Casting your line for a recast of your mortgage? Better plan on dining out for dinner.
William Johnson wrote a post explaining the theory/process of re-casting your mortgage and the possibility of contacting your lender to consider a “re-cast” of your mortgage. Technically, much of William’s post is accurate and I will not attempt to further explain the re-cast process in this post (follow the link to William’s well written post).
However, I must respectively disagree with the likelihood of many (any?) consumers being able to accomplish this suggestion. There are a few instances that MAY help a consumer facilitate a re-cast of the mortgate:
1). A re-cast clause is written into the note of the originating mortgage
2). The consumer has an adjustable rate mortgage
3). The consumer is making a substantial principal reduction at the time of the request.
On, the other hand there are cases where a re-cast is very probably completely out of the realm of possibility:
1). Most fixed rate products (30, 20, 15, 10)
2). Loans sold on the secondary market (investor approval highly unlikely)
It may help to understand that virtually ALL negative amortization loans have a “re-cast clause” hard coded into the mortgage note. The parameters of the product allow for a “re-cast” of the principal balance if (when) the outstanding balance reaches 110%, 115% or 125% (this was determined by the lender/investor at the onset and varies across the board).
In other words, if a consumer has a $100,000 mortgage and they continue to make the negative amortization payment (less than interest owed) amount, the mortgage balance will increase monthly until the maximum outstanding balance of $110,000, $115,000 or $125,000 (respectively).
In the case of these loans, the looming threat of a “re-cast” is the proverbial shoe that is still going to drop in the continuance of the mortgage mess. This is simply because the loan will automatically be amortized at the full allowable interest rate (per the note) at the time of “re-cast”. The increase in payment WILL be significant (increasing the likelihood of eminent default).
In fact, I believe a great strategy for any real estate agent marketing short sales would be to monitor negative amortization loans, educate yourself thoroughly on the product and understanding the actual loan documents so you can show and explain to a consumer the looming situation when the mortgage will “re-cast”.
Now, in the case of a adjustable rate or balloon (also 5/25 or 7/23) mortgage, there is a better likelihood of convincing a lender/servicer to “re-cast” and/or reamoratize a mortgage at 1). the date on which the balloon (also 5/25 or 7/23) is due or the adjustment date of an adjustable rate loan AND 2). the concumer is making a substantative principal reduction of the outstanding mortgage balance.
I think the real value of William’s article is in the education provided to the consumer of exactly what “re-casting” is and in providing the homeowner the “how” to make one more “try” with a lender prior to acknowledging the need to shortsale their home. And, unlike the approval of a short sale or attempt at a loan modification, I suspect it will take only one or two phone calls to a lender to determine IF a “re-cast” is possible or not. It really is a “YES or NO” question.
William deserves much appreciation and kudos for helping the struggling homeowner to understand each and every option available to them, I believe William provides a valuable service in this education and an approach that crystalizes he puts the needs of his potential clients above his own interests and motivations.
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Deborah "Dee Dee" Garvin
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I haven't time to read this now, but I will. (Sitting at an airport hotel in London). As usual this is valuable information for the consumer.
Jane, Hope you have enjoyed your trip. I already have an idea on how to modify this for the benefit of real estate agents directly. Will send it to you as I can.
Unless the loan already contains a re-cast clause, it's likely to be much of a possibility. Interest only loans will re-cast at the end of the interest only period, but that is about it. Other than that, a substantial principal payment is about the only way you are going to get a mortgage re-casted.
Rodney, So glad you weighed in on this! I was trying to be as optimistic as possible, but the facts are that 99% of consumers are wasting their time. Leading them down this path is usually futile.....but, if a consumer wants to make a "last ditch effort" I will support them all the way. Glad to see you here!!!
Surprisingly, I had two friends both successfully renegotiate their notes with their lenders. Both had 30 year fixed loans with interest in the high 5's-low 6% range, had been in their homes for 2-4 years, had good payment histories, good salaries and good credit. Neither were in danger of short selling - they wanted to stay. They just asked. Both are now in the high 4% range and paid nothing for what amounts to a streamline re-fi. Go figure.
