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Obama’s Loan Modification Program is a nice idea with good intentions. A superficial look at the program, what it does and how it does it, would make you think it might or even should work. However the reality is different, unfortunately only a very small number of borrowers are benefiting from this program. This article will explain what the Loan Modification Program tries to do, what are the facts and figures of the last year and why the program is not working.

The Loan Modification Program was created by the Obama administration in 2008. The idea was to help out homeowners that were having trouble paying their mortgages to modify their loans to more affordable monthly payments.

The program aimed to reduce the payments by three main methods:

a)      Reducing the interest rate of the mortgages to as low as 3%.

b)      If reducing the interest is not enough then banks could extend the tenure or term of the loan to 40 years.

c)       If that didn’t solve the problem then the lender would be encouraged to reduce the principal amount of the loan.

If you ask me that sounds pretty good, reducing interest rates, lowering the principal of the loan, even extending the tenure of a loan is acceptable if it stops you from losing your home. The idea was also that banks and lenders would benefit from this program because it would be cheaper for them to modify the loan than the alternative, foreclosure. Foreclosures are expensive for lenders and a loan modification that allowed an otherwise delinquent borrower to faithfully pay his mortgage does make sense.

Fewer foreclosures would stabilize communities, stop prices from dropping and save entire neighborhoods from slowly dying.

Unfortunately none of the above is actually working. Or is it? The Loan Modification Program did meet its short term goal of 500,000 trial loan modifications some months ago. That does sound kind of good, right?

However, of the 760,000 borrowers that have currently signed up only 31,000 have qualified for a permanent loan modification.

To illustrate, Bank of America, one of the U.S leading banks has only completed 98 loan modifications from the160,000 that have applied. That success rate is so low you need four decimal points to even see it on a calculator.

Why are things not working? Well for starters, borrowers are not paying their side of the bargain and often don’t make the three month trial payments. Banks also complain that although borrowers apply they do not fill in the necessary paperwork.

Of course the borrowers’ side is rather different, they claim they never speak twice with the same person and they are sent on a goose chase with conflicting and confusing instructions that are changed as the process goes along.

This brings us to the last reason loan modifications are not working, banks. Banks often simply don’t care if loan modifications happen or not because it is not worth their money. The incentives provided by the government are in many cases a joke compared to the losses involved in reducing interest rates and loan principals. Think like a bank. If you play along and help your clients to get a loan modification you might get $4,000 after 3 years. Great news. How does that compare with the tens of thousands of dollars you are going to lose in the long run? Exactly.

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Since the crash, we've gotten used to thinking of real estate as a market shaped by national forces: Interest rates went down, Wall Street and homebuyers went nuts, regulators fell asleep at the switch, and -- voilà -- we had ourselves a bubble.

The Mortgage Crisis or Credit Crisis as many are more accurately describing it has left millions of Americans (and Earthlings worldwide for that matter) in or at the brink of foreclosure. Banks and Government have launched an ongoing set of increasingly aggressive programs to solve this terrible problem.

Not all the help is coming from the Government either. One association of banks which call themselves the Hope Now Alliance assures they have helped keep over 2 million troubled borrowers in their homes by changing the terms of their loans.

Similarly the Government is proud to say they have surpassed their short term goal of 500,000 trial loan modifications nearly a month before schedule. If you hear the sales spiel for these loan modifications it sounds like mortgage paradise; reduced interest rates to zero, whole chunks of the principal balance wiped out and it goes on and on. To be fair some borrowers have enjoyed these excellent deals . What is also true is that many loan modifications simply moved payments to the end of the loan which provided a kick the can down the road solution. Regulators report that half of these loan modifications are defaulting six months later.

The trouble with loan modifications is that it is not easy to qualify to them. The paperwork is enough to drive you crazy and the red tape is so slow you want to scream, especially when foreclosure proceedings continue despite your loan modification is being in process.

Why are loan modifications so slow?

Well there are many answers to this question. We are going to look at three basic answers to this question.

