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Today HAFA, also known as the Home Affordable Foreclosure Alternatives starts to work. What will it mean for troubled homeowners? For a start the program increases Treasury’s contribution to homeowners from $1,500 to $3,000, while the contribution for junior lien holders gets a rise from $3,000 to $6,000.

Why is Treasury looking for different ways to give money away? Because the previous ways do not seem to be working. Loan modifications sponsored by the HOPE program also include juicy contributions by Treasury to both homeowners and servicers, but that does not seem to have made much of a difference. The government is now trying to look into short sales as a more pragmatic way of dealing with the wave of foreclosures that is hitting the housing market.

HAFA is designed to speed up the process for homeowners that are seeking for alternative ways to foreclosure, but do not qualify for a loan modification. It is also a smart option for homeowners that are so underwater they do not want to even apply for a loan modification, and just want to get rid of a bad investment with the minimum damage to their credit rating.

What does the program offer? The program principally provides extra incentives to homeowners, servicers and junior lien holders to fast track a short sale application. For instance a homeowners that undergoes a short sale on their home can receive up to $3,000 for their trouble. However, this is not the most interesting feature of this new scheme. Short sales has always been a better option than foreclosing on your home, most homeowners can be helped to understand that it is in their best interest to short sale if they cannot get a loan modification and are going to foreclose on their home.

The problem is that troubled homeowners often have a second mortgage on their property. These secondary mortgage lenders are called junior lien holders. They can stall the short sale process, and often do if they feel there will not be enough money to pay them once the house or property is sold. HAFA looks to give junior lien holders an extra incentive by giving them up to $6,000 if they agree to let the short sale proceed.

This program indicates two things. First the government seems to be changing gears in their pursuit of stabilizing the housing market. The initial focus on providing loan modifications to eligible homeowners is changing. The HOPE loan modification program continues, but the government seeks to complement it by encouraging alternatives like short sales to those that are not eligible for a loan modification. Second, the Obama administration is finally looking at the real issue, most troubled homeowners are in trouble not because their mortgage interests are too high, but because they do not have a job, or enough income to pay a mortgage. It also takes into account solvent homeowners that simply want to let their homes go, and provides them a cleaner way to break their mortgage contract.

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The VA has recently offered some insight into how lenders should disclose loan origination fees in relation to the industry’s new Good Faith Estimate.

Lenders and prospective military homebuyers alike should probably stop and take notice: Starting May 1, all VA loan applications must adhere to these new disclosure procedures.

Revisions to the Real Estate Settlement Procedures Act, or RESPA, aimed to make the home-buying process more transparent for consumers. But there’s been some confusion among VA mortgage lenders regarding exactly how those origination fees should be explained.

The revamped Good Faith Estimate lumps together all of the fees originators receive from the purchase. The Department of Veterans Affairs limits origination fees for veterans to one percent, along with a few other acceptable fees.

The VA offers lenders a choice for disclosing fees when their total origination fee is higher than that 1 percent threshold.

If there’s room, lenders can itemize their charges in the 800 lines of the HUD-1Settlement Statement. A new origination statement must be created if there isn’t enough space. That new statement must also be signed and dated by the borrower.

Lenders who would rather just include a separate origination statement should not create an itemized list for the HUD-1 document.

VA officials have suggested that lenders start implementing these guidelines at once to prepare for the May 1 deadline.

The agency also recently noted that lenders do not need to issue an Interest Rate and Discount Disclosure Statement for VA loans when they’ve already used the new Good Faith Estimate and HUD-1 documentation.

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Starting Jan. 1, new rules go into effect that simplify and clarify exactly what mortgage lenders will charge for a loan.

During the housing boom, mortgage lenders were doling out the dough, giving loans to people who could never have qualified before.

If you have a mortgage and you have been keeping an eye on the interest rates lately you are likely to have shed your share of tears. Interest rates in some cases have dropped by over 2% which means thousands and thousands of dollars extra interest you shouldn’t have to pay. You obviously would like a piece of the action and reduce your interest rate, who wouldn’t?

Now that sounds all very good but is it realistic to think you can save money on your mortgage by changing your mortgage to the current interest rates? It depends, it is possible to change mortgages to a lower interest rate and that can save you a lot of money, but it is also true that modifying your mortgage could also be an expensive and uneconomic move for you.

