Monday, November 23, 2009, 11:44PM ET - U.S. Markets Closed.

Jack M. Guttentag The Mortgage Professor

Jack M. Guttentag, The Mortgage Professor

How Deep Must You Dig to Pay the Mortgage?

by Jack M. Guttentag

Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story
Good (204 Ratings)
2.372552/5
Posted on Monday, June 8, 2009, 12:00AM

As the unemployment rate rises, more mortgage borrowers must choose between default and making the payment out of savings. That can be an agonizing decision. See the letter below:

"I was laid off recently but am reasonably hopeful of finding another position soon... We have stayed current by drawing down our IRAs, but there is only about $4,000 left, enough to cover us for one more month...Our family is counseling us to keep the $4K left in our IRAs and not make the next monthly mortgage payments. Do you agree?"

Not making the payment will hurt your credit, but if the choice is between missing the payment this month and missing it next month, I would miss it this month and keep the cash. I would only use the rest of your cash to make the payment if you manage to get a job before 30 days after the payment due date. In that event, you have a reasonable hope of being able to work your way out of the jam you are in, so using your remaining money to save your credit makes sense.

This question is heavily value-laden, which is why I answered it in terms of what I would do, which is not necessarily what someone else with different values might elect to do. Some, especially investors, could take the position that a borrower is morally obliged to make the payment if there is any possible way to do it. This is a defensible argument, but it assumes that the borrower's only duty is to the investor. The borrower in question has a family to consider as well.

The issue of a borrower's obligation to continue making payments out of savings after their income-generating capacity has been impaired arises in connection with the government's Home Affordability Modification Program. See another letter from a reader:

"I have applied to have my loan modified, and am in process of filling out the financial questionnaire that my servicer sent me. It asks for the amounts in my bank accounts. Although my income has dropped, I have enough money in the bank to cover the mortgage payment for three years. Should I take it out, and where should I put it?"

To be eligible to have your payment reduced under this program, you must document not only that your income is insufficient to meet the payment but also that you do not have "sufficient liquid assets" to make the payment. I have scrutinized the specs for this program issued by Treasury, and could not find a definition of either "sufficient" or "liquid assets." It is a thorny issue that Treasury elected not to deal with. In effect, this leaves it up to the servicers to decide, raising the prospect of widely divergent approaches.

Don't expect me to advise you on how to avoid the intent of this regulation, but I am willing to advise Treasury on how it might have created greater certainty in the rule by defining terms. I would define "liquid assets" as deposits without a specific term plus money market funds, and "sufficient" as an amount exceeding six months of payments.

My guess is that few if any borrowers are going to get caught by the "sufficient liquid assets" rule, that Treasury knows this and put the rule in to cover its backside. It does not want to read press reports about a borrower with millions in the bank successfully obtaining a rate reduction. If it happens, it can be blamed on the servicer. From this standpoint, leaving the rule undefined makes perfect sense.

Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story

Rate This story

Good (204 Ratings)
2.5/5
Sign-in to rate!

89 Comments

Showing comments 1-5 of 89Next >>
Sort: first to last

  • Len S - Tuesday, June 23, 2009, 9:10AM ET  Report Abuse

    • Overall: 1/5

    Doesn't it bother most people here that we have a guy who has three years worth of payments on the bank? Yet he wants to PLAY the system? Everyone knew this type of nonesense was gonna happen. Everyone talked about it. Just because you bought the rate you agreed too, now you want to modify it? Bull!!!

  • Yahoo! Finance User - Monday, June 22, 2009, 1:58PM ET  Report Abuse

    • Overall: 3/5

    Not sure why anyone who obviously had a career since the mid 80's would only have $4K left after only saving 6 months - 1 year of expenses? I'm only 40, make no where near 6 figures, and have 10 years of savings. (husbend makes about 6 figures) No rental properties, no lottery winnings, no windfalls. In addition, my kids have about 1-2 years of private college savings right now, and I spend 100% of my take home on private school for them. About 1/2 that is in retirements accounts and pensions that is currently "untouchable". But to make that much money and be broke in 6 months to a year tells me your expenses are TOO high. Cut the housing expenses - sounds like you overpaid for your house. Or you live in an overpriced area like NY, San fran, or something equally unsustainable. Why does everyong think that MORE money solves the problems? the states facing the crisis think the answer is to RAISE taxes? how but CUTTING the spending? Good luck with the interviews - I do hope you find success in your search, but there is NO reason not to be saving at least 20% of your salary every year. Everyone . All the time. Cut your expenses, and it can be done.

