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Mortgage Mod

The American Nightmare

Speaking of the downtown house, as we were in a comment to yesterday’s post, late last week M’hijito and I finally came to an agreement with the credit union over the renegotiated mortgage on the downtown house. Though it’s not what we feel would make sense, it’s better than we feared.

As some will recall, when the Great Desert University canned me and all of my staff, we wheedled a loan modification from the credit union, whose loan officers temporarily gave us a 40-year term at 4 percent. This brought our payments down into the more or less affordable range, but of course it meant that each monthly check paid pennies toward principal.

Not that it mattered, because the house is some $56,000 underwater. One would prefer not to pay $206,000 (the amount owing on the loan) toward a house whose value is now, at best, $150,000.

The loan modification was only good for a year. This month, it came time to renegotiate.

We asked, as we pictured a committee of loan and credit-union executives rolling on the floor in helpless laughter, for a principal reduction. We did not expect to get it. And of course, we didn’t.

What we got was a 40-year loan (39, actually, with a year now gone) at 4.75 percent, with the same old balloon payment that comes due now in 12 years. We were not pleased with the balloon. M’hijito used the Male Voice to try to persuade them to drop that clause. Didn’t work.

So, there we are: if values stay flat until 2023, we will be screwed, screwed, ge-screwed.


This arrangement drops our payment by about $300, lowering my share by $200 and M’hijito’s by $100 a month (he owns 1/3 of the investment). For him, it means he gets to live in a nice house for about what rent on a box in a people warren would cost him. For me, it means my 2011 income will cover my share with so much to spare that I can run the air-conditioning at 71 degrees all next summer!


What more could a person ask?

Actually, for me it means that I not only get to have a life, I also may be able to save enough to buy a new (to me) car in about two years. Should our payment arrangement continue past the time when I can no longer work, the present monthly amount will not require me to draw down an excessive amount from retirement savings.

It also means, I believe, that when M’hijito finishes graduate school and wants to return to San Francisco, we will be able to rent the house for enough to cover the mortgage payments. He can leave at any time, and when we have renters in there, I won’t have to draw down anything pay the mortgage.

What will happen in 12 years, when the balloon comes due? Well, we’ll have to deal with that when it happens. I’m not very worried, though. By 2023, we will have paid the principal down to around $177,000.

If the worst happens and the most pessimistic prediction comes true, the house will lose another 16 percent this year. Assuming it begins to rise after that, at a rate of around 3 percent, in 2023 its value will be $174,400, a shortfall of about $3,000—not an unacceptable amount to have to bring to the table to get rid of it.

If real estate drops 16 percent this year, stays stagnant a year, and then starts to rise at a modest rate, then in 2023 the house will be worth around $169,000. That won’t be good, but even then, it’s less than a $10,000 difference—not an intolerable loss. Over a 12-year period, we could easily set aside that much to buy ourselves out of the place.

Personally, I don’t think values actually will drop that far in 2011. My crystal ball says central-city values will drop about 6 percent this year, stay stagnant in 2012, and then start to rise at about 3 percent a year. Three percent is a pretty modest rate; in normal times, real estate here has appreciated at around 3 to 5 percent per annum, over the long haul. Averaging the annual home appreciation rates between 1980 and 2000 gives you a figure of 3.66 percent.

It’s going to take a long time for Arizona’s economy to recover, because jobs are gone and, with our dunderheaded leaders doing all they can to shoot every one of us in the foot, it will be several decades before employment returns. However, eight in ten Arizonans still have jobs.

Those jobs are ill-paid and getting iller-paid. Meanwhile gasoline prices are soaring—some stations are already selling gas at over $3 a gallon, and we’re told to expect $4 a gallon by next summer.

Think of that. If you earn $10 an hour, a pretty typical wage around here, you will have to work an hour to buy 2½ gallons of gas. The drive from my house to lovely downtown Tempe, not a long commute compared to the drive from the ghost suburbs of Litchfield Park, Laveen, and Maricopa, is 36 miles round trip. My car gets 18 miles to the gallon, and no, on $10 an hour I most certainly could not afford to buy a new vehicle. That means it would cost me 8 bucks a day, $40 a week, just to drive to work—not counting junkets to grocery stores, clothing stores, the kids’ schools, Home Depot, Costco… For a $10-an-hour worker, half a day of every work week will be consumed by the cost of driving to work. And if you lived in one of those bankrupt new suburbs, you could easily double that commute cost.

The legislature has targeted the public school system for destruction. Thus it won’t matter where you live—the local schools out by the White Tanks will be no better than the ghetto schools in the central city.

Everyone who still has a job is gunna want to live closer to work, preferably near the light-rail…which passes within walking distance of the adorable little house. In the past, that impetus has pushed up values in the central city, and it will again in the future.

So, I feel fairly confident that if values drop 16 percent anywhere, it will happen in the outlying suburbs, which all along have absorbed the worst of the real estate losses.

