hmm…usually lenders don’t want their borrowers to pay stuff back early because their interest income would be less. They actually factor a pre-payment risk into their loan models, but I guess if they are really cash strapped these days it is possible they want the money back sooner. I don’t understand why they would forgive your loan, though.

Yes, that’s one of the things I was confused about, SMHSIT. Would the idea be that in exchange for higher payments right now the lender would sacrifice part of the future? It’s entirely possible I simply misunderstood David et al., and I apologize if that’s what happened!

Meanwhile, SMHIT and others, here’s a related question: Citigroup, which is Lehman’s major creditor, holds a lot of mortgages. What happens to you if Citigroup goes belly up? Do you just not have to pay on your mortgage any more (ahahahahahaha, I realize that’s not gonna happen)? Would another mortgage company buy your mortgage?

There are many, rather complex reasons regarding interest rate risk, repayments, interest tranches, asset writedowns etc that would go into this decision by a bank.

For example, let’s say I have a 6% loan on an asset “worth” at the time of writing the loan, $500,000. The loan is $400,000 of that. The bank sells that/securitizes it to people willing to make 6% (less some fees) on that. That note is “worth” about $400,000

Now let’s say interest rates on mortgage debt are 12%. The original note (yielding 6%) is now worth roughly half of the original $400,000 (because investors could go out and buy a 200K note at 12% and derive the same income).

With me?

So, if the bank and investors agree that your note is really only “worth” 200K at prevailing interest rates, it might be worth it to take the loss on the principal, write it down (and take the tax break), re-write your note to a lower principal, and get you the higher prevailing interest rate. Your payments would be about the same, but your tax break would go up, so your effective rate would be less (which is assuredly how the bank would “sell” the idea to you).

Of course the bank is now taking on the risk that rates will drop and you’ll refi. etc etc.

Ah, thanks, David, that is v. helpful! I didn’t explain your idea very well, so appreciate your helping out. So a lot of this relates to the house losing value.

(Sometimes I think the word “value” should be retired and instead the word “price” should be used, considering how relative the price is.)

It’s not the house, it’s the value of the note (and its income stream). but in practice it’d be about the same thing.

Right, the loan, sorry. So David and SMHSIT, the Monday meltdown on Wall Street means it will be even harder to get home loans, right? Which should somewhat offset the increasing affordability of homes in the Bay Area?

I suspect that well qualified buyers in the traditional sense such as those with 20% or greater downpayment, reasonable LTV, etc. will always be able to get home loans.

Consider that there are a number of small household banks and credit unions in the Bay Area and many of them are currently well capitalized with little or no exposure to the sub-prime or exotic mortgage market (this can be verified by reviewing monthly balance sheets submitted to the FDIC).

I believe the real question is how many buyers in the Bay Area will continue to fall into the “well qualified buyer” category? Conversely, how far do home prices have to fall before this category of would-be buyers becomes well populated?

I think another problem is that a lot of “well qualified borrowers” already bought in the last three years because of the low interest rates and constant barrage of propaganda that it was an awesome time to buy. In all honesty I think the current climate is a really a good time to buy because of the high supply and low demand. Additionally, the interest rates for the best borrowers are really ridiculously low right now. In fact I dare say that the mortgage rates available now are probably lower than real inflation rates. Unfortunately prices are still pretty high. San Mateo for example has a median household income of around $70 to $80k, but the median home sale price is still $670k according to the last dataquick report. That just doesn’t compute. For it to be reasonalbe again the prices need to fall at least 50% more, but I think that’s unlikely.

“Additionally, the interest rates for the best borrowers are really ridiculously low right now. Unfortunately prices are still pretty high.”

Isn’t that what you would expect? A low interest rate supports a higher price for a certain monthly payment.

Here’s a chart of historical 30-year fixed mortgage interest rates:

http://mortgage-x.com/images/graph/fhfb_contract_rate.gif

It’s rather difficult to surmise any sort of trend from this data, other than in the early 80’s interest rates were brutal!

Let’s play what-if for a moment and explore the effect of a 10.0% interest rate. Our well qualified buyer wants to buy a $670K home in San Mateo and has 20% down, making the mortgage about $530k. The buyer gets a 30 year fixed mortgage and the payments are $4,700 / month. OOPS, what happened!

Oh, excellent points, Brandon! If I wanted to switch to, say, Mechanics Bank, which is based in Richmond, would I go to the FDIC Web site to check those balance sheets? That’s good information.

Brandon, how did ANYBODY buy a house in the 1980s? That’s terrifying!

Janis,

In that case you would be interested in the following links:

http://www.mechanicsbank.com/mechbank/TMBwebsite.nsf/BusterAnnouncementFDICIns.pdf

http://www.mechanicsbank.com/mechbank/TMBwebsite.nsf/about/financials

Janis, the Mechanics Bank actually posts their FDIC “Consolidated Reports of Condition and Income” on their website.

You might also be interested in the PDF file posted under “New Announcements” on the frontpage.

I tried to post links but Redfin blocked my posts for some reason.

Brandon, HUGE thanks for that information! It’s invaluable. It finally dawned on me what’s going on: I think Redfin blocks posts with links for fear of comment spam, you know, when some commercial entity searches for posts related to its product and then drops in a generic post with a link?

I am really grateful for the pointers. At times like these, it’s critically important for people to know how to protect themselves. So, thanks again.

Okay, looks like that’s taken care of now and your post with the Mechanics Bank links is live.