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Purchasing a loan is very likely to be one of the most serious financial decisions you make. This is especially so if you are looking to consolidate a number of debts, or refinance a subprime (i.e. expensive) mortgage. Signing a loan, or refinancing an existing one, is often a complicated process; the jargon used is difficult to understand and the indexes and complicated terms used to define a loan can be very confusing. This is why too many borrowers go for the first loan they are offered, the one their neighbor or friend recommends, or the one that looks cheapest but isn’t.
You can avoid this by taking some simple but important steps when looking for a loan. Look at the task as a job, a very well paying job, because the difference between a bad loan and a prime loan can mean thousands and thousands of dollars in your pocket. Think of yourself as an investor and commit yourself to choosing the best possible loan. Deciding which loan is the best for you is not as easy as it should be. There are hidden costs, varying rates of interest, prepayment penalties, and other factors that make deciding which loan is best more complicated than simply comparing the cost of the monthly payments.
Weigh up the answers to all these questions (and any more you can think of) and decide which is the best loan for you. Before deciding on your loan, loan modification, or debt consolidation loan talk with a qualified (and free) HUD counselor (find one near you at www.hug.gov) . They can provide you with practical advice on how to make a good decision on your mortgage.
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Avoiding foreclosure is a serious concern for millions of American homeowners. There is a lot of advice on methods to avoid losing your home when you are in financial difficulties. The Obama administration has an arsenal of loan modification programs, alternative foreclosure programs, forbearance periods for the unemployed programs and the list goes on and on. However, as it has been widely advertized, these programs have not obtained the results hoped. So what are the best options for a troubled borrower?
1) Do not ignore the problem. A big issue with many homeowners is that they ignore their financial problems until it is too late. This ostrich syndrome of hiding our heads when we are in trouble is natural, but financially very dangerous. It is important to act straight away as soon as you realize you are going to be behind in your mortgage payments. The sooner you act the more options you have.
2) Know your rights. Before you contact your creditors (and you should do that as soon as possible) look into your rights as a borrower. Read your loan documents carefully and refresh your memory on what your lender can do if you do not make payments. Review your state laws on foreclosure. Every state has different foreclosure laws and timeframes.
3) Contact your lender as soon as possible. Did we already say that? I’ll say it again, contact your lenders. They are interested in finding a solution and providing you with a workout so you can continue paying your loan. There are many options to consider: forbearance periods, reinstatements, loan modifications, deed-in-lieu, refinancing… It all depends on your personal circumstances.
4) Contact a legitimate housing counselor. Non-profit organizations sponsored by the government are ready to give you personalized advice. Call (800) 569-4287 and find one near you.
5) Avoid foreclosure prevention companies. Some of them can help, but the bottom line is that you do not need to pay for these services. Unless you believe loan modification programs are part of a government conspiracy to take your home from you, why pay for a service the government provides for free. On the other hand, unscrupulous loan modification agencies and lenders can cause further damage to your financial situation.
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Exceptional times call for exceptional measures. That was the reasoning behind the bailout of the big banks and insurance companies. We had to swallow the bitter pill of using taxpayers money to bail out corporate America. It was after all in the interest of the American economy. However, this reasoning does not seem to apply to loan modifications.
Obama’s loan modification revamp includes cutting the principal balance of millions of mortgages in the United States. These cuts are aimed at chipping away at the negative equity of underwater mortgages. These mortgages are worth more than the market value of the houses they are paying for, and are the main force behind the rising number of foreclosures.
Obama’s administration is talking to the leaders of the top banks and servicers and telling them they need to cut back on the principal balance of underwater mortgages. Although banks like BoA, Citigroup, Well Fargo, and J.P Morgan Chase accept the need of reducing the principal balance in some situations they will not accept it as a generic measure for all underwater mortgages.
This is not a surprise because the measures suggested by the government would be very expensive. Currently there are over 11 million underwater mortgages. Cutting back the balance of these mortgages to their current value would cost the American taxpayer $700 billion to $900 billion according to the CEO of Morgan Chase Home Lending, not to mention what it would cost banks. Let us not forget that Fannie and Freddie, the government chartered and sponsored leader of the secondary mortgage market, would also have to absorb a chunk of the losses that could amount to up to $150 billion.