The problem with our downtown house is that there are four foreclosures within a block of it. The house across the street appears to be vacant and also probably has been foreclosed. That’s what’s driving down prices there, compared to other North Central neighborhoods, which have lost value but on a much lesser scale. Because of the neighborhood’s central location, the presence of the new lightrail, the proximity of a very upscale area, and the extreme cuteness of the midcentury houses (which appeals to both straight and gay DINKs), buying there during the bubble was highly speculative. A lot of flippers bought houses with no intention of living in them, and most of those speculators had no real funding behind them.

A half-dozen forfeited properties have already been practically given away by the banks. My guess is there’s no more than another half-dozen to go. They’ll be off the market in a year or 18 months. Give things another year to settle down, and then values will start to float back to where they were before the bubble started to inflate. If the rate of increase is anemic compared to normal real estate growth rates, it’ll be around 3 percent.

That’s what my crystal ball says, anyway.

Magic 8-ball

Image: Magic 8-ball. Mostlyrecords. Public Domain

8 thoughts on “Mortgage Mod”

  1. Forty years sucks, plain and simple. The thought of having a thirty year mortgage gets me all itchy and nervous. I couldn’t even imagine having another whole ten years on top of that.

    Still, it sounds like you’re making the best of it. I applaud you for not doing what seems to be the new standard operating method, and just walking away from the mortgage, leaving ‘someone else’ to deal with the underwater mess. Still, it’s too bad that the credit union wouldn’t drop the principal at least by a token amount in recognition of the change of circumstance, and as a way for them to reduce the risk of default. You have to figure a lot of people, upon being told no, would take that as their cue to tear out the copper piping and bolt. Again, good that this isn’t your planned method of handling their response.

    Good luck and keep us posted. Looking forward to seeing a much more happy Funny this coming summer, as I know that being cool lets you keep your cool!

  2. @ Money Beagle: When I die, my son will have enough to pay off the principal, if he so chooses. Also, since renting it is actually a losing proposition no matter what gloss we try to put on it, we (or he, if the place is all his by then) will unload it the minute the value gets anywhere close to the balance of principal.

    One way or another, we’re going to lose a ton of money on the thing. But as you say, at least we’re not defaulting. Yet.

  3. Is selling your house and moving into the downtown house still a possibility? Seems to me that had several advantages for you, less house to maintain being one of the biggies.

  4. You said: Over a 12-year period, we could easily set aside that much to buy ourselves out of the place.

    The practical and wise thing to do would be to take any money that you could set aside to pay off the back-end of the 40-year mortgage. Well, unless the money you set aside would earn more than the % you pay of the mortgage.

    You can figure it yourself, but with this strategy, you will save lots on the mortgage. You are good at these figures…lol…well, I was too when it was my home. Like you said, you are only paying pennies on the principal since the interest gets the larger share of each payment. I loved my amortization table and how more and more of the interest was being paid every year.

    I think you did well in your negotiations. Having money to live without stress is absolutely worth the little problem of a 40-year mortgage. After all, that will probably your son’s problem. But, the two of you can breathe now.

  5. @ frugalscholar: He’s working on taking the prereqs for admission and preparing to take the GRE, while continuing to work fulltime. This semester he’s taking a college math course…and thereon hangs a tale, which I’ll report when I can find a moment to write it up.

    @ Carol: Moving from my larger, more workful house is a possibility. Depends on what the neighborhood looks like after the depression ends, if it ever ends. That area is in transition, and right now the transition is not what we would call “upward.” One does not want to be elderly and frail living in a dangerous neighborhood. If I’m going to move, it’s either going to be someplace relatively close to where my son settles or to a cooler, quieter, more solidly middle-class part of the country with fewer extremists running the government. Arizona is becoming an unpleasant place to live, and I’m afraid that’s not likely to change soon.

    @ Practical Parsimony: The fact is my prognostications are as much wishful thinking as truly educated guesses. Whatever we pay on that house is going into a black hole. We will never break even, because making the place habitable cost about $35,000, above and beyond the amount we paid for it, which we will never recover. We will be extremely lucky if the value recovers enough that we don’t have to bring much to the table to refinance or unload it at the end of the balloon period. There is a possibility that it will never increase in value or, worse, that it will lose even more value and never recover. I’m reluctant to throw any more cash down the toilet than we have to. And at 4.5%, any savings will return significantly more if we put the money in securities — my investments are earning between 5 and 7 percent right now.

    This is not a house that either of us intended to own for the rest of our lives. We had planned to hold it five to ten years, at which time my son would be ready to move on. Now we’re stuck with it for at least fifteen to thirty years. It’s already 60 years old; in the future it will require some more expensive renovations, undoubtedly involving nightmares like black-iron plumbing and antiquated electrical systems. We’ve already dropped way, way too much money on it. Neither of us wants to lose any more in that particular money pit.

  6. Lord of mercy I hope recovery in 12 years isn’t too much to ask. I guess we could always cross our fingers for another bubble. 🙂 Then people like you and I can take the money and run, just like the former owners of our homes did when the market was hot.

  7. @ Lindy Mint: If the market doesn’t stabilize within a year or maybe two, it’ll be at least a decade before prices return to their normal, pre-bubble level…that’s assuming an increase of 3% p.a. after market stabilization.

    Those of us who decide not to walk are gonna be in it for the long haul.

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