I'll just give a simple example to ask this question...
A homedebtor buys a home bigger than they can afford for $100,000 interest only. He loses his job and doesn't make payments for some period of time. He gets back on his feet and the Evil Bank decides to modify the loan and capitalize the unpaid interest instead of adding the property to their already growing shadow inventory. The new loan is $110,000 and for simplicity let's just say the 10k is the amount of interest that wasn't paid. The debtor signs on the dotted line and now the interest that he owed is included in a new-and-bigger principal balance. This isn't a new loan/refi where points and other stuff are deductible on an amortization schedule over the life of the loan.
So here's the question: Is the 10k that was capitalized deductible as mortgage interest? He didn't PAY it per se, but will be paying it someday assuming the loan is eventually paid off. In the mean time, he just borrowed $10k from the bank to pay the interest. Assuming it isn't deductible, how does the bank recognize the 10k if/when it does get paid? Is this just another honey pot that the banks don't have to recognize as interest income in the future?
I'll just give a simple example to ask this question...
A homedebtor buys a home bigger than they can afford for $100,000 interest only. He loses his job and doesn't make payments for some period of time. He gets back on his feet and the Evil Bank decides to modify the loan and capitalize the unpaid interest instead of adding the property to their already growing shadow inventory. The new loan is $110,000 and for simplicity let's just say the 10k is the amount of interest that wasn't paid. The debtor signs on the dotted line and now the interest that he owed is included in a new-and-bigger principal balance. This isn't a new loan/refi where points and other stuff are deductible on an amortization schedule over the life of the loan.
So here's the question: Is the 10k that was capitalized deductible as mortgage interest? He didn't PAY it per se, but will be paying it someday assuming the loan is eventually paid off. In the mean time, he just borrowed $10k from the bank to pay the interest. Assuming it isn't deductible, how does the bank recognize the 10k if/when it does get paid? Is this just another honey pot that the banks don't have to recognize as interest income in the future?
#housing