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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

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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.

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89 Comments

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  • Dan - Monday, June 8, 2009, 6:43PM ET  Report Abuse

    • Overall: 3/5

    I had to drop health insurance to make my mortgage. I am underemployed and underwater on the mortgage. But still earn too much to qualify for any asistance. A very bad place to be in our society. Not poor enough to be poor and not rich enough to flurish. What used to be the middle class is now the sucker class.

  • Yahoo! Finance User - Monday, June 8, 2009, 8:25PM ET  Report Abuse

    • Overall: 3/5

    The Middle Class is not the Sucker class. People who over paid in a market they thought would boom forever and people who bought more house than they could afford, at the expense of health care are the suckers. Stop blaming others for your issues. Live within your means, well within them, and you will be well insulated from financial storms.

  • Yahoo! Finance User - Monday, June 8, 2009, 8:44PM ET  Report Abuse

    • Overall: 2/5

    I don't know if I was smart, lucky, or both. It was so easy to be drawn into the bigger, bigger, bigger trend and although I purchased and paid off a home well under my means, I was being tempted to buy a bunch of land and build my final home on it. I am so glad that I have not done that yet. I am just watching with no debt and a job which is a nice safe place to be in this economy. I feel sorry for those in trouble.

  • John - Monday, June 8, 2009, 8:48PM ET  Report Abuse

    • Overall: 2/5

    Finance User said: "Live within your means, well within them, and you will be well insulated from financial storms" If only this were true. The government is moving rapidly to take from the sensible to reward the profligate. Eventually there will be no-one left living within their means and we must all line up to suckle at Obama's great teat.

  • Crisis Solution - Monday, June 8, 2009, 8:50PM ET  Report Abuse

    • Overall: 2/5

    The point is this; as long as the banks keep putting people in these situations, foreclosures will not only continue but will rise as well. So, those of you who can only make comments like the "stupid class," etc will continue to become more and more upside down in your mortgages as well. Then you will loose your property as well. Of course, if you make dumb comments like the one below you are probably just pissed and may not even have ever tried to own a property. Foreclosures will stop and prices will stabilize on the day the banks let the people who were "suckers" (as you say) keep their properties. These people were lied to, accepting the appraised values that the Ponzi scheme the banks pulled on this country created, and therefore they bought at inflated prices. Prices were inflated because these banks were giving property away to many who should not have bought (I will stay politically correct here but we know who these people were! Thanks Sen. Frank) while many others were putting up large down payments which they had saved for years to accumulate. Their savings are gone now and the bank will foreclose and resell the property to someone else for about 25% of the note. Their credit scores are now junk and what should they do? So why this author can not see the stupidity in this process I will never know. None of the talking heads on the news can figure this out either. The banks, on one sheet of paper can lower the notes, foreclosures will stop, they will make more money, prices will stabilize, the unemployment rate will turn around, and everyone can go home. Crisis solved.

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