I have written before about how federal mortgage modification guidelines discourage homeowners from earning too much.
One instance of this would be a underwater homeowner who turns down (or fails to search for) a higher paying job in regions that are outside of the commuting distance from his house. Let's suppose that one of those regions offers a job pays well enough to justify the costs of moving.
Absent an underwater mortgage, such a homeowner would take the job, sell his house, take his equity to his new region, and purchase a house there. When underwater, but absent modification, he might still make the same choice, but would have to consider the extra cost of either (a) defaulting on or short-selling his mortgage (this would be the cost of having a lower credit score, or perhaps moral qualms with failing to pay) or (b) raising the funds to pay off his negative equity.
Absent mortgage modification, turning down the job will not make his negative equity go away. In fact, to the degree that he considers default/short-sale and his home equity is uncertain, taking that job and moving would allow him to exercise his home-value-put option while it is still in the money. In other words, persons in this situation might be too quick to move (that's the foreclosure problem).
But mortgage modification changes the story: now turning down the job and staying in the house might make the negative equity go away, because persons are eligible for federal mortgage modification only if they remain in the underwater house.
So when I say that "mortgage modification discourages people from earning too much" that does not only mean quitting one's job to "game" the mortgage modification formula, but also failing to increase one's income or take an new job when the opportunities arise.
One instance of this would be a underwater homeowner who turns down (or fails to search for) a higher paying job in regions that are outside of the commuting distance from his house. Let's suppose that one of those regions offers a job pays well enough to justify the costs of moving.
Absent an underwater mortgage, such a homeowner would take the job, sell his house, take his equity to his new region, and purchase a house there. When underwater, but absent modification, he might still make the same choice, but would have to consider the extra cost of either (a) defaulting on or short-selling his mortgage (this would be the cost of having a lower credit score, or perhaps moral qualms with failing to pay) or (b) raising the funds to pay off his negative equity.
Absent mortgage modification, turning down the job will not make his negative equity go away. In fact, to the degree that he considers default/short-sale and his home equity is uncertain, taking that job and moving would allow him to exercise his home-value-put option while it is still in the money. In other words, persons in this situation might be too quick to move (that's the foreclosure problem).
But mortgage modification changes the story: now turning down the job and staying in the house might make the negative equity go away, because persons are eligible for federal mortgage modification only if they remain in the underwater house.
So when I say that "mortgage modification discourages people from earning too much" that does not only mean quitting one's job to "game" the mortgage modification formula, but also failing to increase one's income or take an new job when the opportunities arise.
No comments:
Post a Comment