surprised. Quite interesting. In other words, you are telling me the modification is not so much a voluntary thing as much as it is a money making scheme at the bank with more money siphoned from the pockets of the taxpayer. And for a moment I was encouraged that banks were doing these things under their own recognizance. Sigh...
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