Banks pulling back from “80-20″ mortgage loans

During the last few years, banks went on a feeding frenzy and started making the kind of loans they always said they would never make. Now they are pulling back. One of the more risky mortage loans banks started making was the “80-20″ loan, where the entire purchase price of a house would be covered with an 80% conventional mortgage and a 20% second mortgage — at a much higher rate.

According to an article in the Wall Street Journal, almost half of all “subprime” (high risk) loans made in 2006 were of this 80-20 variety. These loans are structured in a way that often makes it easier for a person to buy a house than rent it! Not one penny comes out of their pockets up front when they buy.

The problem comes when the borrower has to make payments on both mortgages, especially high because the second (20%) mortgage is at a much higher rate (often 12% or even higher). Nearly 13% of subprime loans are now 60 days or more overdue and banks are panicking.

If you are one of those behind on your mortgage payments, and you feel there is no way you can keep up with the payments in future, call your bank and tell them. No matter what the reason for your delinquency, if you can convince the bank that their choice is foreclosure or cutting the interest rate, there is a good chance they will cut the rate.

This is particularly true of the holder of the 20% loan, because they usually end up with nothing if the property is foreclosed.

If this does not work, think about a Chapter 13 bankruptcy. The court may be willing to force the bank to take an interest rate you can live with.

For more information on bankruptcy, click here.

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