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Troubled homeowners are so worried about losing  their home they will do anything to save it. This generally ends up including a loan modification. Loan modifications are a way of reducing monthly payments by a) reducing interest rates, b) extending the tenure of the loan, and c) in some rare cases even by reducing  the principal balance of a mortgage.

However, many home owners are starting to realize that interest rates and mortgage payments are not the only things that are being lowered. The credit score of homeowners is being reduced by up to 100 points just for entering a loan modification program. 100 points in a scale that generally goes from 300 to 850 points is a significant blow to a homeowner that has taken good care to protect his credit rating.

The big question is: is it fair? Should it be done?

The main argument housing counselors are putting forward against this practice is the lack of transparency. Most of the times troubled homeowners that ask for a loan modification feel like they are doing the right thing by trying their best to pay for their mortgage despite financial problems. When they realize that there credit score has been hit despite their efforts the sometimes feel cheated.

Are they justified? It seems reasonable to me that lenders and mortgage servicers provide clear information on the consequences of taking on a loan modification. But would a troubled homeowner applying for a loan mod change his mind just because he realizes his credit will be affected? If they do, it probably means they did not really need it to start with.

Why should a loan modification affect your credit rating?

Credit scores and rating are in place to do one thing, help banks and lenders know how reliable a borrower you are. Reliability in this industry is proven by your credit history that is how good you have been at paying your debts, your income and your commitment to the security of the loan, in this case your home.

A credit score is a numeric value assigned to you that qualifies your credit history and how desirable you are as a lender. Now, let us try and detach the emotional aspect of being a troubled homeowner and think about the consequences of a loan modification. A loan modification will in the vast majority of cases mean a reduction in interest, principal balance, or both. This means the bank is losing money. Losing money the borrower agreed to pay. By applying for a loan modification the borrower is stating he or she is struggling to make the payments they agreed to make. Shouldn’t that affect their credit rating, their reliability as a borrower?

Even though applying for a modification will take a chunk from your credit rating it is probably going to shade into insignificance compared to the effect falling behind in your mortgage payments and God forbid, foreclosing on your home. These actions can leave your credit score in tatters for years, and fade into insignificance when compared with a 100 point hit.

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Loan Modification consultants have being saying it for a long time; the best loan modifications are those that reduce the balance of the loan. This might seem obvious; of course borrowers are going to prefer loan modifications that reduce the amount they owe. What is not so obvious is that these types of loan modifications may be the best kind for lenders too.

Loan Modifications can use a variety of tools and measures to reduce the monthly payments of a mortgage. Reducing monthly payments is considered to be the main objective of a loan modification, as a way of giving troubled borrowers a break so they can continue to pay their mortgage. This can be done by:

1)      Reducing the interest rate of the mortgage, either temporarily or permanently.

2)      Extending the term of the loan, which means giving the borrower longer to pay the loan back.

3)      Rolling interest payments to the end of the loan, this reduces monthly payments but creates a huge payment at the end of the loan.

4)      Principal reductions of the loan balance. Here the bank or lender “forgives” or writes off a portion of the loan.

The Obama Administration does not control which measures lenders use on loan modifications and they certainly don’t require lenders to cut mortgage principals, what’s more, until recently principal reductions seemed unthinkable, a nice idea but not very practical. It must be said that forgiving debts is a nice thing for friends to do, but it doesn’t sound like a good way for lenders to do business.

However, recent reports are showing that principal reductions could be a key factor in creating cost efficient loan modifications for both lenders and borrowers. One of these reports was published by the Lender Processing Services June 2009 Mortgage Monitor and concluded that re-defaults on loan modifications with a principal reduction element fare much better than those based exclusively on interest rate reductions. The report states that “the success rate for loss mitigation-related loan modification hovers in the 30-40% range, with a higher success rate for loan modifications involving a reduction in unpaid balance.

The success rates of loan modifications with principal reductions is so much better than with other methods that lenders are beginning to listen to the data and increasing their principal reductions on mortgages of troubled borrowers.

You might still ask yourself why banks or lenders would be willing to cut unpaid loan balances instead of using other apparently cheaper measures. The key, we hinted at above, are foreclosures. Foreclosures are expensive for lenders, selling in a buyers’ market and the costs associated with selling a property are not cheap.  Having said that any kind of loan modification carried out to avoid foreclosure is expensive for lenders whether they reduce interest rates, extend the term of the loan or reduce the principal balance, what makes it even worse is when borrowers re-default on their loans after the loan modification. Because foreclosure re-defaults are much lower on loan modifications with principal reductions, lenders are starting to think they might be cheaper in the long run, which is good news for the fortunate few that actually qualify for a loan modification.

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Debt is truly a four letter word for many of us. When we fall in the grips of uncontrolled debt it can suck the life and joy out of whole families and even communities. The problem is that it is so easy to fall into debt. Everyone wants to lend us money and there are so many great things to buy with it.

When all we hear on the TV and radio is about loan modifications, mortgage refinances debt relief. It pays to understand these and other terms and be able to make an educated decision.

