The last three years have seen an amazing growth in the number of schemes designed to help homeowners keep their homes and help them avoid foreclosure. However, this is becoming increasingly difficult as the issue homeowners are having with their mortgages is not so much the interest rate and loan tenures, but with the fact they have lost their jobs, and cannot afford any kind of mortgage payments.
The fact that homeowners cannot afford their mortgages due to unemployment makes it very hard for governments to design the right loan modification or aid that will work for lenders and borrowers. The truth is that in many cases banks will profit more, or lose less, from foreclosures than loan modifications.
A new type of aid has been put forward to respond to the increasing percentage of prime loans that are heading towards foreclosure due to unemployment. These mortgages have little to be improved on; they generally have low interest rates and reasonable payment conditions. However, job loss has made it impossible for borrowers to continue making payments. The new solution is to provide temporary aid to the homeowner until he or she finds a job. This is an easier pill to swallow for lenders than making principal balance reductions or permanent loan modifications. It also sidesteps the long and slow road of loan modification trials.
However the question is what type of temporary aid should be provided. There are a variety of proposals. One is to simply pay the loans for unemployed homeowners that cannot afford their mortgage for a set number of months. This type of aid is already in place in various states.
Another option is to provide these borrowers with loans, the payment of which is deferred to a further date. This option does seem like giving people more rope with which to hang themselves, but it might be good is some circumstances. A third option some banks like Citibank have already started to use is to simply defer payments on a mortgage for a few months. The above mentioned bank has offered in some qualified cases 6 month deferment on mortgage payments to allow the borrower to get back on his or her feet.
This is a great option for the right borrowers because a) it does not cost the mortgage that much, b) does not have to go through such a strict and long selection process and c) actually deals with the problem of unemployed homeowners that do not qualify for loan modifications.
Needless to say many banks are wary of rescheduling payments that may never be made and putting off a foreclosure process that may already be inevitable. This is why the Government should look into the possibility of adding this measure to their flagship HAMP program and think of alternative measures that will deal with the increase in unemployment instead of just focusing on reducing interest rates. Many feel that the government is simply fighting the wrong war, (we are still talking about mortgages by the way) this measure might realign efforts in a direction that might be more productive. However a good selection process will be needed to assure that those that qualify really have the potential to find a job that will allow them to make realistic payments on their mortgage.
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The Obama administration and all the agencies at its disposal are working around the clock to save troubled loans but it is simply not good or fast enough.
In the third quarter there was a 6.2% rise of all seriously delinquent (i.e. 60 days or more past due) and 3.2% increase of all loans in the process of foreclosure.
What is even scarier is that even prime mortgages, those loans with the best interest rates and conditions also rose heavily.
However banks and loan servicers do seem to have stepped on the gas a little and supported the government’s efforts through the HAMP program, or Home Affordable Modification Program. Out of every 6 troubled homeowner one received a permanent or trial loan modification. Unfortunately the homeowners that get a trial but don’t get a permanent modification make up most of that figure. The bad news is that even those who do get a permanent loan modification (31,000 out of 750,000 in the last count) half tend to re-default with 6 months. The good news is that that loan mods done in the second quarter show a lower initial re-default rate. This could be because lenders are making more generous loan modification and reducing monthly payments more aggressively to make payments more likely.
So how are mortgages performing? Badly seems to be the sad consensus. 87 percent of all US home loans are listed as performing, which obviously means 13% aren’t. Government backed mortgages are not faring much better, in some cases worse. Only 83% of the Veterans Benefits Administration loans are “performing”. Fannie and Freddie mortgages (with government backing) are not celebrating with 8% of their mortgages “not performing.
It is not all bad news. The housing market with low interest rates and a large portfolio of “cheap” homes is attracting buyers. This large inventory is likely to stay with us for a while as banks continue to try to unload their distressed properties and troubled homeowners continue to agree to “short sales”.
According to First American CoreLogic one in four home loans is still “under water” or has a mortgage that is worth more than its current value.
What is the government doing to fight this situation?
Two main strategies: 1) Keep the housing market stable by keeping the interest rates low.
2) Loan Modifications.
The first strategy does seem to be helping by encouraging buyers to invest in a new home. Loan modifications are not meeting with the expectations but the latest figures do show that re-defaulting has dropped with the latest more generous mods.
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Reading the news for the last two weeks you would either think the government has the credit crisis in control after hitting its 500,000 trial loan modifications or that there is no hope after seeing the rise in prime mortgage foreclosures and the rise in unemployment.
The truth is that nobody really knows what is going on right now in the economic arena. Last week Citigroup lowered their “emergency fund” for bad or non performing loans which surprised analysts that fail to find evidence of an improvement of credit payment ability.
Loan modifications can be a great solution for some. For others it is not a possibility or simple will setback the inevitable with hard earned tax dollars.
Loan modifications are not for everybody because loan modifications can only “attack” certain causes of high loan payments, namely high interest rates, length of tenure, interest stability and principal payment structure.
