Things are so bad in the system that I have now heard from many readers about people having loan modifications that effectively allow home borrowers to stay in their homes at below market rents. In other words, another subsidy to an already incredibly subsidized market.
Take for example this Chase modification that recently occurred here in Los Angeles County:
This loan modification occurred in the 91306 zip code of Los Angeles County. The current median price for this market is $355,000. Remember those horrific option ARMs? Well they are now morphing into other products. Here are the original terms on the note:
Option ARM payments
Negative Amortization: $1,754
Interest Only: $2,265
P&I: $2,905
The “real” monthly cost on the mortgage is closer to $3,000. Yet with this new modification, the borrower can stay in the house paying $1,694 per month all the way until 2015 with a 3.75 percent interest rate. This is someone that took out an option ARM from one of the former option ARM kingpins. The borrower who speculated wins because they get to stay in the home and the bank has already won with all the taxpayer money they have stuffed into their pockets. Oh, and what is the new principal balance?
So the bank can assert that they have a $542,000 asset in a market where the median home price is closer to $355,000. What do they care? They already have taxpayer money to speculate on Wall Street and basically allow these mortgages to sit fertile for as long as the borrower can string by a few payments. Moral hazard? We are beyond that point.