Does anyone have experience with subject to loan modification?
In this market there are many properties many properties that have negative equity. Even if people qualify for loan modification may be still inclined to walk away. With the Obama plan guidelines a loan modification can yield:
-reduce the principle balance of the first mortgage up to 33%
-have the monthly payment reduced to 31% of the borrowers income
-"waterfall" payments with a floor of 2% increasing annually to ~5% over a period of 30 years (like a neg am because it will add to the principle balance)
I ran into a situation last week where the person owed 550k and the FMV was around 300k. With a loan mod it would be possible to reduce the payment over the first year to around $850 per month. Most importantly the market rent is $2200 per month.
Also, I'm not sure what type of balance reduction or interest rate reduction could be acheived, which leaves the situation very ambiguous.
This means that if I took over the property subject to the loan being modified, the cash flow would be over $1000 per month.
My real question is would this be legal? My intuition says that there has to be something for the homeowner other than just the loan being modified i.e. a clearer exit strategy. It obviously would be a bad situation in 5 years if the loan is on their credit and the principle balance has increased again.
Any ideas or suggestions?
Gabe