  • Feerless - Saturday, June 20, 2009, 12:56AM ET  Report Abuse

    • Overall: 2/5

    Man, you guys are making this way too complicated. The modification is for the average homeowner who cannot make his payment because of severe loss of income. If you've lost income and make a mortgage payment, you're eligible. I believe the modification is really just a piece of the bailout money for people like us. It's just indirect...instead of giving us money, they're reducing our expenses (by having us pay less interest).

  • eamonm - Friday, June 19, 2009, 2:15AM ET  Report Abuse

    • Overall: 5/5

    IT ISNT THE MORTGAGE IT IS THE TAXES

  • Adam - Sunday, June 14, 2009, 1:04AM ET  Report Abuse

    • Overall: 4/5

    I am in the loss mitigation arena myself and have worked in almost all areas of mortgage finance over the past seven years. Although I agree by "actual definition" written by Mr. Guttentag as there is no better way to dissect the treasury's outline and opaque answers in this area. This is clearly a strategy in avoidance of a deadpan black & white answer by the Treasury in this "sticky" area of what is and what isn't sufficient liquid assets. Obviously a straightforward transparent comment is something the treasury does not want to publicly mark in stone as they may have to retract, backpedal or wipe the pie off their deadpan expressionless faces.Through this volatile (to put it lightly) time with ever changing program guidelines I can speak first hand being in the trenches of this mess .I am Vice President of a mid sized full tier Loan Modification Firm and deal with this type of situation daily.I will be glad to take a stab at answering this persons questions on whether 3 years of reserves is something that would be considered and hidden when applying for a modification. A Modification to your loan is for someone facing financial hardship IE:" I can't pay the bills, I am going to loose my home, I have drained my assets and have been borrowing from credit cards to pay for my mortgage." The answer is no modification program that I am aware of would even consider an application with 36 months reserves unless in a retirement account and you are close to retirement age. The lender will be happy to let you continue draining your assets to pay them until your financial picture is down to the bare bones, as in NO ASSETS or very very little. Then perhaps when you are actually behind on your payments you may make some real headway. If you are current on your loan and trying to modify you must have a sever hardship proving immanent default within the next 60 to days or some serious negotiation skills. Again this is only in the event it is not in a retirement account and you are close to age of retirement. If you have cash flow problems that are severe enough to where you are in the "red" financially or almost it would make for a more compelling case. Good luck in trying to tackle this on your own.

Showing comments 1-5 of 89Next >>

More from Jack M. Guttentag

The Mortgage Encyclopedia

An authoritative yet concise guide to the mysteries of mortgage finance, arranged alphabetically from "A-Credit" to "Zero Balance." Includes information that will help you decide whether to use a mortgage broker, learn if you can avoid mortgage insurance, and much more. Reach for this indispensable guide and get the fast, accurate information you need!

Order your copy now!

Find out more about The Mortgage Professor.

More from Yahoo! Sources

  • CNN Money
  • Consumer Reports
  • Kiplinger
  • The Motley Fool
  • Business Week
  • Wall Street Journal

Historical chart data and daily updates provided by Commodity Systems, Inc. (CSI). International historical chart data and daily updates provided by Morningstar, Inc. Fundamental company data provided by Capital IQ. Quotes and other information supplied by independent providers identified on the Yahoo! Finance partner page. Quotes are updated automatically, but will be turned off after 25 minutes of inactivity. Quotes are delayed at least 15 minutes. Real-Time continuous streaming quotes are available through our premium service. You may turn streaming quotes on or off. All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.

Yahoo! Answers is provided for informational purposes only, and no Q&A is intended for trading or investing purposes. Yahoo! shall not be responsible or liable for the accuracy, usefulness or availability of any Q&A information, and shall not be responsible or liable for any trading or investment decisions based on such information. View Complete Answers Disclaimer.