This means that if you already have a long mortgage (30 or 40 years), it is a fixed mortgage (as opposed the a variable or ATM mortgage) and low interest rates there is not much a loan modification can do for you because you already have a “good deal”.
All is not lost though. There is one option left open for you that might just be the difference between foreclosure and saving your home, and that is balloon payments.
What is a balloon payment?
Balloon payments are a kind of interest break your mortgage provider gives you so your monthly interest payments are not so high. Let’s explain with a simple example. Imagine you owe your bank $100,000 your interest rate is around 3% which means you will pay around (probably a little less) $3,000 interest the first year. However what your bank or mortgage provider can do in order to lower your interest payments and therefore your mortgage payment is defer a portion of your principal to the end of the mortgage “forgiving” the interest on this amount until the end of the mortgage. Going back to our little example, your bank might defer $20,000 leaving you with “only” $80,000 to pay for, dropping your first year interest payments by over $600. We have oversimplified this example heavily, but you get the idea.
The only catch with this option is that you are leaving yourself a lot of principal to pay till the end of your mortgage. If you are planning to sell your home in the near future this might not be a problem. But if you want to keep it long term you are going to have to find the way to pay the “balloon payment” once your mortgage tenure is over.
Balloon payments can be used as yet another tool to reduce your monthly payments by combining it with other options that might be open to you. Research all your options and contact an expert. Experts will not cost you money because the government is providing the best advice for free.
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Creative is probably not the first word that comes to mind when you think about loan modifications. There doesn’t seem to be many new ideas in the loan modification department.
The Government is definitely doing its best to reach the borrowers that need the help, especially those that reach those that can pay affordable mortgage payments. This helps “guarantee” the government is not throwing away good money after bad with borrowers that overstretched themselves and cannot afford any reasonably monthly payment.
However all signs show that these programs are not being as successful as they hoped. But how do loan modifications lower, or attempt to lower your monthly payments. The first and main way is by lowering your interest rate. Actually one of the main purposes of loan modifications is to allow homeowners whose homes have dropped drastically in price to still take advantage of the lower interest rates now available. The problems come when low interest rates are not enough. The government is currently trying to drop interest rates to around 2%. However if this level of interest rate is still too high to make your monthly payments affordable there are still some options open to you. You servicer or lender can still extend your payment term.
This means you will extend the amount of time you take to pay your loan. This idea is pretty intuitive if you owe $1,000 and you have to pay it in 10 months you have to pay around $100 plus interest. If you can pay it in twice the time your payments should be half as much plus interest. Servicers can extend the loan to up to 40 years which can have a drastic effect on your loan payments even though it keeps you in debt well into your eighties.
What if all this is not enough? What if you still can’t afford your monthly payments? Your lender or service provider can actually defer a portion of the principal (original) amount you owe until the maturity of the loan. We call this a principal forbearance. This does not mean the debt or part of it is forgiven just deferred or set aside until you sell your home or the rest of your mortgage has been paid. This option can be very effective in lowering your monthly payment but will create a balloon payment on your mortgage. This means that your payments will be lower monthly but you will have to make a very large payment at the end of the mortgage. This can be beneficial if you are planning to sell your home and cut short your mortgage anyway or if you want a break in your monthly payments now and expect your income to increase in the future.
Another option, not very popular with service providers is to simply forgive the principal owed. This is a long shot to say the least but still worth a try. Service providers are not required to do this so don’t keep your hopes too high. `
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Loan modifications are complicated products. It does require some understanding about how they work and what options you have when trying to modify them. Two options homeowners have to protect their homes are loan modifications and FHA refinancing.
Contacting a qualified financial advisor is always a great idea if you are struggling to understand what your options really are. Remember however that often free help is better than paid consultants that can financially from decisions you make through commissions and kickbacks.
The Government is investing heavily in public (that means free) counseling offices that provide homeowners with the best options.
Whatever your choice is, it is a good idea to understand as much as you can about loan modifications and FHA refinancing. Understanding the basics of loan modification and refinance before you talk to a qualified consultant will help you make an educated decision based on his advice.
So which is best for you?
A loan modification or an FHA refinance. Which is best for you might very well depend on who insures your loan.
You need to ask your lender or service provider (not always the same) who insures your loan, Freddie Mac, Fannie Mae or the Federal Housing Administration (FHA). These insurers are authorized by congress to insure home loans. This allows banks to provide low interest rates to high risk borrowers which enables borrowers in trouble to still get a fair interest on their mortgage, modify or even refinance their home. If your mortgage is insured by Fannie, Freddie or FHA your lender is pretty much safe and should be happy to modify or refinance your home.
If your mortgage is insured by Freddie or Fannie then you should apply for Making Home Affordable mortgage aid. There is no real difference between the two of them, they are based more on the location of the borrower than any other significant factor.
If you are insured by FHA you are eligible for the Hope for Homeowners plan. These plans allow borrowers that previously did not qualify for loan modification or refinance to now be accepted, so even though you didn’t qualify in the past apply again and you might get a pleasant surprise.