1)    Mortgages are not always owned by the bank or institution you bought them from. Banks often simply work as middle men, servicing mortgages for investors. They sell the product, collect payments and answer any questions. IndyMac for instance manages 650,000 loans but only owns 7% of them. The other 93% is owned by a variety of investors ranging from private individuals to pension funds.

This means that when banks don’t own a loan they must ask the investors that own them if they are willing to modify the loan. It is easy to imagine how much paperwork and time dealing with the borrower, getting their details, studying each specific case, then finding the real owner of the loan and asking them if they mind losing some money on their loan is going to take.

2)    Banks aren’t designed to modify loans but to sell them. Banks make money by selling loans and mortgages. Modifying them is, as we mentioned above, a slow and time consuming process that doesn’t make money. The government has started to fund the loan modification process which has helped to speed things up, but banks still have to redesign themselves to deal appropriately with the millions of borrowers in trouble.

3)    Foreclosures are often a better deal for the lenders. Loan modifications are a hard bullet to bite for lenders. You are asking them to accept a certain loss if they modify the loan by reducing interest rates or “forgiving” a chunk of the balance when they can also take their chances with a foreclosure which might actually make them a profit. In some cases loan modifications are profitable for both the lender and the borrower and in those cases paperwork does seem to go faster.

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Loan Modifications can seem complicated to many of us. Especially when we are dealing with the stress of losing our home and we are presented with a seemingly endless list of requirements and forms to cope with. It is easy when writing many articles on a specialized subject to assume that everyone knows what you are talking about, that everybody is familiar with what HAMP, TARP, a servicing company, short sales and foreclosures are.

If you are an expert in loan modifications what on earth are you doing reading an article titled Back To Basics, if not this article is for you. This article will explain the big picture loan modifications are currently set in and the basic terms you must be comfortable with.

Who is the owner of your mortgage? Knowing who owns your mortgage is vital. This is not as easy as it sounds. Often the bank or institution you bought your mortgage from is just a handler, a servicing company that sells mortgages and collects payments on behalf of an investor. We will not go into detail with how mortgages are bundled and sold but it is enough to say that it is probably more complicated than you expect so it pays to approach your lender or mortgage servicer with large amounts of patience and an open mind. It is also a good idea to become somewhat of an expert on the subject so you can at least ask the right questions and know when you are being taken for a ride.

The Programs.
Facing mixed feelings and responses from the public the American administration has started many programs and measures to modify loans and make them more affordable for troubled homeowners. There are two main programs, the HARP program (Home Affordable Refinance Program) and HAMP (Home Affordable Modification Program).

HARP is for homeowners that are current on their payments but have not been able to take advantage of the current lower interest rates because the value of their home has dropped and they are not able to refinance their mortgage. In order to qualify for HARP applicants must have mortgages owned or insured by Fannie Mae or Freddie Mac.

HAMP is by far the most widely used program. Any servicing company is eligible. The government provides incentives to investors and borrowers if a loan modification is successful. The purpose of HAMP is to bring mortgage payments down to 31% or less of a family’s monthly income. This program requires homeowners to have a job and be able to pay for a reasonable mortgage payment. The first step you must make with HAMP is to qualify for a three month trial loan modification. Once you have gone throught the three months without missing a payment you can qualify for a full loan modification.

HAMP reduces loan payments with three main methods: 1) Reducing interest, 2) Extending the mortgage term up to a maximum of 40 years and 3) Forbearance of principal and allowing for a ballon payment at the end of the mortgage.

Don’t pay for help, it is free!
It is importance not to fall for loan modification scammers no matter how much you hate paperwork. The best advice comes from the government and they have a vested interest in your success. You can call HUD for approved housing counseling at 239 434-2397 or visit www.hud.gov.

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Mortgage applications fell last week for the third week in a row, even as interest rates edged lower, an industry group said Wednesday.

Loan Modifications are a very emotionally charged issue. If you are a homeowner in trouble and want information on your chances of getting a much needed loan modification it can be a nightmare to get the right information for your specific situation. You have probable heard about the many scam artists ready to take advantage of desperate homeowners that will do pretty much anything to save their home. This is why it is best to get expert advice from one of the many government appointed (FREE) institutions.

