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A Congressional watchdog group said Tuesday that U.S. banks should undergo stress tests to determine whether or not they have enough money to absorb losses that could stem from investigations into their foreclosure processes.

Loan Modifications have taken over the financial news in the last year. This is not at all surprising, with over 11.3 million people, nearly 25 per cent of all homes, with underwater mortgages; this is an issue that has the nation’s attention.

This makes any research into the issue of loan modifications and their effect on foreclosure of great interest to borrowers, banks, and the government.

One professor whose research has received a lot of attention is Sanjiv Ranjan Das, from the University of Santa Clara in California. Last year Das attacked the underwater issue, this refers to borrowers whose mortgage balances are larger than the market value of their homes. The underwater issue is one of the big problems the United States housing market has to deal with.

Professor Sanjiv Ranjan Das had a large and interested audience to his research; one big fan was his namesake Sanjiv Das, a top executive at CitiMortgage, the fourth biggest bank in the US, lender and servicer of over seven hundred billion dollars in mortgages.

Interestingly, these two men, one a professor and the other a banker, share more than just a name. Not least among the things they have in common is an education at the Indian Institute of Management.

Now they are working together on research that seeks to explain the behavior of borrowers that are stuck with underwater homes, unemployment and mortgage payments they cannot afford.

Interestingly the partnership between the two Das, began when the professor started receiving emails meant for the CitiMortgage Das. However, the accidental emails were great for the research of Santa Clara’s professor.

According to Das’ research the perfect or optimal loan modification includes an element of forgiving some of the balance in the loan. This is not easy for bankers to accept. Reducing the balance of the loan increases the speed at which the bank must accept losses and there is the added fear that it will create a counterproductive culture among borrowers.

However research has shown that re-defaulting on mortgages is much higher among borrowers that do not receive a reduction of their mortgage balance. This is because having an underwater home, a house with negative equity, makes many homeowners feel there is no financial sense in keeping their homes. However, when a principal reduction is carried out, even if only a modest one, re-defaulting on mortgages is sharply reduced.

Nevertheless lenders still shy away from this radical loan modification method and prefer using interest rate reductions and term extensions to reduce the monthly payments of troubled homeowners.

The good news is that the research carried out is getting the attention of the right people. The more is studied about the effects of income shock, or wealth shock, on troubled borrowers the more effective loan modifications and debt management as whole will be.

Related posts:

1. Loan Modification Alternative by CitiGroup: Refinancing 30 Year Fixed Rate Mortgages
2. Captain Obvious: Piggyback mortgages make loan modification harder
3. Loan Modification Alternatives: Wells Fargo Interest Only Loans

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1. Loan Modification Alternative by CitiGroup: Refinancing 30 Year Fixed Rate Mortgages
2. Captain Obvious: Piggyback mortgages make loan modification harder
3. Loan Modification Alternatives: Wells Fargo Interest Only Loans

If loan modifications are not an option and you want to avoid foreclosure or bankruptcy a short sale of your home might be a good option. The key when you are undergoing a bad financial situation is like with every emergency and try to think clearly without letting raw emotions take over. You must analyze the situation and work out what is the best option for you. Although it is a good idea to hire an experienced lawyer in real estate issues, nobody can do all the thinking for you, you have a unique understanding of your situation and more importantly you will be the one that will suffer or enjoy the consequences of your decisions.

A short sale is the sale of your home at a price lower than the purchasing price. It is an option to be considered if you do not qualify for a loan modification, due to a lack of income or when you own a home that is worth less than what you owe on the mortgage.

Obviously the key player in a short sale is the lender. The lender is, after all, the party that may have to take any losses that occur by short selling the house. However, in some short sale agreements the buyer can be made responsible for the difference between the price of the short sale and the balance of the mortgage. Needless to say that is not the ideal type of mortgage for you, the homeowner.

There are three possible outcomes a lender may agree to when negotiating a short sale. The key concept you negotiate in a short sale is what will happen with the deficiency balance or the difference between price of the short sale and the pending balance on the loan.

The first option a lender may try for is to lay the deficiency balance on the lap of the homeowner once the short sale has been carried out. Needless to say homeowners do not often profit all that much from this kind of short sale.

A second option is for the homeowner to sign a promissory note to the lender for the deficiency balance. This means that the homeowner will have to pay whatever agreed in the promissory note if the there is a deficiency balance after the short sale. However if the deficiency balance is larger than what the homeowner agreed to pay in the promissory note the lender will absorb the difference.

The third option is the one you need to aim for if you are the homeowner. In this case the lender agrees to cancel the entire deficiency balance, or difference between the short sale and the pending balance on the mortgage. As you probably guessed lenders are not waiting in line to offer this kind of deal, you will have to work hard for it.

The most important part of negotiating a short sale is to convince the lender that it is in their best interest to accept a short sale. To do this you must a) prove you cannot afford the mortgage due to a valid hardship and do not have the assets to pay for the mortgage and b) present your home as a business opportunity for the bank.