Making Home Affordable loan modification plan is designed to reduce monthly payments and stabilize the expenses of borrowers in trouble until they can get a hold of their finances. It is very regulated and fine tuned to provide the specific results the administration is looking for. There are some clever incentives both for borrowers and lenders to encourage loan modifications and paying them on time.
If you are insured with FHA you cannot apply for a Making Home Affordable loan modification but there are other options, some of which are more flexible and can adapt better to your personal circumstances.
Visit a government counselor for free and ask for your best options. It is a good idea to check the website of the program you qualify for to be prepared for what paperwork you need.
Most importantly don’t trust your loan modification to a loan modification company without understanding what they are doing and the effects it will have on your home and credit score.
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Mortgage modifications have received a lot of publicity in the media due and with good reason, millions and millions (4-5 according to government projections) will be left homeless if they don’t make appropriate loan modifications to their mortgages.
However that does not mean that loan modifications are only for the poor and destitute. We can all take advantage of the historic low interest rates and modify our loan or mortgage. Of course this is not an option that will help everyone, in some cases loan modifications cost more than they save and the only benefit they provide is to reduce monthly payments in exchange of a huge increase in interest payments throughout the life of the loan.
How can you can find out if your are eligible for a loan modification that will save you money?
1) Check the cost.
It doesn’t get much more basic than this but it is vital that we check the price tag before we buy it. To illustrate you might have heard about companies that install solar panels to save money on your electric bill. I actually looked into one of these systems for my home and when you put figures onto paper it would have taken decades to cover the cost of my investment. I happen to believe that solar panels would be a great idea and that all new homes should be forced to have them, but you get my drift, before you “purchase” a product that provides a saving it is wise to work out exactly how much you are saving.
2) Are you planning to sell soon?
Loan modifications take time to pay off the initial cost of purchasing the mortgage modification, often two to three years. If you are planning to sell soon you might lose money.
3) Have you had your mortgage for a long time?
Mortgages are set so that at the beginning of the loan you pay most of the interest of the mortgage while paying most of the principal towards the end of the mortgage’s tenure. For example in the first 5 years payments tend to be broken up in 85% to pay for the interest of the mortgage and 15% towards the loan’s principal. If you modify your loan, your outstanding loan will be reset and you will begin to pay mostly interest with your monthly payments again. This could actually reduce your equity and provide little or no benefits. Therefore if you are in the final years of your loan it might be best to stay put.
Loan modifications are generally best suited for people who have recently bought the mortgage, are planning to own the home for a long time and who have excellent credit ratings. Nevertheless it is always a good idea to contact your bank and tell them you are seriously considering refinancing your mortgage, if you are a good customer they are likely to bend backwards to keep you on their portfolio whatever your circumstances are.
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Loan Refinancing is becoming more and more popular as interest rates drop and governments worldwide make it more and more accessible. This has caused an avalanche of applications and a whole new finance industry sector seems to have appeared overnight offering all kinds of guarantees on your loan refinancing application.
How should you feel about loan refinancing and what dangers should you avoid? Loan refinancing can be a solution for people in the early years of a mortgage that negotiated a high interest (compared to the current low interest rates) and has a low prepayment penalty on their current mortgage. If you have the right circumstances you could make substantial savings on your current mortgage. You must understand however that it will take a little while for you to start saving money on your loan modification because you will need to pay for the loan modification costs. It is therefore not a good idea to take on a loan modification if you are planning to sell your house in the short term as you will probably sell the property before you have broken even on your loan modification expenses.
Beware of high loan modification fees.
Because loan modifications prey on the desperate and have become so popular in today’s crippled economy many unscrupulous characters and companies are taking advantage of people by charging outrageous fees without being able to guarantee any savings. These application fees can range anywhere between $100 to $1,000 and are non-refundable. In the best situations the companies really feel they cannot lose because they have been successful so often in the past, in the worst cases these fees are part of a scam as nobody can guarantee a loan modification will be successful.
The other type of fees we must keep an eye on are the fees banks and lending companies charge to modify your loan. There is no end of fees that can be charged, inspection fees, survey fees, application fees, title search fees and the list goes on and on. It is vital then that you do your homework and check the total cost of your loan modification. Lenders are required by law to detail all the costs in a good faith estimate, ask for it and study it carefully. It is important that you compare the costs of the loan modification against the savings you will make with a lower interest rate or other benefits the loan mod offers you.
Probably the most expensive fee you will have to pay and that you must pay special attention to is the prepayment penalty of your current loan.
This penalty is a clause lenders include in the loan contract that many of us borrowers are not even aware of. This penalty comes into play if you decide to pay for your loan early to save on interest payments or to change loan or mortgage providers. The fees can range from 1% of the capital paid to completely outrageous penalties. This penalty alone can make the loan modification uneconomic, a complete waste of time so it is a good idea to check your loan’s penalty and consider negotiating a low penalty fee for your next loan.
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