Nice job of explaining reality!
Dear Deborah,
I have never heard about this clause before. Thank you for bringing it up. Will need to read further on it or wait for your next blog. The experience Bea shared is very interesting and might be a suggestion to some folks with higher interest rates but a good payment history.
So is "re-cast" the same thing as a loan mod? but for those with good credit and who aren't late? And if a loan is re-cast at better terms, then this doesn't negatively impact the credit report?
Bea, Your friends live under a lucky star!!! Hey, I am all in favor of consumers asking lenders....I just think the message needs to be clear that there is no "expectation" that a lender will actually do them. And, yes, I think it probably helped that your friends "walked on water" from a risk point of view.
Francine, Well, woman, fancy meeting you here!!! LOL! Thanks....miss you!
Dorte, I encourage you to read William's post for a very thorough explanation of the recast process. Yes, it would be great if lenders would do more of them, but I won't hold my breath.
Karen, No, a re-cast is not a loan mod.....Kind of. It is a modification (change) in the terms of the mortgage note that would lower the interest, fix an adjustable rate and/or change the amortization. If a lender/servicer will do a re-cast there is absolutely no negative impact on credit. Feel free to contact me directly if you further questions...be happy to help!
I also agree that 99% of homeowners wouldn't have this opportunity. The information of recasting should have been explained thoroughly prior to the homeowner accepting the terms and conditions of the loan. Yet for those who can, this is a rare opportunity and should be explored.
Generally, this loan serviced self employed homeowners who experience inconsistent cash flows sometime during a year but usually increased their cash flow during other times of the year, like the hoiday season. At the end of their fiscal year they could have the cash flow to pay down the negative interest balance.
The homeowner who understands this type of loan knows that at the end of the year, they should focus on the sum of accrued negative balance and try to reduce it to prevent the sum from increasing to the 10 or 15 percent recast trigger. Many small business owners were prime beneficiaries of this loan product.
Finally depending on the index, margin and the cap, many borrowers would not be adversely affected with expiring loans of this type because the index rates are still very low. This loan product was not designed for most homeowners, yet many MLO order takers who are no longer in the loan industry used this product almost exclusively to homeowners that didn't comprehend the terms and conditions of their loan and probably not really qualified unfortunately, to own a home.
Good Morning Debra,
Thank you so much for the mention. Interesting subject. While recasting may only help a few homeowners caught in bad economic times, it remains as a viable possibility for those whose goal had been to pay off their principal early. I have a relative that used an annual bonus check and applied it to her fixed rate mortgage year after year to reduce her principal and pay off her loan early and was told she is eligle for recasting.
Kimo, You and I are in absolute agreement on when the loan was used correctly and when it wasn't. Thanks for you comments!
William, My pleasure...Your relative is exactly the client for whom a lender/servicer would be most likely to agree to the re-cast. My purpose for writing this post was not to be contradictory...just clarifying. To re-cast or not, that is the question (LOL)...rarely would it ever be detrimental for a consumer to get a re-cast (kind of a rate and term rate reduction refinance without any closing costs....how bad could that be???????). By all means, ASK! All they can say is no!!
Those loans are causing people a lot of problems. There were good reasons for those products to be on the market, but they were used wrong.
I'm sure folks didn't understand what they were signing. I've read & reread & reread one of these and I'm still not sure I understood it. Of course, with the whole country convinced that up was the only possible direction for value, what it said didn't matter much anyway. One thing folks with questionable credit are still told is that having a mortgage is a great way to build credit. The plan in many, if not most cases was a refinance at a later date. Now that option is gone and this whole scenario regarding negative amortization loans is just one piece of the giant puzzle that is the economic meltdown haunting us today. The inevitable rise of interest rates just another reason why things are not going to be magically different anytime soon. Imagine recasting and higher interest rates and it's yet another reason for a queasy stomach.
By the way, Deborah, thank you so much for the post. I really gained knowledge I didn't have before reading your feature. That's what AR is for me - a source of information from the inside out with the ying and yang of getting multiple perspectives on issues. That's exactly what's missing in our political dialog today.
Gene, Your comment is absolutely correct!!!