However it is a good idea to get a general idea of your situation in order to at least make the right questions.

Let’s present a hypothetical scenario:
You are the owner of a house worth $300,000 on which you owe $400,000 you also have debt racked up on a second home. Can you get a loan modification?
This scenario is rather common. In the past years many saw wisdom in investing in bricks and mortar and buying to rent. When they struggle to find someone interesting in renting they struggle to pay both mortgages, and that’s if they haven’t lost their job.
Unfortunately, even though the scenario is common it is not a good candidate for a loan modification. The reason for this is that homeowners with two homes are too financially committed to qualify. In order to qualify for a loan modification your mortgage payments must not be over 31% of your income. If your mortgage payments are over 31% you are considered a high risk homeowner that should never have spent such a high percentage of their income on a mortgage.

The best options in this case is to try to keep payments and keep your head above water (easier said than done)  and down size your mortgage payments as soon as possible in order to qualify for a loan modification.

The question is, if you are in that situation, can you carry on your primary home until the economy decides to come back?

That will depend a lot on how high your interest rates are and what type of interest (ARM or Fixed) you have. The good news is that interest rates are low right now so even the riskier ARM loans are not so bad, at least for now. The issues might come in 2011 when many experts are predicting interest rates are going to climb. For those that are already overburdened this could be what brakes the proverbial camel’s back.

The key is to plan for that very real possibility and downscale now you can plan for it. This might mean short selling your second home and putting your mortgage payments below 31% in order to qualify for a loan modification. However if it is a case of losing both homes or keeping one it is a bit of a no-brainer.

Whatever your circumstances your best option is to get help straight from the experts. The good news is that this information is free as the government is providing it as part of their loan modification program.

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Loan modifications seem like a pretty simple concept. You can’t pay your mortgage so the government “encourages” your mortgage provider to give you a break. The break can come in the form of lower interest rates, a longer tenure, deferring a part of your loan or even “forgiving” a chunk of your loan (that doesn’t happen all that often).

The key word of the above paragraph is “seems”. The truth is not even close to simple. Banks are businesses and like all businesses, successful ones anyway, they need to know where they are going, what the future will look like in order to decide what decisions to make today.
Investors and business analysts also want to know what the future of business looks like. Mortgage and securities analysts have a difficult job on their hands because the future is so difficult (read impossible) to predict accurately.

Loan modifications depend on how the future looks to analysts because mortgage providers decide what interest rates, conditions and how generous (how much they can afford to call a loss) they are going to be depending on how good or how bad things look.
Analysts look at how big companies prepare themselves for the future as a way of checking their own predictions. How can an analyst see how a big company like a bank or mortgage provider is preparing for the future?

One way is to see how much they are setting aside for bad loans and delinquent payments. If a bank predicts the economic future is looking bleak they will set aside larger amounts of cash in case their customers (borrowers) fail to pay. Of course even this is not as simple as all that. If a company wishes to boost their profit or improve how their accounting looks they can play with these figures.

Nevertheless, alarm bells ring in analysts ears when big companies, like Citigroup, reduce their contingency reserves and they can’t figure out why. This is what happened this week and analysts are still asking why.

Normally when banks stock away less cash to cover for loan losses it can be interpreted as a sign of improving credit conditions, but when analysts looked at the rest of Citigroup’s earnings report there was little if any proof of borrower difficulties easing off. What analysts have noticed is that non-performing loans has gone up by 16%, 7% and in the last quarter by 5% which would indicate an improvement in borrowers’ ability to pay but seems to be more of a reaction to the loan modification effort by the government that is improving underlying credit quality.

So is Citigroup being too optimistic or do they believe that the government’s programs have a chance to control the credit crisis? One thing is for sure in business, time will tell.

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Mortgage applications surged last week as interest rates on home loans remained low, an industry group said Wednesday.

Homeowners in the United States have all asked themselves questions about loan refinance. Whether they are in serious financial trouble or not they all wonder if they could benefit from the governments eagerness to spend taxpayer dollars on loan refinance.

