HAMP, the Government’s Loan Modification Program is changing their tune about the paperwork required to apply for a loan modification. Homeowners applying for a loan modification must now include their paperwork before even entering the trial stage.
Previously troubled homeowners could apply for a loan modification trial by simply providing proof of income over the phone. The problems arose when some troubled homeowners either took too long to send the paperwork or could not prove the claims they had made. The Treasury and many servicers claim that this is the cause that the conversion of trials to completed modifications has been so slow.
The Treasury’s response has been to simplify the paperwork required for HAMP conforming loan modifications and require that it is provided before a trial can start. The goal is to accelerate the process and help homeowners to start paying lower mortgage payments sooner.
What are the requirements?
Homeowners that want to apply for a HAMP mortgage modification must provide:
- Two pay stubs. If they have a job.
- A completed form that gives permission to the servicer to pull up a tax return.
- A modification request with a hardship letter included. Hardship letters are documents that explain why you need a modification for your mortgage. The hardship letter must explain what has changed in your circumstances so as to no longer afford your mortgage payments.
When will these changes occur?
The first of June is the official starting date but servicers are allowed to start sooner if they want to. If you are going to apply for a modification you will need the documentation detailed above.
The Benefits.
The plan is that these changes will increase the conversion rate of homeowners on trial modifications to those on completed modifications.
This has been a bone of contention between servicers and homeowners. Servicers complaining at how bad homeowners were at providing the required paperwork and homeowners claiming it was only an excuse.
It must be said that banks that required paperwork for the trial process to start, like GMAC, had much better trial to modification conversion rates. Herb Allison, assistant secretary at Treasury believes that these changes will help all servicers to speed up the whole process.
Let us hope these changes work because HAMP has a long way to go to fulfill its goal of helping 4 million homeowners with affordable mortgages by 2012. Up to date the program has more than 90,000 homeowners on trials and 66,000 homeowners have signed their mortgage modification papers with average savings of around $500 a month.
Although the simplified paperwork requirements will in all likelihood help speed up the process it does seem like speed is the least of HAMP’s troubles, helping the 3,800,000+ troubled homeowners that are neither on trials or have completed modifications does seem to be more of an issue.
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The debate in the last months has centered on how the Government and lenders were not doing enough to get troubled borrowers into a loan modification. However, a recent report might indicate that this has actually a good thing for borrowers!
A report released last week by the State Foreclosure Prevention Working Group disclosed that about 72 percent of the loan modifications carried out in October ended up owing more. This is because lenders will add missed mortgage payments with interest to the modified loan. Therefore, although loan modifications may reduce monthly payments they sink borrowers further into debt.
This does seem an oxymoron, to help troubled borrowers by increasing the size of their loan. Supporters of the scheme say that this is necessary evil for lenders to be able to afford the modifications and allow borrowers to afford their mortgage payments and keep their homes. But is this even true?
Reports show that the number of borrower that foreclose after completing a mortgage modification is much higher when their mortgage balance was increased or left unchanged. This is because borrowers have little incentive in staying with a house that is worth less than their mortgage. If this is the case they will often simply walk away from their mortgage with means considerable costs for lenders.
This is called the underwater effect. Borrowers that own homes that are worth less than their mortgages have little hope to regain equity and are seen by their owners as a liability instead of an investment. Studies show that the best way to reduce foreclosure rates, a nuisance for both borrower and lenders is to reduce, even if only a little, the principal balance of the loan.
But is it the government’s job to force lenders reduce the principal of loans?
This is of course the big debate. On one side you will have those that feel most borrowers had it coming. “I knew I couldn’t afford it, so I kept on renting. Why should they get bailed out for borrowing irresponsibly?” seems to be a common opinion. The logic of the argument is hard to fault.
On the other hand there is the moral argument that the Government has a responsibility towards troubled families that could end on the street, which from a pragmatic point of view might even cost society more in handouts.
The other question is why even try and stop foreclosures? Many view them as a natural outcome of a financial crisis and that the market will normalize itself after going through the “normal” post crisis period.
Many feel that the best move underwater borrowers can make is to simply walk away from their mortgages. When asked about the morality of breaking the mortgage contract most will say banks had it coming when they started lending irresponsibly.
If your mortgage is underwater this is a good question to ask yourself. Is it really worth it for you to stay with your mortgage? Or would it make more sense to simply walk away, take the hit on your credit score and carry on with your life? The answer will depend on how much you have invested in your home, financially and emotionally.
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Short Selling your home could be the win-win-win alternative to loan modifications. Loan modifications can be expensive for lenders and borrowers. Foreclosures are even more expensive costing lenders billions of dollars. According to a study carried out by the congressional Joint Economic Committee (www.jec.senate.gov) each foreclosure can cost lenders as much as $50,000. Homeowners naturally don’t appreciate foreclosures either as they often end up causing borrowers to file for bankruptcy besides losing their home.
The other players in the foreclosure game are the neighbors of the homeowners that lose their home. The empty homes that are dumped on the market bring down the prices of all the homes in the neighborhood.
Short Sales can be a win-win-win situation for the lender, borrower and everybody else.
Why?
Well short sales are not without disadvantages but they do carry three great advantages:
1) The seller gets out of the mortgage liability without having to face bankruptcy.
2) The buyer gets a home for a reduced price.
3) The lender gets rid of the house at a relatively minimal loss without having to waste money, time and energy on a foreclosure.
So what is a short sale exactly? Short sales are a process by which a home is sold quickly for a reduced price. Typically the lender agrees to “forget” the difference between the debt and the price the house is sold at. It does seem strange that a bank or private lender will be willing to sell a house at a loss and forgive the outstanding debt. However the case is that even though lenders don’t make a profit short selling can be a much better (i.e. cheaper) solution than foreclosing or even modifying a loan.
Let’s illustrate a scenario where a short sale might make sense. Imagine you own a house that is worth $100,000, you owe $120,000 on your mortgage. You approach your mortgage provider and explain you have lost your job and are unlikely to be able to find a good enough job to continue repaying your $2000 a month mortgage. The ank agrees you are unlikely to be able to pay in the future and accepts your proposal of short selling your home. You sell it at $75,000 and the bank absorbs the $50,000. Obviously the key part is to convince your bank that paying the difference of your mortgage and the price of the home is going to be cheaper or better business than foreclosure a full bankruptcy.
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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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