Here is an email from “FJ” regarding his attempt to enter the mortgage modification program at Fannie Mae. “FJ” writes:

Hey Mish,

I always found it humorous when you posted people’s dealing with their mortgage lender, hence my personal submission.

We applied for Fannie Mae’s mortgage modification program only to be denied during the probation period for paying too early. Evidently, paying your mortgage one day early signifies an “over willingness” to pay (i.e. keep current) and from FNM’s perspective. That means you can afford the original payment.

Here was my response:

“Look man, I’m on my second layoff in 2 1/2 years and my wife’s company is hanging by a thread so I think I’ll stop paying you now. For the next 6-12 months I’ll save what would normally be spent on carrying/maintaining our underwater mortgage, while you run through the process of foreclosing.

My loan’s non-recourse so no worries there. And we’ll have no problem renting a home just as nice for 1/3 the cost. The way I see it, I need incentives to stay.”

And that’s where I left it.

FJ

“FJ” if you can really rent for 1/3 the cost you should get some professional advice about walking.

Note that the lenders (Fannie Mae, Freddie Mac, Bank of America, Wells Fargo, etc.) are stuck in a Morton’s Fork.

Once someone decides to stop paying, the loan may be irrecoverable no matter what incentives the lender offers down the road. On the other hand, if the lender offers new terms to anyone who asks, everyone will ask. Either way the lender loses. Moreover, the lender may not easily be able to figure out which option is worse.

The only time the lender is not forked is when someone has a lot of equity in the house issues a threat. Otherwise the lender has to choose between two very unpleasant alternatives, perhaps without even being aware.

Mike “Mish” Shedlock
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