This series of articles seeks to answer in a simple, jargon-free manner to the all-important questions that are on your mind.

Question 1.) I am current with my mortgage payments. Can a refinance under the Home Affordable Refinance Program (HARP) actually help me?

Oh yes. If you are current on your loan payments but want to modify your loan to take advantage of the current lower interest rates but can’t do it because your home has decreased in value you are one of the demographics HARP is specifically targeting. A loan refinance that lowers your interest rate can provide significant savings now and for the entire lifetime of your loan.

If you take advantage of a refinance under HARP, Fannie Mae and Freddie Mac will allow you to modify a loan they provided or guaranteed with mortgage backed securities.

Question 2.) I want a loan refinance but how do I know if am eligible for a HARP loan refinance?

The answer to this question deserves an article of its own but here are five basic requirements.

-    The loan or mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac. If you don’t know who owns or guarantees your mortgage check below for how to find out. It does not mean you can’t get a loan refinance if your mortgage is not with Fannie or Freddie just that you won’t get it under the HARP program. However many banks and mortgage providers are willing to provide loan refinances for premium borrowers.

-    You are current on your payments. Yes sir, despite what some “experts” might have told you, you DO NOT have to be delinquent in your payments to qualify, in fact that disqualifies you.

-    What you owe on your primary mortgage must not be more than 125 percent of the value (today) of your property.

-    You must be able to afford to pay the modified monthly payments.

-    The loan refinance actually improves your overall and long term financial stability.

Question 3. How do I know if my mortgage is with Fannie or Freddie?

Call your mortgage lender or servicer, which means whoever you pay your monthly payments to and ask about the HARP program.  You can also contact Fannie or Freddie by phone or online and find out directly from them:

o     Fannie Mae
1-800-7FANNIE (8am to 8pm EST).
www.fanniemae.com/loanlookup

o    Freddie Mac
-800-FREDDIE (8am to 8pm EST)
www.freddiemac.com/mymortgage

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Many believe that the only way to get out of an economic crisis is to buy yourself out of it. To spend enough to jumpstart the economy again. Loan Modifications are one of the tools the Government are using to get homeowners out of the whole they dug for themselves before they bury the whole economy with them.
Such is the determination and commitment the government has to this project they have earmarked 75 billion dollars to stimulate loan modifications on qualifying mortgages. That is the Hope anyway. The Hope is that changing the mortgages, reducing monthly payments, extending tenures, providing bonuses to borrowers as well as lenders and dropping interest rates will buy America’s homeowners out of the credit crisis.
Sadly it could seem that Hope, empty hope is all there is to this program. One of the foundations of the program is the assumption that banks will make an effort to create loan modifications for homeowners that are at risk of losing their homes. This is done by providing incentives to banks and homeowners to agree to sustainable loan modification. However the problem is that banks only have to “put forth an effort” and provide basic statistics in order to receive the stimulus. They are obliged to provide statistics on how many homeowners they’ve contacted but in no way forced to approve any loan modifications or even stop foreclosures while a loan modification is arranged.
Even if a loan modification is approved there is no assurance that it will be beneficial or even worthwhile for the homeowners. The cost of getting the loan modification can be so expensive and the monthly payment reduction so low it is not worthwhile to go through. One borrower is reported to have spent nearly $10,000 for a loan modification that only reduced the monthly payment by $25. To add insult to injury this outrageous waste of money will probably end up being a statistic that is used to show how generous and helpful banks are being.
After all is said and done the loan modification program is progressing very slowly. The number of loan modifications is around 200,000 while 9 million home loans are at risk to foreclose by next year.
Because there is no requirement for banks to make a real effort on loan modifications that are not profitable for them, the question remains if it is reasonable for us to expect banks to invest in providing loan modifications that are going to cost them money, money they are not likely to see turn any profit.
A more creative approach is needed to find a real solution to the credit crisis. Loan modifications on their own do not seem to the answer. The Hope Mortgage Program is actually only geared for homeowners that can still deal with a mortgage at a reduced rate. Those worst off cannot expect any help from the government.

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