So what are the expenses, the real cost of low interest mortgage refinancing.
Prepayment penalties. These are often the mother of all mortgage refinancing expenses. Lenders often “protect “ their interests and avoid clients changing to cheaper loans by inserting clauses in mortgages that establish that paying the mortgage early (and not paying a whole lot if interest in the process) incurs a penalty to compensate the lender. The penalties can vary from a percentage of the amount of the principal paid to a fixed amount like 6 months interest payments upfront. Check carefully what interest rates you must pay before deciding to change mortgage provider.

Application fees.
The current economic crises that has caused so many to lose their income and consequently their homes has also had the effect of jumpstarting a new industry, loan modification advisors. These companies will ride you over the rocky terrain of loan modifications. Most of us don’t need them as the steps you need to take are rather simple. Whatever you choose to do remember they cannot guarantee you any outcome and that they can’t do anything you couldn’t for your own interests.
Title search, inspections and surveys.
The costs linked to mortgage refinancing and loan modifications are rather large. One should expect to pay anything between 3 to 6 percent of the outstanding principal in setup fees. This will include the survey of a qualified inspector that will determine if your home is still sound and therefore a good investment.

Title surveys, check the accuracy and availability of the titles attached to a home or property. Some banks will also ask for insect infestations and other smaller issues before agreeing to the loan.

These are just a small sample of the fees you will have to face. It is important that we compare our income, the c of loan modification and the savings the loan mod will provide.  Do yourself a favor and check the real cost before signing.

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How Do Banks Profit From Mortgage Modifications

The beauty of capitalism is that there is some degree of transparency, we expect everyone to do everything for some kind of profit or benefit. As it is often said there is no such thing as a free lunch, the world of mortgages and loans is no exception. Taking aside a couple of laudable nonprofit loan organizations, banks and lenders lend for profit, understanding how and where they make a profit can help you understand how you can save money and get a better deal on your loan modification or mortgage refinance.

Profits for banks can come from  all kinds of avenues when clients modify their mortgage or loan. This article will point out some of the basic you must keep an eye for.

Mortgage modification fees

Banks and lenders make money by moving money and papers. If you modify an option, clause or interest rate on your mortgage it is very likely this will cause you to incur in some kind of fee. This is bad and good news. If a bank is going to make money on your loan modification you don’t have to feel like it is charity, modifying your loan can be a positive thing for both of you, it also entitles you to demand a certain level of customer care.
It is important to note that banks should only include fees in a loan modification that belong to the current loan modification for reports or actions carried for the borrower, previous costs and fees should not be included in the modification.

Extending the length of the tenure.

Making a loan last for a longer time is good news for your bank and can be good news for you, mind you it can be terrible news also.  It is good news for the bank because they guarantee they are going to a return on their investment for a longer period for the same amount of cash.  This is an important point to think about. Some borrowers extend their loans without even thinking twice, not realizing how expensive it can be in extra interest.

Increasing the principle borrowed.

Just as the car salesperson tries to sell you all the extras he can a good mortgage salesperson might try to get you to increase the amount borrowed as part of your loan modification. As you probably guessed, borrowing more money will cost you more. This is fine if you can afford it or you need it very desperately, nevertheless it is worth thinking twice before digging yourself deeper into debt.
As you can see banks can actually make a profit from a modification of your mortgage making mortg

age modifications a potential win-win situation if everybody does their part. Your part is to be informed, understand your options and keep your eyes on the game.

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Benefits For All When Loan Modifications Work

Loan modifications have a bad reputation for being expensive on the customer and a gold mine for the greedy banks that offer them. It is true that a bad loan modification can be expensive and even lethal for a family’s economy. We saw this during the housing boom when owners saw their house value increasing with no end in sight and decided to “free” some of their locked capital by modifying their mortgage to have some cash to spend on their home, buy a car or go on the holidays of their dreams. This was all fine and good until financial hardship hits and incomes wobble and home prices topple.

To illustrate, just in Queens, New York, 100 families lose their homes to foreclosures. The President of Queen’s Borough, Helen Marshal blames the “mortgage lenders and realtors” who prey on uninformed homeowners “trying to plug into the American dream”. According the Marshall homeowners panic when they receive the foreclosure notices and don’t seek help due to shame and confusion.

Sadly the 100 families a week in Queens, the 13,000 homes in the city of New York and  the 4.5 million distress  foreclosures nationwide may have had or even have a chance to never occur with smart and fair loan modifications. This way everybody is a winner, families don’t lose their homes, banks don’t lose money but make more instead. However as Queen’s President said lack of information is often the worst culprit for foreclosures, home owners don’t know what to do, feel embarrassed to find out and end up losing all they have.