In order to do all that, you are going to have to submit a whole lot of paperwork to your lender. This will include:

A)     A hardship letter that explains why you are in financial trouble and explains how you do not have the income or savings to pay for the mortgage.

B)     Proof for all the claims you make in your hardship letter. This will include proof of unemployment or of your current pay if you are still working.  You will also need to prove what income you have through  bank statements and tax returns. The lender will no doubt ask you if you have access to pension funds, stocks or some other type of investment. You will have to provide a written statement that answers these questions and explains why they are not accessible.

C)     You need to provide an up-to-date valuation on your home. This you can carry out with a broker’s appraisal and by providing analysis of closed deals or active listings of similar properties in your neighborhood.

D)    Authorization to the lender to release information on you and the property.

It is a good idea to prepare this paperwork with care and hire a good real estate attorney. The good news is that if you play it well you can include the price of the lawyer in the proceedings costs covered by the lender.

Related posts:

1. Loan Modification Alternatives: Short Sale Your Home
2. Foreclosure or Bankruptcy, What to Do When Loan Modifications Don’t Work
3. Deed In Lieu of Foreclosure, The Last Resort Loan Modification

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1. Loan Modification Alternatives: Short Sale Your Home
2. Foreclosure or Bankruptcy, What to Do When Loan Modifications Don’t Work
3. Deed In Lieu of Foreclosure, The Last Resort Loan Modification

If you do not qualify for a loan modification, and foreclosure seems unavoidable, there are steps you can take to make the most of a bad situation. One of these options is arranging with your lender for a Deed in Lieu of Foreclosure.

What does this mean?

It means you hand over the deed, or ownership, of your house to the lender in exchange of clearing your debt. The homeowner loses his home but is left without a debt while the lender takes immediate control of the house.

What advantages does this option have?

In certain circumstances a Deed in Lieu of Foreclosure can have significant advantages for both the lender and the buyer.

1)     The lender can take immediate control over the property. A much more efficient method than foreclosure proceedings that can take years to finish.

2)     The borrower foregoes his home but is left without any debt.

3)     Lenders can save themselves a lot of money in court expenses, time and other complications if they avoid a typical repossession procedure.

4)     Borrowers that avoid a foreclosure will remove the stain on their record and in some cases avoid bankruptcy.

What are the requirements for a Deed in Lieu of Foreclosure to be carried out?

1) The market value of the home must be less than the current balance of the mortgage.

2) There must be no third party credits secured by the home, like a second mortgage or a secured car loan.

Although it might seem counterintuitive for a homeowner to let his home, probably his largest investment, go without anything to show for it, it can be a much better alternative than a long and painful foreclosure. Borrowers don’t have to see their credit score hurt and can start again elsewhere, while lenders can cut their losses and try to make the most of a bad loan without having to continue spending money and resources.

In what circumstances should a homeowner think about handing a Deed in Lieu of Foreclosure?

Obviously, homeowners that are going through financial difficulties and cannot afford their monthly mortgage payments. However if they still have some sort of income then they may well qualify for a home modification or some other option. This path is more suited for homeowners that either cannot afford any kind of loan modification or feel that their home is too underwater, worth less than the mortgage balance, to be worth saving.

How is it done?

Both parties must agree to sign an Agreement in Lieu of Foreclosure. This document transfers ownership to the lender. In some cases the homeowner might pay a certain amount of money to reduce the loan and make sure her credit score is not affected. Once the document is signed the lender will issue a waiver to deficiency judgment, which will be used if the sale of the house is below the value of the mortgage. After this an escrow service executes the agreement; releasing both the lender and the borrower from their mortgage contract.

Related posts:

1. Foreclosure or Bankruptcy, What to Do When Loan Modifications Don’t Work
2. What Is A Foreclosure?
3. What Is A Loan Modification? The Three Keys To Loan Modification Success

Related posts:

1. Foreclosure or Bankruptcy, What to Do When Loan Modifications Don’t Work
2. What Is A Foreclosure?
3. What Is A Loan Modification? The Three Keys To Loan Modification Success

A congressional watchdog panel warned on Thursday that mounting commercial real estate losses could endanger the banking system and thwart economic recovery.

What is a NPV test?

If you are trying to work your way through a loan modification you know what it is, if you are planning to get a loan modification you should find out soon.

NPV stands for Net Present Value. It is a financial concept that allows lenders to work out if it is profitable to make a certain financial choice. In the case we are currently considering banks and lenders use the NPV test to decide if it makes sound financial sense to approve a loan modification or not.

Passing the NPV test is paramount if you want to get a loan modification. Put simply if you fail this particular test there is no loan modification for you. The bank will simply foreclose your home and bite the bullet on any losses they have to deal with, you are not worth the risk of a loan modification.

