When the neighbor saves $100,000 while you keep paying

Aline van Duyn of FT.com wrote a great article that explains a few things about mortgage modifications. I quote part of van Duyn’s article below. But that is not the real shocker. While approximately 35 percent of people are struggling with mortgages, what really drives me wild is what happens when the neighbor gets $100,00 knocked off of the mortage balance while others in the neighborhood keep paying on time like they should.

There are two types of subprime loans. First, those that are in fact owned by investors, often banks. Persuading people to contact their lenders when they run into problems repaying the loans is hard enough. Numerous tricks have been used, including sending modification offers in fancy-looking envelopes that are likely to be opened. But changing terms is possible and could prevent foreclosure – the worst outcome for lenders, borrowers and the plunging house market.

Then there are those mortgages that have been securitised. These are not owned by individuals, or banks, but by special “trusts”. In other words, the relationship between the borrower and the lender is between a person and a contract, a piece of paper. Decisions are not governed by someone’s will, but by legal requirements.

These are, not surprisingly, highly inflexible. The threat of litigation hangs over anyone’s head if they lose the trust money, such as allowing people to modify mortgages, only to have them foreclose a few months later. In a world of contracts, litigation rules.

Here is the link to the full article. Food for thought for some, and anger management for others, might be the order of the day.