Previous Entry Share Next Entry
Mortages, in theory, part 2 of N
blaisepascal
When last we left, Harriette had borrowed $100000 from Bob for 6% over 30 years, and we saw what would normally happen if Harriette payed off the mortgage, on time, in one form or another. What happens in this simple scenario if something goes wrong and Harriette isn't able to pay it off?

Let's suppose that, 10 years after getting the loan, Harriette stills owes $84K in principal, and suffers a sharp change in her financial situation: her son gets cancer and had humongous health bills; she loses her biggest client in her business; she gives birth; etc. All of a sudden, the $600/month mortgage payment is no longer really doable.

Here's a few things which could happen:

She can sell the house and move.

She could go to Bob, explain the situation, and work out a refinancing of the mortgage so that her payments are lower (say, a new 30-year mortgage at 4%, which would have a $410/month payment).

She could go to Bob, explain the situation, and Bob could understand that the situation is temporary and thus temporarily accept less than the $600/month, as long as she pays the interest ($420/month), which lengthens the payback period on the loan.

She could go to Bob, explain the situation, and come up with some "loan modification" which would allow her to stay good on the mortgage without having to pay the previously agreed monthly amount. Since the loan is a private contract between Harriette and Bob's bank, it can be modified at any time with the agreement of both parties.

But if she can't sell, and can't make a suitable arrangement with Bob, then Bob will foreclose.

The procedures differ from place to place, but in general, Bob will petition a court for foreclosure, and Bob and Harriette will attend a hearing before a judge where Bob will say that Harriette has failed to pay, present evidence of the mortgage terms, and Harriette will have her say. Since Harriette didn't pay, the judge will order the house sold at auction. The Sheriff (usually) will hold an auction, and get, say, $100K for the house. Bob will get a check for $84K (the balance of the loan) and Harriette will get a check for $16K (the remainder of what the house sold for).

Harriette's foreclosure will go on her credit reports, and will make it hard for her to get credit for several years (usually 7).

The mortgage is a "no recourse" loan, usually, in the US. That means that if the Sheriff was only able to sell the house for $50K, Bob would get %50K, and would not be able to sue Harriette for the remaining $34K.

Since it is expensive for Bob to foreclose on the property, and isn't guaranteed to get all his money back on the deal anyway, Bob usually has lots of incentive to work with Harriette to make a deal to prevent foreclosure from happening.

Unless things aren't as simple as all that. So far, I've mentioned Harriette, Bob, and Bill. But there are more who could be involved. There could be Mike, Sam, Tammy, Irene, and Eve. And they can make the situation much more complicated... We'll get into that next time.

?

Log in

No account? Create an account