Not surprisingly banks do not think this would be responsible or even beneficial for homeowners. In fact Morgan’s CEO is also quoted as saying: “such programs could be potentially very harmful to consumers, investors and future market conditions”. It is nice to have the banking community taking an interest in the consumer’s interest. I guess the $700 billion bank bailout was in the consumer’s interest, so it was money well spent.
This is not to say that big banks are not willing to provide principal balance cuts on principal. Bank of America has famously promised to offer balance cuts to 45,000 homeowners that are in serious financial difficulties, with subprime loans and seriously underwater. Banks are apparently scared of creating a default avalanche if consumers get wind of the possibility of reducing their mortgage balances by thousands of dollars if they default on their mortgage payments.
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The Treasury’s report on the MHA for March explained the drop of new loan modifications as a result of banks requiring that borrowers present all relevant documentation before trial loan modifications could start. However, there could be another factor that is causing this drop in loan modifications; the rise in the number of houses banks are repossessing. Figures provided by RealtyTrac show that the number of homes repossessed reached 257,944 during the quarter, which is a 35% increase from the same period in 2009.
The whole purpose of government relief programs like HAMP, is to keep people in their homes and stop foreclosures. These programs temporarily stalled the number of foreclosures but as the government’s efforts tail off foreclosures are expected to continue to increase. According to research firm First American CoreLogic, 29% of all house sales were distress sales, i.e. foreclosures and short sales. This is not good news for Obama’s revamped MHA program that seeks to specifically target the troubled homeowners that are spiking figures of distressed home sales.
The results of these efforts are not all that encouraging. According to Treasury’s own data the number of homeowners that have secured a permanent loan modification is 230,000. 150,000 troubled homeowners dropped from the program because of failing on payments during the trial period, because they did not provide the necessary documentation, or because the servicers did not feel they qualified after all. The number of borrowers that have benefited from the program has reached 1 million. These borrowers saw their mortgage payments drop to 31% of their monthly income. However, the majority of these trial modifications do not end up in permanent loan modifications. Needless to say these figures do not create consumer confidence in a turbulent housing market where faith in homeownership is dropping, and fast.
Even though most people still feel owning a home is important and preferable to rentals, a survey by Fannie Mae shows that many are skeptical about the chances of prices rising and underwater mortgages gaining any equity. Underwater mortgages are home loans that are worth more than their current market value. For instance if you owe $100,000 on your home but its market value is only $80,000 you are $20,000 in the red, or underwater. Underwater mortgages are much harder to refinance as lenders are not willing to invest in a property that is no longer a suitable security for the loan it is backing. In many cases the only practical ways to deal with these loans is to short sale or foreclose, which explains the rise in distress sales we are witnessing.
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Obama’s Making Home Affordable plan has relied heavily on Fannie and Freddie as key players in the government’s strategy to revive the housing market. Freddie and Fanny encouraged – some might say bullied – servicers and lenders on their servicer lists to accept loan modification programs. This was not cheap. Bailing out Freddie Mac and Fannie Mae cost American taxpayers more than $125 billion. This is by far the most expensive bailout of the long list of government bailouts since 2008.
Yesterday Treasury Department started the process of overhauling these two mortgage juggernauts. It seems like Treasury are not quite sure what to do with them. Either that or they are just a very polite government department because they are asking the American taxpayers 7 questions on what they should do with Fannie and Freddie. The US treasury press release explains this unorthodox move as a display of the government’s interest in “hearing from a wide variety of perspectives. […] This open process will help shape the future of our housing finance system.”
Whether this open process will help or not is still to be seen. What is certain is that changes made to the quasi-governmental corporations will have a strong effect on the housing market. Treasury will gather the suggestions at www.regulations.gov. What do these questions deal with? These questions request suggestions on the value of home ownership (as opposed to renting), the role of government in guaranteeing money for loans, and allowing for variability of income, and housing requirements of different regions.
These are the questions in full:
It will be interesting what comes out of this poll system of creating federal legislation. It does seem that the government asking what to do with Fannie and Freddie after they bailed them out is a little like buying a million dollar home in the slums, and then asking your wife what she would like to do with it.
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Obama’s Loan Modification programs have been criticized for their lack of results. But what are these results? The March Servicer Performance Report is fresh off the press, so let us have a quick look at what it has to say.
