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One of my latest articles suggested that the best advice you can get on loan modifications is free and supplied by  the Government and that the Government has a vested interest in loan modifications to work, that is to stop families from losing their homes. This elicited an anonymous comment that I feel can be helpful as I believe it touches on many of the issues people are thinking about. The comment is copied in full even though some of the sentiments expressed may have hurt my fragile ego. The readers’ comments are in italics.

“The best advice comes from the government and they have a vested interest in your success.” Really?  The best advice comes from the government????  Based on the terrible advice that you are giving I can believe that you may actually believe this but that does not make it true. 

Yes, I agree Obama wouldn’t lose sleep over me foreclosing on my home, but I do think he wants this credit crisis to be behind him, to get re-elected and because most people like to do well in a job, few of us like to fail miserably. This does not mean I think he will succeed. I personally believe the whole problem we have now is not so much a mortgage issue, as a credit culture crisis. In many cases mortgage payments are one of the smaller loans borrowers have to worry about. Think credit cards, car loans, refinance mortgages, etc…

The government is not littered with the sharpest minds in America.  It is a bunch of people who are trying to get re-elected. Do you really think they are looking out for my best interest?  Did you ever stop to think that the banking lobby has the politicians in their back pocket?    When you call HUD all they do is give you the number at the bank to call and answer some basic questions.  Wow, what a great service they provide. 

Again I would have to agree that not all government employees have a Mensa membership card in their wallets. And yes, I am sure the banking lobby has plenty of leverage on this government, just look at how quickly the Government bailed them out when they needed it.

However HUD does provide more information than your banks number. Foreclosure prevention counseling services are provided free of charge by nonprofit housing counseling agencies working in partnership with the Federal Government. These agencies are funded, in part, by HUD and NeighborWorks® America. There is no need to pay a private company for these services. http://www.hud.gov/offices/hsg/sfh/hcc/fc/

However if you feel it is all a big conspiracy and that all these counseling agencies are out to get you and don’t want to help you with your mortgage then it might be a good idea to get your own loan modification “guru”. You know what though? Not all of them are the brightest minds of America either.

Politicians tell people not to use loan mod companies because the banks don’t want people to help them out.  Wouldn’t it be great if the person that was suing you for something was representing them self and you had a great attorney to help you out?? 

Have you ever spent 6 months getting the run around from the bank while you stress out over the possibility of losing your home?  Who has the time or mental energy or mortgage knowledge to negotiate with the banks?  Do people know how to calculate their DTI or surplus/deficit?  Did you know that most lenders have guidelines that are based on the monthly surplus/deficit and if you give them numbers that fall outside of those guidelines at any time during the 3-6 month negotiations or during the 3-6 month trial modification you will be DENIED?   

Can you imagine how somebody would feel if they went through hell for 6 months and then when they went through the final financial review after the trial mod they got denied because they got a bonus check or saw their income dip or had an unexpected expense pop up?  Who is going to counsel them on how to manage their finances throughout this process and hold their hand in a great time of need… the government….yeah right.  At least they have your great articles to fall back on.  If you truly want to help people please educate yourself on what you are writing about before you start writing.  Which bank do you work for?

I think the key of the issue is that our friend feels (for completely altruistic reasons I’m sure) that loan modification agents are the way to go. We are too ignorant to work it all out ourselves, and the Government is not to be trusted. That is a feeling many share, which is why they will pay thousands of dollars to a loan modification agency to do the work for them.

It is true that for many of us the paperwork required is just too much to deal with when we have work, family and a hundred other things on our mind, but just because you pay for that help doesn’t mean it is going to be better.

The truth is that nobody can really guarantee you anything. Loan modification agencies can’t guarantee success, although they do have vested interests in delivering the goods, because it is the bank that approves or drops the loan modification application.

You need to decide if loan modifications are worth the trouble at all, some just see them as a trick banks play to get 3 extra months out borrowers.

You also need to decide if paying for a loan modification agency or using a free government issued counselor is the smart thing for you.

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Virtually all credit cards offered online by major banks still include abusive practices that will be outlawed early next year, according to a new report from the Pew Charitable Trust.

Last week’s big news in loan modifications was that HAMP, Obama’s administration’s program to get troubled (i.e. 60 days behind their payments) loans back in line with “aggressive” modifications made its first target of 50,000 trial loans before November. That is what the government hoped anyway.

The big news this week could be that foreclosures seem to be slowing down as well as loan delinquencies fall from peak. That is an interesting way of saying that things aren’t as bad as when they were at their worst. But, hey, when you are in a world credit crisis you have to make the most of good news.

Why are things getting better? Is the Government’s program proving its worth?