A good example of a success story in foreclosure avoidance is that of Philadelphia which New York City is trying to imitate. In 2008 the Mayor of Philadelphia Michael Nutter and the Association of Community Organizations for Reform Now (ACORN) started up the Philadelphia Foreclosure Diversion Program. The main resource the program offers is information and advice for home owners in risk of losing their home. Nutter admits that one of the hardest tasks of the program was to attract the homeowners in order to give them the information and advice. The program took drastic measures and Jehovah’s Witness style went from door to door to talk to the people that needed the help.

The results?

In Philadelphia alone 3,380 homeowners at risk have entered a pre-foreclosure mediation process, PFDF, 1,200 have reached an agreement and 1,500 are still in the process of being settled.
If you live in New York you can now call 311 to get advice on your home and the risk of foreclosure but wherever you live you can get advice and counsel from financial advisers, websites like ours and your bank that is very interested in coming to an agreement with you before foreclosure is even a risk.

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Mortgage modifications are supposed to be a win-win situation. Homeowners lower their monthly payments and get to keep their homes. Mortgage lenders, minimize loss by allowing the homeowner to hold onto their property than they would if the property went into foreclosure. The community benefits because instead of an empty property, they have neighbors. According to a new report from the Boston Federal Reserve Bank, lenders aren’t buying it. At least one bank, First Federal Bank of California, is.

Just released figures for May 2009 indicate that First Federal Bank of California, a subsidiary of FirstFed Financial Corp., has modified nearly $1 billion worth of home mortgages enabling more than 2,000 California families to avoid foreclosure. Perhaps more significantly 81 percent of homeowners whose mortgage have been modified by the bank are current on their monthly payments.

“We got to borrowers ahead of time. We didn’t make them ruin their credit in order to get a workout,” explains Babette Heimbuch, Chairman and CEO of First Fed Financial. “As a community bank, we are committed to responding quickly to the needs of our customers. These mortgages are more than just loan numbers; they represent people.”

It isn’t just homeowners who are benefiting. First Federal Bank of California’s loan-modification program has reduced the bank’s risk profile – without the help of federal money. Acting early to convert many adjustable-rate loans into fixed-rate mortgages for up to 10 years and eliminating negative amortization provisions for modified loans, the bank significantly reduced the balance of loans that are scheduled to recast.  They have reduced the number of potential foreclosures and the losses incurred in the foreclosure process.

First Federal Bank of California is a federally chartered savings association operating 39 retail banking offices in Southern California. Among the earliest loans modified, just 29.8 percent of mortgages modified by the bank were more than 30 days delinquent ninety days after modification, compared to a national rate of 63.3 percent  reported in US News & World Report. Over time the loan modification program has been refined further reducing delinquencies to 15.6 percent six months after modification compared to the national rate of 59.5 percent. First Federal Bank of California has also outperformed the broader banking industry on 60-day and 90-day delinquency rates as well.

“We’re very proud of our success in helping borrowers to continue to afford their homes in these times of economic hardship,” says Heimbach. “We are working hard to complete the process of modifying our clients’ loans in continued service to our community.”

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A study by the Boston Fed has found that the administration’s mortgage rescue plan has failed to provide that all important profit incentive. According to today’s Boston Globe:

Mortgage lenders don’t try to rework most home loans held by borrowers facing foreclosure because it would probably mean losing money.

The Boston Fed’s findings suggest the Obama administration’s major effort to solve the foreclosure crisis by giving the lending industry $75 billion to rewrite delinquent loans to more affordable levels is not likely to work.

One of the study’s coauthors, Boston Fed senior economist Paul S. Willen, said the government would be better off giving the money directly to struggling borrowers to help them with their payments, rather than to lenders that are averse to working out the troubled loans.

“Loan modification is not profitable for lenders,” Willen said. “If it were profitable, they would go out and hire staff.”

Hard to argue with that logic.

Writing at the WSJ, Stan Liebowitz makes a strong case for the idea that now is exactly not the time for the government to be stepping in and fiddling with the markets.

What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house — that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.

The difference in policy implications is enormous: A significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising.

(Hat tip to the HousingDoom blog)

Leibowitz is hardly a laissez faire type. He just thinks that the economy would be best served by having government do what it should have been doing all along: Requiring, monitoring and enforcing strong underwriter standards.

We are at a crossroads where we can undo the damage to the housing market by strengthening underwriting standards in a reasonable way. But to do so political leaders must face up to the actual causes of the mortgage crisis, not fictitious causes that fit political agendas and election strategies.

Yeah, I’m not holding my breath on that one.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage, a satirical look at marketing and business.

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