Should You Keep Paying Your Mortgage Or Rely On The Bailout?

Every time I turn around I’m hearing something about the mortgage bailout and how people hate it. Just today, I had a member that came into the branch and wanted to talk to someone about a loan. It was a perfectly reasonable request we get all the time, so I didn’t think anything of it. But, as I sit down with this woman, I realize it’s not really a reasonable request at all.

So, I ask the member what kind of loan she’s interested in and she says she wants to know about her mortgage. I don’t actually handle mortgages, and to be honest, don’t know a lot about them. The credit union has two mortgage specialists that take care of that. However, most people don’t really differentiate between a mortgage and a home equity, so it’s pretty common for us to ask some questions to clarify what the member is really looking for. Thinking that was the case, I start asking my questions.

The member stops me, though. She tells me she’s not interested in refinancing anything, but she needs me to tell her what the advantage is to her to keep paying her mortgage. As she sees it, if she stops paying her mortgage, she can get herself a piece of the bailout pie. I was a little surprised, to say the least. I realize that not everyone is for this bailout because we’re all a little tired of helping people out of their stupid mistakes; however, I would think the advantages of keeping your mortgage in good standing and not relying on the bailout were fairly obvious.

She went on to rant about the fact that she doesn’t qualify for any of the tax deductions either, and she believes she deserves something for her efforts on paying her home. But, at the end, she literally wanted me to list out the benefits of her keeping her mortgage current, because as she saw it, banks like us were responsible for the mess we’re in. A told her it was a fair point, but that we’re a credit union, not a bank, and we did not participate in the subprime loans responsible for the mess. But, I was happy to point out the benefits for her.

Before I get to the benefits of what I discussed with her, just in case you’ve been living in a cave the last month and a half, here’s a summary of Obama’s housing bailout plan.

• Only available for owner-occupied, principal residences with mortgages that originated before January 1, 2009.

• Monthly payments must exceed  31% of homeowner’s gross monthly income to be eligible. 31% is the magic number Obama wants homeowners to be at, so those over that number will have their interest rates lowered to as low as 2%, terms extended, and principal balances forebeared at no interest.

• There will be some cash incentives to both lenders and homeowners when mortgage payments are made on time for 3 months. The lenders get their $1000 for every loan modified for up to three years. Homeowners get their $1000 knocked off their principal balance every year for up to five years. The caveat here is that all payments must be on time.

• Homeowner’s have to demonstrate financial hardship - such as job loss - and the homeowner will be required to sign an affidavit attesting to said hardship.

There are a couple more little provisions in the plan, but these are the big ones. The good thing about this plan is that there is a lot of strict requirements on the documentation that can and can’t be approved. Income and credit reports will be checked with a fine tooth comb. The downside is that this plan leaves out a significant group of homeowners - speculators.

Ok, coming back to the benefits of paying your mortgage on time.

# 1 - Potential increase in property value

For those homeowners who are not struggling to pay their bills, the big selling point on Obama’s plan is that by keeping so many homes out of foreclosure, it is likely to increase home values naturally, as opposed to the way of the bubble. By making payments on time and keeping their loan in good standing, a homeowner increases their chances of being able to sell for a good price. But, if selling isn’t in the near future, then it does keep your assets positive by having a good home value. That means in the event you need to borrow from your equity for anything like home repairs to consolidating debt, you can do so without worrying about your home being worth less than you owe.

# 2 - Protects your credit score

The member I was talking to today had a 769 credit score. That’s A+ anywhere you go, which means she qualified for the best rate across the board. I explained that by continuing to make her monthly payments on time every month she was protecting her credit score and showing any future lenders she may need that she is responsible and capable of making educated decisions. These people looking at the mortgage bailout as an option are going to have a real hard time getting credit anywhere else.

# 3 - Protects your investment

By this point, the member had already been paying on the mortgage for four years. While she hasn’t made a significant dent in her principal balance yet, she has sunk quite a bit of money into this house - not only through mortgage payments, but through repairs and additions, as well. Continuing to make the payments on time protects that money she’s already spent on the house. Defaulting on this loan wouldn’t necessarily get her a piece of the pie, anyway. It’s better to protect the assets she has.

# 4 - Protects her legacy

This member has said that she’s probably not going to move out of this house - unless she defaults. She’s happy with her home and feels safe and comfortable there. She also finds it spacious enough to raise her three kids. So, by keeping current on her mortgage payments, she’s protecting what she plans to leave behind for her kids. Plus, she’s raising these kids to be financially savvy, so defaulting on the loan isn’t exactly the message she should be sending.

# 5 - Keeps her in good standing with the credit union

From a credit union perspective, by continuing to pay her mortgage balance on time, she stays in good standing with us. This will benefit her in the form of lower interest rates on loans and higher dividend rates on savings and certificates of deposit. Since credit unions are nonprofit, any monies we make for the year are given back to the members. If people are defaulting on their loans, the credit union doesn’t make money.

# 6 - She wouldn’t be continuing the debt cycle

We have enough trouble with the people out there who’ve made poor decisions, and are now asking for a handout. We don’t need anyone else asking for money we don’t have. Again, I referred back to her kids. I asked her if she wanted to be partially responsibly for forcing further debt onto her children…a harsh tactic, I know.

At any rate, I think she was satisfied with these reasons. I’m sure there are more, but these six were the first to pop in my head just based on our conversation. In reality, I think she just wanted to vent. I don’t believe she was ever serious about defaulting on her home.

So what other benefits do you see for homeowners who continue to pay their mortgage on time? Do you think it’s better for them just to default and ask for a bailout?

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Comment by Anne Carmichael

2009-03-15 11:59:33

This story seems to be about the typical saga. How’s this? We put in around $500,000 in a house in Loudoun Co., Va. last mid April. The house price was $995,000. By July 1st several houses went into foreclosure. The house prices in our neighborhood average over a million dollars. We watched our equity fall in a little over 2 months to around $650,000. Now with another foreclosure going up for sale, and the bank dumping it on the market at $505,000, we are completely underwater now. and even after putting in $500,000. The foreclosed house had been well cared for. I toured it yesterday. It is our model, and has more land than we do. There is no way we can compete with that price, and we really want to get out of here and go back home to New Orleans. We are 60 years old, and bought and fixed up houses over the years to get sweat equity. We have lost everything now. And I truly do not want to pay any more mortgage on this house. The banks have been dumping houses for pennies on the dollar, totally destroying the market here. With all the bailout money they are getting, I think they should not be allowed to destroy the housing market by dumping houses.
Signed
Just an old person who always paid her bills, and has top credit scores. ONe of the productive people who will get no help

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