Yesterday a mortgage modification for clients currently in a confirmed Chapter 13 plan appeared on my desk. The plan is several years old and the mortgage arrears were about $5000. The lender sought relief from stay over what turned out to be a one payment delinquency and the bank’s posting error. Got that sorted out and here comes an apparently unsolicited loan modification from GMAC Mortgage.
The loan mod proposes to roll the defaults (which are now insignificant) into the loan balance, leave the term unchanged, lower the interest rate to 6% and fix it for the life of the loan. Any balance not paid in the remaining 25 year term is due at the conclusion. I calculated the balloon to be $12,000. OK. Monthly payment will be unchanged $3236.
Seems OK. Not a godsend for people managing to make the payments by and large.
Then on a lark, I went back to the note being modified and found that the adjustable rate will reset in September. I look up the LIBOR rate, add the premium as the note provides, and amortize the same balance over the same term at the adjusted rate. Care to guess? The resulting interest rate is a hair under 3% and the monthly payment will be $2100/month.
Now, let’s see: would I rather pay $2100 a month or $3236 a month for the same house?
I have to assume that GMAC figured the borrowers would be so happy to be offered a modification that they would not do the math. And, of course, the modification has them agreeing to the current principal balance and waiving any arguments that GMAC or its minions, up stream or down steam, don’t really own the note.
To be fair: the one benefit to the modification is that the 6% interest rate would be fixed under the modification. That may have some value if you think interest rates will zoom over 6% and the client expects to keep the house for the long term. But I doubt GMAC was trying to benefit the borrowers.
Have you seen such pranks in your practice?
Image courtesy freejay3.