The highlights for HAMP are that more than 230,000 mortgages have been permanently modified. 108,000 loans have been approved by the lender and are simply waiting for the borrower to sign the final papers. That gives us a total 338,000 loans with permanent modifications. The other big newsbyte is that over 1.1 million trial loan modifications are active under the HAMP program. As you all know these trial loan modifications last for three months. If at the end of this period the borrower has provided all the relevant documentation and is up-to-date with his mortgage payments he is given a permanent loan modification. That is, of course, the theory.
According to MHA these loan modifications represent over $3 billion dollars in savings for monthly mortgage payments. The bad news on the report is the number of trial modifications added in the March has dropped to 57,000 from 72,000 in February. The reason for this, according to HAMP’s spin, is that servicers and lenders are requiring upfront documentation before trial modifications start. This has been a bone of contention with critics of the program that see the trial loan modification (without prequalifying the necessary documents) as a way of getting troubled borrowers to pay for three extra months and then deny them the loan modification on the basis of pending paperwork .
The flip side on the reduction of new trial modifications is there has been an increase of 15% in the number of permanent loan modifications approved in March. The story MHA is spinning is that numbers are dropping because of prequalifying filters servicers are introducing. The biggest issue with the Making Home Affordable Program is it doesn’t tackle the real issues of the housing crisis. Interest rate reductions of loans can substantially reduce the cost of a mortgage. A drop of 1% translates into savings $1,500 in most cases. The problem is that high interest mortgages are not the biggest problem any longer. Unemployment is.
MHA understands this and is providing alternatives programs to HAMP that provide specific aid to unemployed homeowners. The latest program for unemployed started this month. It provides loan modifications of mortgage payments to 31% of the unemployed worker’s income for a 3 to 6-month period. The question is will these measures provide real aid to those that need it and not just throw good money at lenders and servicers with little long term benefits for borrowers.
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When everybody was saying HAMP’s loan modification was dead as a dodo the Obama Administration has revamped the program under a new Hardest Hit Fund enhancement. This enhancement promises to allocate $600 million from the TARP fund to finance innovative ways of keeping people in their homes or avoid outright foreclosures. This help has been focused on specific states that have been particularly hard hit by the financial crisis. Throwing more money at an idea is not really a novel concept. What is kind of novel is that the Administration is asking for suggestions on how to spend it best.
The first HFA initiative targeted five states based on the rate of decline in house prices (over 20%). The idea was to help people with underwater and subprime mortgages. However, the situation has changed, the fastest demographic joining the list of troubled homeowners are unemployed homeowners with prime mortgages but with not enough income to pay for them. That is why the Administration is now targeting states with a high rate of unemployment (over 12%). There are five states that comply with this criterion: North Carolina, South Carolina, Rhode Island, Ohio, and Oregon. The key though, is that each state can use the fund as they see fit, well, within reason.
These states can now apply for this enhancement of the existing HFA fund. What gives this new enhancement an actual chance of being useful is that each state has some freedom in deciding how to use the money. The program does qualify the allowable uses of the money, but it gives officials in each state the freedom to decide the particulars. The guidelines are rather broad: 1) Protect home values, 2) Preserve homeownership and promote jobs and economic growth, and 3) Provide public accountability.
This gives states a chance to find creative ways to use the money in the most effective way. Relying on the creative thinking of government officials might or might not be a stroke of genius; time will tell. The administration has encouraged eligible states to submit proposals on how the cash should be spent in their counties. The schemes the TARP fund could be used for includes:
1) Unemployment Programs. This is actually already in place. Troubled homeowners that are currently unemployed will be provided with a temporary loan modification, or forbearance period, where the mortgage payments will be reduced to 31% of their current income.
2) Loan Modifications. This is a rather boring alternative, which will simply give financial institutions and lenders more money for accepting loan modifications.
3) Principal balance reduction. This is a more interesting option; reducing the balance of a loan to offset underwater mortgages and allow for further modifications.
4) Second Lien Reductions. This is also something now done by the HAFA program. It basically means junior lien holders of mortgages are paid off / compensated for allowing a short sale to go ahead even though they know too well they will not get a dime from it.
These are some of the ideas already on the table; the hope is that new and wonderful suggestions will crop up like some kind of multi-state brainstorm. What would you do with the cash? Obama seems to be open to suggestions.
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There has been a lot of ink spilled on the issue of loan modifications, foreclosure, short sales, and their effect on your credit score. Depending on which newspaper, blog, or Wikipedia article you read there are a couple dozen theories or authoritative statements on how the whole credit scoring system works.