You will get a whole lot of opinions on that. Let’s try and hang on to a few important facts to get some perspective on the whole issue.

- A target few thought possible was achieved through sweat, blood and tears.

- Foreclosures are no longer only coming from subprime mortgages that need the help of HAMP to lower interest rates but are increasingly coming from prime mortgages with good interest rates. This is because the current crisis is not only a mortgage interest crisis but a credit crisis. People have over borrowed not only on their homes but on their cars, their credit cards and when they lose their high paying jobs they are in trouble and of course mortgage payments are right at the top of the loans they are trying to pay back.

- Banks are starting to work hard to meet the targets set by the administration. One example is the First Federal Bank of California a subsidiary of FirstFed Financial Corp has modified more than 1.4 billion dollars worth of home mortgages, averting 3,000 mortgages from foreclosure. In fact this relatively small local bank is doing very well when compared to banks nationally. The great results in loan modifications at First Federal Bank of California are strongly linked to good results in other related areas like loan delinquencies which have also declined significantly from previous peak levels. For instance loans that were 30 to 59 days behind payments were 55 percent lower than in January.

How did First Federal Bank of California pull this off?

I don’t know. They will happily say it is there interest in their client’s real needs that allow them to provide realistic modifications to their loans which provides sustainable loan payments for borrowers. What can’t be argued is that this bank is meeting and exceeding government’s expectations.

One of the factors that might be contributing towards this is that smaller banks can modify and fine tune their management faster and more efficiently. Smaller can be better in business and banks have complained about the difficulty of changing the cogs of their corporations to provide fast loan modifications.

What is amazing is that after 6 months we know the government is on target (at least their first target) but we’re not sure if it is aiming for the right target, subprime mortgages.

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The current credit crisis has caught the whole world by surprise. Loans, credit cards, mortgages and the secondary loans that they secured all trembled when the whole world got a reality check on the world economy. The prices of homes seemed to never stop rising and banks were fighting each other to lend out money without caring too much about credit rating and income / expense ratios.

Of course when mortgage securities failed, people couldn’t afford to pay their credit cards, loans and mortgages and homes started to lose value things got bad. Millions of families now face losing their home. Many would say that it is part of life. That owning a home is not a civil right, it is a privilege and there is no shame in renting. I wholeheartedly agree, I have rented most of my life and my parents at 67 still rent and they are the happiest couple you will meet.

However 9 million families facing mortgage foreclosure is a big number for any economy to face, even the United States economy. The effect on consumer spending, and the economy as a whole is huge and there is also a case for the government to try and stop some of these foreclosures for the greater good.

This has caused the government to start a number of loan modification programs to try and alleviate the situation. However the progress has been slow and some feel that the measures taken are simply not what the economy needs. Some have pointed out that the we are facing a credit crisis not a housing or mortgage crisis. You could compare it to giving away water to people in a sinking boat. The water is going to help but what they really need is a raft and some water.

Loan modifications help home owners that tied themselves to a bad interest rate to have access to premium interest rates and reduce monthly payments. It also provides bonuses to borrowers and lenders when the loan modifications are successful. This is useful and has helped many. However if you are financially underwater with other debts and loans, getting help on one of these debts might not be enough to make a difference.

Debt consolidation can provide a more suitable lifeboat for those that are crushed by numerous debts that drain their monthly income. Debt consolidations consist of a large loan that pays for all the debts a borrower has.  Debt consolidation loans typically have a lower interest rate than car loans and credit cards although generally higher than premium mortgage rates. The new debt consolidation loan helps to put all debts into one manageable monthly payment that can provide real help to borrowers. The only problem is that they can be very expensive and cause borrowers to re-mortgage their home sometimes putting their home at risk for loans that did not have a home as security.

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The objectives of the Obama Loan Modifications program are rather ambitious, to help 7 million people (the number is also quoted as 9 million, depending who you ask) modify their loan in order to afford monthly mortgage payments. In fact the way the program is designed you can save money by modifying your loan. The government is seriously backing this program with their big guns, namely $75 billion of funding. As always with these programs there are technicalities to deal with but the gist is rather simple to understand.

The loan modification program provides incentives to banks and service providers to modify your loan to a more sustainable monthly payment if you qualify through the trial period. The three month trial period tests if you are on time with your payments.

If you are, you receive a bonus that goes towards paying the principal of your loan. After that, every year you pay your mortgage without being delinquent on any payment another bonus is paid towards your mortgage principal.

These bonuses are worth extra because they pay the actual cash you initially borrowed, on which you will not have to pay interest. Who qualifies? This is one of the prickly areas of the program. The Loan modification aid program was designed to be as open as possible. You don´t have to be behind in your payments to qualify, just struggling to meet the monthly payments with your current income.