Beverly, Your comment is exactly why any consumer who still have a neg am mortgage should be trying to get is recast now and/or make an exit strategy....the sooner the better. If they are still making minimum payments and cannot afford the increase in the payment for a recast in today's market there is absolutely no way they will be able to handle the payment increase when the bank takes the reins and recasts the loan. Thanks for visiting and bringing great information to the thread.
Hi Deborah,
Very well, thought-out article. Thanks for sharing. Have you noticed a lot of the NegAm Loans have minimum payments that are paying more toward their principal balance (vs. the amortized option)? I've been seeing this, and heard about this during the earlier part of the decade while rates were low. This seems to occur when we have a drop in the rates and somebody has held the loan for at least a few years. Haven't studied it enough to determine if the re-cast of these loans will really hurt the borrowers ability to continue paying the loan (especially since they've been able to pay more principal down as a result of the lower rates). I wonder if the longer than normal timeframe of very low rates will help diffuse this possible bomb (re-cast). If they're able to keep paying larger chunks of their balance, then possibly the change in their re-payment won't be considerable, as many may think. What do you think?
Mike, EXCELLENT point! And, you may be onto something...however, you and I would have to know 1). when they took out the loan, 2). exactly what is on the Note and the terms of recast, 3). current balance of the loan and the amount of principal reduction the consumer has been making AND 4). the approximate value of the property. Remember the recast is set by ltv...in today's market you could be making additional principal reductions and still losing ground. This analysis would be a very beneficial action for any consumer holding a neg am loan. They may well be better suited to stick and stay. And, by the way, you bring up a good topic: The reality is the, over the course of 30 years, an adjustable rate loan will almost always be better that a straight 30 year fixed. You just have to have the stomach and resources for the twists and turns! Glad to have you here~ You work for a great company!!
I don't think anything has worked where the owner has contacted the lender to change anything! Give it up, unless it's to the lenders benefit, it ain't gonna happen. Homeowners just don't have the wherewithall to take a lender on & discuss bupp-kiss, maybe an attorney.
Lyn, I think you may be correct, but I can tell you this: I would certainly be more than willing to meet with a consumer and review their mortgage docs (note) to determine if it would be advantageous to even attempt to get a recast AND I would help them through the conversation with their lender. Why? Because if I were successful the good will and referrals would be worth it and, more over, it would remove one more question from the "should we short sale or not?" which would help both clients and real estate agents. I think there is opportunity here that I wasn't even thinking of when I wrote the article!!!! Got to put more thought behind this!!
Thanks for injecting a little clarity into the mortgage maze.
Deborah, I agree with you that it is not as likely as many think it is, for the reasons you have stated. I have never heard of anybody getting this type of modification to their mortgage when they requested it.
I think there are still a lot of people out there with neg am loans who don't understand re-casting or what's coming.
If they don't qualify for refinancing, there is likely to be something that will stand in the way of the re-cast as well. Though it is going to depend upon the particular lender/investor and maybe what his portfolio is looking like.
I agree, most borrowers are going to be out of luck trying to get a principle reduction, simply because their house is now under water. I think they "invented" the strategic default for that.
You'd think the banks would want to keep the customer, but no, after all, they're banks.
I realize the post is about re-casting neg am loans, but the bankers are not much help on any type of product.
Interesting article
Marte, Thanks, I try...there is massive confusion in the marketplace today and we need to share enough information as possible so consumers can make informed decisions.
Nancy, You are correct, but there are people who could be successful if they knew how to talk to their lender/servicer.
Christine, Your comment exposes why understanding this process is so important. Agents may well increase their listings because of looming recasts.
Steven, Exactly! Every situation is unique.
Jon, The chances of getting a principal reduction are less than nil and a recast does not address or warrant a reduction. To be sure, a consumer would completely blow their chance of getting a recast if they approach a lender about a reduction. Totally different animals!!
Robert, Thank you much!
Thanks for the clarification and for the tip on monitoring the negative amortization loans!
Josh & Julie, Thank you, and if you have access to records on neg am loans I encourage you to market them heavily for short sales. There is absolutely a untapped market there!