A recent report on the Nicaraguan economy, the poorest Central American country after Haiti, showed that only 1% of the population really had the resources to afford having a credit card. It goes without saying that the actual percentage of the population that own a credit card is much higher, well into the 50%. The economist behind the report advised his Nicaraguan readers that could not afford to have a credit card to burn it. It will only bring you difficulties. This somewhat simplistic approach to debt relief, getting rid of your credit card, does have its strong points, in fact it might even make our top 3 debt relief measures.

So what debt relief steps can we make to improve debt management?
The first step is to analyze your situation. You need to spend some time and effort working out exactly where you are financially. How much money you owe, to whom, how many expenses (including debts) do you have every month and what your monthly income is. You then need to work out how much you can afford to pay toward expenses every month. In your analysis you need to include interest rates, debt tenures (when the loan ends) and prepayment fees.

One you have all this information you can compare your current interest rate with what the going market rate is. If your pre-payment fees are not too high you could look into modifying your loan or mortgage.

Loan Modification is a very popular debt relief measure at the moment. Such is that case that the government has earmarked 75 billion (yep, that is a “b”) dollars towards helping desperate homeowners to get a loan modification.

Loan modifications can help homeowners to reduce their monthly interest payment, which can reduce their monthly mortgage payments. Loan modifications can also save you money on your principal (the cash you actually borrowed, taking away interest) if you take advantage of the bonuses the government programs provide on borrowers that pay on time. However loan modifications are far from a panacea, there are a lot of things you can get wrong so it is worth consulting with a government agency for unbiased information.

Debt Consolidation or the purchase of a super loan that pays off smaller loans with higher interests is also a popular choice. One must also be careful with this type of debt relief because it can be very expensive. Debt consolidation interest rates although lower than that of credit cards and car loans are still higher than the interest rates of mortgages and similar large loans. They also have the disadvantage of securing your loan with your home. You will not lose your home if you fail to pay your credit cards but if you secure a debt consolidation loan with your home to pay your credit card debts, you could.

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The Government is making all kinds of efforts to help home owners modify their loans so that monthly mortgage payments are more affordable. Forecasts predict that upto 9 million home owners will end up losing their homes when their mortgages foreclose.

For the last year I have been reporting on the different measures the government is implementing to extend loan modifications to as many people as posible. For instance, now you don´t even have to be behind in your payments to qualify.

However some feel that this is not enough. For example one of the requirements to apply for a Home Affordable Mortgage Program is that your mortgage is over 31% of your income. If your mortgage is 31% or less of your monthly income then you will not qualify for a mortgage modification. This requirement makes it imposible for home owners is trouble that have other loans besides their mortgage and cannot afford to pay their debts.

There are at least to school of thoughts on government sponsored modifications. One group, which we will call the ¨Who cares” group will say that owning a home is not a right but a privilege. The other group we could describe as the ¨Poor Borrowers” suggest that protecting home owners that have overspent or fallen in financial dificulties is the Government´s responsibility.

Last week one blogger commented on an article I wrote explaining how many borrowers cannot benefit from HAMP, the Obama Administration Loan Modification Program because their mortgage payments are too affordable to qualify, while their total debts make it imposible to get to the end of the month.

The bloggers comment was that it was bad enough we are bailing out home buyers at all and that suggesting we should bail out home owners whose mortgage payments are less than 31% of their income and that have still found a way to get in the red with other debts was a travesty. I could easily agree with him. I have made bad financial decisions in the past and nobody offered to bail me out. It is only right that we pay for our own bad decisions just as we profit from our good choices.

However the side of the store is the overall effect to the economy if 9 million people foreclose on their mortgages. What would be the effect on construction, credit and related services if such a large percentage of home owners foreclosed in one year. Viewed from this perspectiva bailing out home owners is more about helping the economy as a whole than specific individuals.

Of course many of us disagreed when massive bank corporations recieved bailouts to save them from the credit crisis. It would seem reasonable to allow the market forces to take their course whatever the consequences for a particular company is.
I couldn´t agree more, but what would have been the effect on the World economy if dozens of the world´s biggest banks had fallen into bankruptcy at once?

That is the paradox goverment policy makers have to deal with. To let market forces deal with people´s mistakes and problems or bail them out.

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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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Loan modifications and mortgage refinancing are the hot subject of the moment in the financial world. This is no surprise when there are around 5 million homeowners facing foreclosure with or without the government’s aid and 9 million without it. This “need” has opened a practically brand new market for financial consultants looking for a niche to work in. In a matter of months a new industry was born providing help and advice to save our homes and consolidate our debts while reducing our monthly payments.

Unfortunately some companies and individuals have taken advantage of this new industry to target desperate home owners that in their need to lower their monthly expenses are vulnerable to scams.

The government is trying its best to reduce the increase in foreclosures. That is a good thing because according to the Center for Responsible Living a new foreclosure is filed every 13 seconds. Of course the government doesn’t appreciate it when private companies and consultants pull down the modest advances they are making by duping home owners into fraudulent contracts and outright scams.