However the issue gets a little complicated due to a clause that limits a lot of home owners that are struggling. You can only qualify if your mortgage represents more than 30% of your monthly income. If it is less you will not qualify. This clause is actually under revision due to the fact that most borrowers don´t only owe on their mortgage but on their car, their credit cards, etc… This causes some of the most desperate home owners that owe money from various lenders not to qualify for the help they need. There are two main groups that can qualify for loan modification.

Those that want a loan modification but that didn´t qualify because the value of their home dropped and those that are on the brink of foreclosure. Either of these groups can get a loan modification if they comply with the programs requirements.

 Don’t forget.

It is free to apply for a loan modifications. What is more, the government is paying banks to give you loan modifications. It is therefore a great idea to not trust companies who ask for expensive fees to get your loan modification processed. The best advice you can get is for a change free. Contact the Home Affordable Mortgage Program or any of the other government housing departments.

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You know there is something wrong with a system when those that need it don’t qualify. This seems to be the case with the Home Affordable Modification Program. One of the main reasons home owners are turned down is because their loans, by the Home Affordable Modification Program standards, are too affordable.

How is it decided if a loan is too affordable to qualify?

One of the main factors is the percentage of the household income that is dedicated to pay the mortgage. If 31% or more of the household income is set aside for the mortgage and other criteria is also satisfied then the home owners qualifies for the loan modification. However if the percentage of the household income is lower it is too bad.

When this criteria was decided it seemed a reasonable percentage of a household income. It was actually seen as a turn back to old fashioned conservative times when workers where only expected to put one week of their wages toward their housing. Apparently it was in the times of the railway “explosion” that workers were given housing by the railway company in exchange for one week of wages.

However this measure has turned out to be just that, old fashioned. People nowadays don’t only owe money on their homes, also on their cars, their credit cards. In fact credit card debts are right at the top in the catalysts for bankruptcy.

Forbes website reported that William Erbey, chief executive of Ocwen, the second largest U.S subprime mortgage servicer says his borrowers are often saddled with credit card bills and auto loans and will pay those bill before their home loans. William Erbey feels that “ It’s not their mortgage that is out of whack. It’s that their other consumption patterns are out of whack”.

This opinion will ring true for many that have seen how a consumerist culture has moved more and more people to get deeper into debt as a matter of course.
Others criticize the administration and government institutions for being out of touch with reality. Forbes also reported that Chief Executive Sanjiv Das chided policymakers by saying: “This is people solving for a housing crisis not realizing we’re in a credit crisis”.

These comments and the slow start of the Home Affordable Modification Program indicates that it might be the program itself that is ready for modification. A program that worked on the overall debt of a household would provide more practical help than just focusing on one of the debts of this credit crisis. One of the biggest hurdles the government have to overcome is training people to spend sensibly not only provide the cash to pay the debts.

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Debt consolidation and debt settlement adverts are all over the media lately. This is quite predictable when millions upon millions of Americans are behind in their payments and risking foreclosure on their mortgages besides being maxed out on their credit cards. Understanding what each debt management system will do for you and which is the right one for you is vital if you are in serious debt and are struggling to make payments.

Debt Consolidation.

You have no doubt seen many adverts promising to consolidate your debts into one large loan that will charge you a lower interest rate and cheaper monthly payments. These debt consolidation loans do exist and can work for you if you choose the right loan. Of course they can also be the biggest financial mistake you make.

Understanding how debt consolidation loans work is the key to making the right choice.
Debt consolidation generally works as a secondary or even a primary mortgage loan. A debt consolidation company will buy off your other debts and  put them together into a mortgage-like loan. This makes your interest rate drop as the loan is secured by your home. The bad news is that the security for the loan is your home. If you don’t make payments your loan is at risk. However if your debts are on your credit cards or car loan and you do not make payments your debtors cannot force you to sell your home. However if your lender provides you with a debt consolidation secured by your home you could be forced to sell to pay the loan.
Another risk related to debt consolidation loans is that they can be expensive and incur in high setup fees which increase the principal on your debt and the interest you pay throughout the lifetime of the loan.

Debt Settlement.

Debt settlement works on a different premise. You settle directly with your lender and doesn’t involve a third party that buys your debt, reducing expenses significantly.
In order to settle your loan you must contact the debt settlement department of your bank and explain that although you would love to pay your loan you currently cannot afford to do so. They will ask for a load of information on your income and expenses and see what modifications they can make on your loan.

Modifications can include reducing the principal amount of your loan, increase the length of your loan and even reduce the interest rate.
The problem with debt settlement is that it destroys your credit rating as you are basically telling your lender you can’t pay your debts and that you need their help. That is not going to make you very popular with lenders.