If you are planning to do any of the above: modify your mortgage, foreclose on your mortgage, short sale your home, or any other loan related activity it is worth finding out what the effects will be on your credit score. But why is our credit score so important? And, how does your payment history affect it?
Your credit score is important because it summarizes your credit risk to lenders and businesses. It is a number that describes your financial reliability as a borrower. Some employers and landlords also use this score as one of many ways to get a background check on us. If we apply for a loan and our credit score is low we a) might not get approved, or b) will have to pay higher interest rates than if we he had a higher score. It is as simple as that.
What makes up your credit score?
The biggest factor is your payment history. Around 35% of your score is based on your borrowing and paying record. This is quite understandable; a lender is justified in wanting to know if you have paid your debts in the past. This does not mean that a single (or event two) late payment/s will automatically destroy your credit score. An overall good record of paying your loans could outweigh a couple of bad instances.
This doesn’t mean either that if you have no late payments you will have a perfect score (that would be 850, in FICO’s main scoring system), there are many other factors to consider.
How long will past delinquencies affect your credit score for?
Bankruptcies, foreclosures, wage attachments, and other cases of delinquency seriously affect your credit score. How recent and frequent a case of delinquency is also counts in your credit score. Bankruptcies will stay on your credit report for 7 to 10 years depending on what chapter you filed under. The good thing is that more recent activity in your account will weigh more in your credit score than older delinquencies. A foreclosure, even though some of our readers would like to believe otherwise, will stay on your credit report for a long time. How long is not specified by FICO, but even a 90 day late payment 5 years ago will affect your credit score. Although thankfully the longer ago a delinquency occurred the less effect it has on your score, which means it is worth trying to improve your score because what you do now will have a great effect on your score.
Note: A great reference to learn the basics of the wonderful world of credit rating is ”Understand your FICO Score” booklet provided by FICO at http://www.myfico.com/Downloads/Files/myFICO_UYFS_Booklet.pdf. FICO credit scores are the most used credit risk scores in the United Sates.
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The latest federal report on loan modifications shows that loan modifications carried out from January to April 2009 had a re-default rate of 51.5%. Re-default is defined by the report as any modified mortgage that has pending payment that is 30 days or more late. The same report highlights that re-default rates of modified loans in the last 12 months is 57.9%. This means that loan modifications are a) not doing what they are meant to; help people keep up with their monthly mortgage payments. And b) are getting worse at it.
Homeowners that have qualified for loan modifications are still struggling to make payments for a variety of reasons. Some have since lost their jobs, or their income has been reduced. Others simply do not see the sense in continuing to pay for a mortgage that is completely underwater. There are a lot people in that last category; around 24% of all homes with a mortgage on them were underwater in the last quarter of the 2009. The median price of a house in the United States has dropped by 28% since July 2006. It does not take a degree in Economics to see that loan modifications are just not working.
The question is why bother spending money on loan modifications that do not help homeowners keep their homes? A growing number of analysts are saying there is simply no rational reason to rewrite all these underwater loans. The number of homes facing a foreclosure is huge. The last quarter of 2009 had 2.39 million borrowers that were 60 days late on their mortgage payments, which is nearly a 50% rise from the previous year.
The pressure is on for the Obama administration to provide real solutions to the oncoming wave of foreclosures. Projections expect over 4.5 million foreclosure filings just this year. Some critics say the government’s current loan modification program is a disservice to the public, because it has extended the problem over years by helping homeowners, but not enough to make a real difference.
Of the 594,000 loan modifications that have started the application process from September to December process only 21,000 have received a permanent modification. In the entire lifetime of the HAMP program only 168,708 have received a loan modification, according to the Treasury’s own analysis.
Not surprisingly, owners whose mortgage monthly payments were reduced the most had the least chances of re-defaulting on their homes. The magic number of loan modifications seems to be 20%. When a loan modification reduces monthly payments by over 20% re-default rates dropped considerably.
One of the big issues that feed on this scenario is that many homeowners are underwater on their homes and are not interested in keeping their homes. They prefer to simply let them go back to the mortgage owner. Treasury has responded to this issue by creating HAFA, a mortgage aid for designed to get people to short sale their home. HAFA helps to fast track the short sale process by paying servicers, junior lien holders and borrowers to complete a short sale.
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