The latest and most scandalous case occurred yesterday when Attorney General Andrew M. Cuomo announced that his office had filed a lawsuit against American Modification Agency, Inc. (Amerimod) one the biggest foreclosure rescue companies in the country, and its owner Salvatore Pane, Jr.

The lawsuit accuses Amerimod and its owner of deception, false advertising and deception of homeowners in risk of foreclosure. The investigation into Amerimod disclosed that while the company claimed to modify the mortgages of desperate homeowners close to foreclosure did not only fail to fulfill its promises but actually added to their financial woes by throwing them deeper into debt. Amerimod would routinely charge up-front fees for services they had not carried out. They exaggerated their loan modification success rate and underestimated the time required to modify the loan.

The lawsuit also accuses Amerimod of failing to include the legally required disclosures in the customer contracts. What is even worse is that the company regularly provided terrible financial advice to its customers, like suggesting they stop making mortgage payments to their lender. They would also target Spanish speakers with Spanish speaking salespeople but once it came to contract signing they would not provide Spanish contracts.

The lawsuit hopes to close down the loan modification company and compensate Amerimod customers that were charged illegal up-front fees and fell for their hollow promises.

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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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One of the greatest culprits for serious debt problems are credit cards. Obviously it is our bad use or management of credit cards that causes the debt problems, you can’t blame a gun for what its owner does with it. Nevertheless some guns are more trigger sensitive than others, and it’s not the same to own an automatic machine gun than an air gun. It’s all about understanding the rules of the game and what the real cost of your credit is. The Obama administration have backed the implementation of new credit card rules that will help many of us to save money and stop paying so much of it to the banks in fees and penalties.

What are the new rules?

Raise interest rates on existing balance. This is a great victory for consumers. This is a little known tool banks had in their arsenal of money making methods. In fact most of us probably didn’t know the bank could increase the rate of interest on our credit card without asking. If you think of it that is pretty crazy because the interest rates on credit cards are already huge.

Payments will pay off your most expensive debts first. Borrowers using credit cards, especially when transferring balance from one card to another, can find themselves with different rates of interest for debts on the same card. Previously there was not guideline or rule on which part of the debt banks must use your monthly payments to cover. Obviously banks had an incentive to pay the cheaper interest rates first and leave the most expensive rates to last. With this new credit card rule that will not be a legal course of action for banks that must allow borrowers to pay off their most expensive credit card debt first.

Other cards can’t penalize you for missing a deadline on another cards. We all know that banks are a closed knit community. They might compete against each other but when they are dealing with borrowers data, credit record and payment history they are happy to share their knowledge. They can still share information on delinquent credit card payers but can’t hold it against them.

None of these measures will stop the banking industry from making more and more money on our misuse of credit cards but it has plugged some holes banks will no longer abuse.

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How can you get out of the cycle of debt and have a fresh start. Those looking for easy fix solutions will have to continue looking but those that are determined to work hard with their problem and are willing to make big changes in their lifestyle and habits can find a solution.
We must start by saying that some debt problems are too extreme to solve in any practical way and bankruptcy is the only real solution, but that is an extreme measure you should leave as the very last resort as it will destroy your credit rating and affect your ability to get a loan, a lease or even a job for years to come.

So what steps can you take to break the cycle of debt?
Maybe you started with some small time debts, maybe a small investment loan to start a business and it all went wrong, you then required another loan, or credit card to pay for your debts, or your monthly payments and now you can’t afford to pay the interest on your debt payments, throw in a car loan and a mortgage and you can quickly find yourself in a seemingly no way out situation.

The steps you must take are surprisingly simple, which makes some think they can’t possibly work, unfortunately they are also slow and require endurance and “stickability” to make them work.

Step 1.
Sit down and work out exactly how much you owe and the rate of interest you are paying on each loan.

Step 2.
Assess what your or your family’s income is and what you can afford to pay towards your loan payments. You should aim to pay as much as you can without completely strangling your family’s economy and leaving  you with some breathing room if interest rates rise.

Step 3.
This is the hard step, to change your lifestyle and habits to reduce your expenses to a complete minimum. You are in serious debt, this is not a game, you are under moral and legal obligation to do everything you can to pay your debts and that means going without  your precious luxuries and saving every buck you can. Where people often fail when trying to break the cycle of debt is by trying to reduce their debt without changing their lifestyle.

Often people in a cycle of debt are “addicted” to spending and living above their means, just like an alcoholic is addicted to the feeling alcohol provides, in both cases a complete lifestyle change is often required.

Step 3.

If you cannot find a way to pay for your current loan payments with your income you  are going to have to find a way to reduce your payments or increase your income. Increasing your income in the short term is often difficult, although sometimes one of the spouses does not work and can start doing so to pay towards the loan.
Another solution is to consolidate your loan in a large debt consolidation loan that will allow you to reduce your monthly expenses. Although this can be a good solution beware of the high fees and interest rates that can make the loan uneconomical.

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