Loan Modifications finally got a boost of media coverage last week when Bank of America unveiled their new loan modification scheme. This scheme promises to forgive up to $3 billion to eligible homeowners with underwater mortgages. Underwater mortgages are loans that have a principal balance larger than the current value of their home.
It seems that overnight Bank of America has gone from villain to hero. From one of the most inefficient loan modification servicers to an innovative leader in the field. Does Bank of America deserve this positive media? Is it all as good as it sounds? This article will expand on our previous post and provide some more details on how the plan will work.
1) The scheme plans to help around 45,000 underwater borrowers with up to $3 billion in principal balance reduction. Principal balance reductions are the big daddy of loan modifications. The Holy Grail of modifications for borrowers. Up to now most servicers have limited their help to reducing interest rates and extending the term of the loan. However, this is not the whole truth, Wells Fargo reduced up to $2 billion in principal balance reductions for their customers. This was done with much less fanfare than BofA latest program.
2) To qualify you must have a LTV ratio (loan to value ratio) of 120% or more. What does this mean? Take this example, if you own a house that is currently worth $100,000, but you still owe $120,000 on it, you have a 120% LTV ratio and qualify for BofA latest modification program. There is no limit to your LTV ratio, although BofA has limited principal reductions up to 30%. Having said that 30% of your loan is a sweet chunk of your mortgage.
3) This program aims to help those that were worse hit by the financial crisis. It focuses on troubled homeowners that have subprime loans (loans with very high interest rates), payment option mortgages, these are mortgages where the borrower can decide how much to pay every month, which can be even less than the month’s interest fee, and teaser 2 to 1 ARM mortgages that sold cheap interest rates for the first two years, but then switched to adjustable rate mortgages.
4) The difference with this program is that BofA is claiming to look at principal reductions as the primary method of reducing monthly payments for eligible borrowers. This is a drastic change from the current situation, where principal reduction is the last option banks and servicers will look into to avoid a foreclosure.
5) This program will reduce principal balance on a staggered 5 year scheme. The bank will take away the principal balance, place it in a 5 years forbearance account ,and calculate monthly payments on the new, modified loan balance. This reduces monthly payments considerably and helps borrowers keep up with their payments. If borrowers keep up with their payments their forbearance account will be reduced after every year. After five years the entire principal balance reduction is permanently forgiven.
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Forensic Loan Auditing is a fancy way of describing a thorough revision of the documents you signed when applying for your loan. This includes the accuracy of the math in the interest rates and payments schedule, the legality of the terms of the loan and any proof that you were misled in some way.
Why is Forensic Loan Auditing useful?
Forensic Loan Auditing is useful because if your mortgage did not comply with the Federal Guidelines for lenders at the time of signing there is a chance your mortgage was illegal, or at the very least non-complying. This can cause your mortgage to be void and your loan to be wiped out. Admittedly this does not happen all that often, but you can see why servicers and lenders take a Forensic Loan Audit very seriously.
If you took out your mortgage a few years ago, before the current financial crisis, it is likely your loan fails Federal Guidelines on some level. In boom years, like those we had three or four years ago, banks and servicers are very relaxed with their interpretation of Government guidelines. This is especially the case with laws relating to RESPA, TILA or the infamous section 32.
How To Carry Out A Forensic Loan Audit?
There are two ways, the easy but expensive option and the difficult but cheap route. It all, of course, depends if you do it yourself or employ a professional.
Because of the number of loans in trouble forensic loan auditing is becoming a booming industry. However, don’t be quick to believe those that say you can’t d it on your own?
This is what you will need to do:
1) Check the date you signed your loan documents.
2) Check the Federal Loan Guidelines for that period.
3) Compare them with the terms you accepted and the documentation you signed.
The responsibility for any illegal procedures falls on the lender and/or servicer that are required to follow current law, so if you find any discrepancies it could provide you with extra leverage against your bank when asking for a loan modification or even make the loan void if serious mistakes were made.
Lawyers will of course happily do all the work for you, and are likely to do a much better job. However they don’t come cheap. Some loan modification companies include forensic loan auditing as part of their service. Nevertheless make sure you check the costs of using a loan modification company because the Government has provided free counseling companies that are just as good if not better than any paid service provider.
Forensic Loan Auditing is not the Holy Grail of Homeowners but can be a useful tool for certain loans in providing leverage against unhelpful banks and in rare cases even cancel the debt on your mortgage.
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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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Mortgage modification and mortgage refinance are at the top of Obama’s administration priorities in domestic finance. Washington wants Banks to do their bit for the economy and provide reasonable loan modifications for the hardest hit families and is willing to pay them for the favor.
However banks don’t seem to be moving fast enough. The programs are in place but not enough people are benefiting from them. Home owners desperate for help are calling their mortgage providers and are being stonewalled by “overwhelmed” lenders that can’t seem to cope with the volume of customers in need of help.
This situation has angered many because it is these same banks that don’t seem to be pulling their weight that were very happy to accept tax money in the bailout provided during the recent financial crisis.
There has been a lot of ink spilled on the issue of why banks seem to be dragging their feet on the issue of mortgages modification when it would seem that loan modifications are a win-win situation.
Some have suggested that only a specific group of troubled borrowers are actually profitable for banks when providing loan and mortgage modifications. The Obama Mortgage Plan administrators have obviously looked into the matter and published a list of the movers and slackers (they didn’t actually call it that) as part of a press release from the Treasury Department.
So what are the results?
Among the big boys the results in loan modification have been rather uneven.
JPMorgan Chase and GMAC are at the top of the class having started modifications on 20% of the eligible mortgages since the program started in March. The slackers among the top dogs of banking are Wells Fargo and the Bank of America with pathetic percentages of 6% and 4%. Obviously the instant picture these statistics show is oversimplified but it does seem clear that more can be done by big banks to pull their weight in the current crisis with the same “gusto” with which they accepted government handouts when their “house” was at risk of foreclosing.
To be fare JPMorgan Chase has since paid back his loans, but the same can’t be said for the rest. Other banks have fared even worse as is the case with Wachovia that only has a measly 2% of eligible mortgage modifications in processing.
So what can the government to promote loan modification by banks that seem to be dragging their heels? That may be one of the big questions that the Obama administration has yet to answer in order to dig out millions of families out of foreclosure.
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