A soft form of debt settlement is being encouraged by the government through the loan modification program.  It is well worth contacting the H.U.D (Housing and Urban Development department) to see if you can qualify for mortgage aid.

Which is the right debt management for you? Doing your own research is the key to find out. Neither of these options are without its disadvantages which is why planning and research are vital.

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Edit Post ‹ Blown Mortgage — WordPressIf you are going through hard times you better get ready to receive unsolicited phone calls with questions along the lines of: Are you in debt? Would you like us to reduce your debt by cents to the dollar? You have been pre-approved for a 20%, 30%, %50 or whatever percentage is the flavor of the month reduction of your mortgage and other debts.

These forms of debt relief companies are in the best cases suspect in the success rate they can produce and in the worst cases out and out conmen whose only purpose is to milk you from the little cash you have left.

However Debt Relief methods can be very effective so it is not a great idea to simply ignore debt relief altogether or even all debt relief companies which in some cases can provide valuable information to people in financial trouble.

So what can you do to find useful help in today’s financial crisis? This article turns the question on its head and answers 3 things that you shouldn’t do instead.

Don’t believe everything you hear. If it sounds too good IT IS.

If your prospective debt relief company says things like these:
-    Creditors don’t sue people if they don’t pay their credit cards
-    Nothing negative will appear on our credit card if we use debt relief companies.
-    And my favorite, the company can have negative information deleted from your credit report.

Unfortunately all three statements are completely wrong and wishing them to be so will not be too productive.  This is pretty basic stuff but I think it is worth detailing why all three claims are impossible to keep.

1) Banks need to sue delinquent credit card or mortgage debtors or they create a dangerous precedent that further increases the cost of their services.

2) Debt relief companies can negotiate a settlement for your loan but cannot change the law. Credit and loan providers are required by law to inform about any delinquent payers and no debt relief company is going to bypass that.

3) This one is quite amazing. The next claim debt relief companies need to make is that they can cure cancer. Time is of course the only thing that can get information deleted; generally five years will need to go by before previous credit misdemeanors are forgotten.

Debt Relief companies do have a place as a tool in the debt relief management toolbox especially for inexperienced borrowers that are not comfortable negotiating with their banks and are intimidated by paperwork and banks but it should be by no means the first option as they tend to be expensive and devastating for your credit record.

The truth is that everything a debt relief company can do for you, you can do better with some research and effort. Debt relief companies will talk to your bank and explain that you can’t afford to pay the loan and require a reduction in order to make that possible. Banks understand that it is sometimes better to reduce a loan and get paid than keeping it the same and not see a dime so they are sometimes willing to negotiate. There is no reason why you can’t do that yourself especially considering the “real” cost of debt relief companies.

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Pay down credit cards, but also set a budget and save some cash in an emergency fund for hard times.

There is nothing harder than helping someone who doesn’t think they need help. That statement is certainly true for borrowers and debt relief. We live in such a crazy consumerist society that sometimes we don’t realize when we are living beyond our means and are in need of urgent help. Like an anorexic teenager we can look into the mirror and see a financially healthy person while we are really killing ourselves. How can you tell if you are in serious need of debt relief?

We are going to mention a number of signs that will tell you that you need urgent help. Obviously these are not set rules but more like a general ballpark of financial safety you must try to stay within.

1) You have no savings. We live in a spend first pay later culture, not a save now buy later culture. This mentality increases the chances of financial problems and reduces the value of things that can be purchases on a whim and on which we must often pay interest for years. Many governments are trying to fight this attitude by encouraging people to save. A good rule of thumb is to save at least 10% of your income.

2) You only make minimum payments on your credit cards. Uncontrolled spending on credit cards can be one of the fastest routes to bankruptcy. Spending money you can’t see and don’t have to pay back in a hurry is a great recipe for financial bankruptcy. It is important to pay for your credit cards before they accrue interest or to use credit cards as an emergency ONLY and use other financial products like loans, equity loans and other options for borrowing. Paying minimal credit card payments is a silly path to everlasting loans that you end up never paying.

3) You don’t check your statements and don’t know exactly how much you owe. As we mentioned in our previous article fear often breeds on ignorance and when we are fearful we sometimes hide behind our ignorance as if it were a shield. Understanding our situation is the first step to fixing it.

4) You have more than 3 major credit cards. There is really no need for various credit cards when you are not leaving beyond your means, one or two are more than enough. It is a slippery slope when we start relying on credit cards to get to the end of the month, buy things we can’t afford and eventually to pay the interest of other credit cards.

None of these situations is final or hopeless. However action is required to avoid the problems that bad financial habits can cause you. Finding the right advice and sticking it can be the difference between bankruptcy and financial security.

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