Understanding how the NPV test works is therefore a priority for borrowers. The only problem is that many of the variables in the NPV formula are secret so that homeowners can’t rig the test. However there are some steps a homeowner can take to at least tip the scales in his favor.

The Net Present Value provides a way for lenders to quantify the current value of a property taking certain factors into account. These factors include the cost of foreclosing the property, the chances of the borrower defaulting in the future despite the loan modification, this is called the loan modification re-default rate, which unfortunately for borrowers is rather high.

What can you do to improve your chances of passing the NPV test?

As we mentioned above the exact formula and values of variables are secret to make it harder for delinquent borrowers to influence the test. The test calculates / guesses on various factors:

a)      How many months you are likely to pay before re-defaulting.

b)      What are the chances you can fix your own finances without the help of a loan modification.

c)      The value of your home.

d)     The estimated value of your home next year.

e)      The cost of foreclosing your home.

f)       What the house is likely to go for if it is foreclosed.

However there are three steps a borrower can make to improve his/her chances.

1)      Make it clear that you really want to stay in your house. If you can prove that staying in your house is very important for you despite the financial investment you have vested in your home this will give added strength to your claim. You might want to stay in your home because you live near to your aging parents, or you don’t want to change your children’s school or it would be a huge embarrassment for you to go through a foreclosure. If you prove that you will do anything to avoid a foreclosure the lender might rate your risk of re-defaulting more positively.

2)      The value of your home is critical for your NPV test. Banks expect homeowners that own underwater properties to default. After all why would someone keep paying for a house that is worth less than the mortgage? It is hard to influence the valuation of your home but the federal government’s home value projections change at the beginning of every quarter. Even if you were turned down one quarter there is a chance you could be accepted the next quarter.

3)      Make a good case of your current inability to pay the mortgage but how you are very willing to pay if the monthly payments are reduced. Be prepared to back these claims with evidence. Prepare a budget and provide bills and other proof of your income and expenses.

Related posts:

1. NPV Test, Your Personal Loan Modification Sword of Damocles
2. Loan Modifications Short Guide To Success Part 1 – The Problems
3. Loan Modification Success Report, The Truth Is Far Worse

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1. NPV Test, Your Personal Loan Modification Sword of Damocles
2. Loan Modifications Short Guide To Success Part 1 – The Problems
3. Loan Modification Success Report, The Truth Is Far Worse

Obama Mortgage Plan, Pays For Paying Your Mortgage
Home mortgage aid plans are hard to design. Because of how the ideologies behind open market and social responsibility are polarized no matter what you do with a mortgage aid plan pretty much half the nation is going to disagree with you.

Obama’s new mortgage plan is not perfect, not even his closest aides will say that. Its strongest opponents will point out that the new mortgage plan does not really cover for homes that have seriously dropped in value in the last months/years. Most of the families in trouble live in homes that have lost serious value, so there is a question mark in how effective this mortgage modification plan is going to be.
However the new plan has managed to incentivize the payment of mortgages and their previous modification so that it is worthwhile for banks and borrowers. This might not be enough to tip the scales on the millions of households that are at risk of losing their home this year but then again, it might.

If anything does help to tip the scales on the current crisis is to make it attractive for homeowners to pay their mortgage as well as reducing it’s principal and making it affordable on a monthly basis. Let’s face it, if your home is under water (it is worth less than what you owe on it) and there is no prospect of prices going up and you are struggling to pay the mortgage you might be inclined to cut your losses, give up and let the home go. Of course if someone is willing to give you some extra incentive to pay your mortgage and make it affordable, you might just give it a try.
What incentives does the Obama Mortgage Plan offer?
There are two main benefits or incentives homeowners that are in the red can take advantage of.
1)    Once their mortgage has been modified and monthly payments begin the Treasury will pay an incentive for every mortgage payment a borrower pays on time that goes to pay the principal balance of the loan(The cash you actually borrowed, not the interest). This is interesting because it will help reduce the length of the loan and the amount of interest paid on it. Over a five year period this “incentive” could help reduce the principal on the loan by $5,000. Reducing the principal of the mortgage has of course even greater repercussions as years go by. If you have a 15 year mortgage and you reduce your principal by $5,000 in the first five years you will be actually saving yourself over $3,000 in interest by the end of your mortgage.
2)    There is a trial period of three months before any modification is permanent. During those three months the homeowner must pay his mortgage on time. If he does he gets $1,000 from the government every year for next three years. If the mortgage isn’t paid on time there is no deal.
These are not huge benefits but they are something and they might just help people start thinking in a different way and help people dig themselves out of financial trouble.

Related posts:

1. Fed study: Obama mortgage plan should give money to borrowers, not banks
2. The perfect plan for refinancing your mortgage
3. Obama’s Mortgage Refinancing Aid, Who Really Benefits

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1. Fed study: Obama mortgage plan should give money to borrowers, not banks
2. The perfect plan for refinancing your mortgage
3. Obama’s Mortgage Refinancing Aid, Who Really Benefits

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