Have you ever heard about having your cake and eating it? That’s what many mortgage providers are trying to do with loan modifications. How so? As it is well known the Government offers lenders incentives for processing loss mitigation actions. Loss mitigation action is code for loan modifications. What has been the result of the Government’s loan modification incentive program?
Banks, lenders and servicer have of course gladly accepted these “incentives” for processing loan modifications. But what has been the result for borrowers?
Mortgage Letter 2009-35 sent to all Government approved mortgagees on September 23rd 2009 provides a surprisingly honest picture. This letter is quite interesting as an exercise in stating the obvious and calling mortgagee providers thieves to their greedy faces.
The second paragraph of Mortgage Letter 2009-35 is priceless:
The recent economic slow-down has increased demand for loss mitigation actions, including but not limited to, loan modifications. Recent industry studies of these loan modifications revealed that borrowers who experienced an increased mortgage payment on a modified loan had a significantly higher re-default rate than borrowers whose loan modification provided a lower payment.
If you thought loan modification research studies were a waste of time, think again. The Government has come up with a breakthrough. Borrowers in financial trouble are more likely to re-default on their mortgages when their monthly mortgages are increased! Shocking.
I’m sure David H. Stevens, Assistant Secretary for Housing, the author of the letter, knew he was stating the obvious because the in the very next paragraph he hits the mortgage industry with a brutal honesty that is refreshing to say the least:
FHA reviewed its recent insured loan modifications and found that, generally, they resulted in higher payments to the borrower. The higher payment was the result of not lowering the interest rate to the current market rate and/or not extending the term to the maximum of thirty years authorized under 24 CFR 203.616. Generally, the loan modifications simply capitalized the past due amounts and allowable charges and did not extend the term of the loan.
May I personally congratulate Mr Stevens, or whoever writes his letters, on the construction of that paragraph. There is nothing we didn’t know there but it is nice when a Government official simply goes out on a limb and says it.
So this is the picture: Banks provide loan modifications to troubled home owners which generally don’t reduce their monthly payments and simply add on the late charges and interest to the mortgage without even extending the loan term and get an incentive from the Government for their troubles.
The above mentioned letter set out that these practices were to stop in a 30 day period from the date of the letter, that was the end of November 2009, and that any loan modifications where the interest rate was not reduced would not apply for a loan modification incentive. I guess it is a start.
Related posts:
Big Banks are in trouble as more and more families are unable to pay their mortgages. The problem is that troubled homeowners are no longer the “typical” borrower with subprime loans with high interest rates. High unemployment is creating a whole new demographic of troubled borrower with “good” loans they can simply not afford anymore.
Another problem is the existence of billions of dollars in option-adjustable rate mortgages which are a totally different ball game to subprime mortgages or prime mortgages.
Wells Fargo & Co. the fourth largest U.S bank is a good representative of this situation with over $107 billion in option adjustable mortgages. This loan product is as typical as it gets in housing boom “crazy” products. Option adjustable mortgages allow (or allowed, not many are sold anymore funnily enough) borrowers to make small monthly payments in return for increasing their mortgage balance. This effectively allowed borrowers to choose how much to pay as their monthly mortgage payment. The result was that many of us fell for the belief that the housing boom would never end and that our homes would continue to increase in value offsetting any increase in mortgage balance due to small monthly payments below the cost of interest.
The problem now, of course, is that many Pick-A-Pay borrowers own homes that are worth much less than what they owe in mortgage debt and just about as many can’t afford a monthly payment that will pay off any of the mortgage principal.
What can banks do? Wells Fargo is taking one big gamble by issuing interest only loans in the thousands. These interest only loans will defer borrower’s balances for up to 10 years. The gamble is that housing prices and consumers income will rise, especially in the hardest hit parts of the country, and cover the billions of dollars in underwater debt.
Although borrowers that are struggling to pay their mortgages and fear losing their homes will probably be happy to take anything that will keep them afloat during these hard times it is hard not to see this measure as a very high risk one. One newspaper compared this “solution” as a game of kick the can down the road where the “problem” is kicked into the future hoping it will disappear. However with loan modifications hardly making a dent into the number of homeowners facing foreclosures it is hard to see many better alternatives to these extreme measures.
If you own a Pick-A-Pay mortgage and are struggling to pay enough to reduce your mortgage principal it is paramount that you get good personalized advice. 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.
Related posts:
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.
Related posts:
If you ask a question about a complicated subject like loan refinances you want a simple answer that gives you the information you need not one that creates more questions. This is the goal of this series of articles here at www.blownmortgage.com.
Loan Refinance Question 4.) How do I know if a refinance under HARP (Home Affordable Refinance Program) is actually going to help me out?
This is a great question. Not all loan refinances are profitable. Many people have worked hard to get a loan refinance approved to later find out that the monthly payments have barely dropped or even raised while the principal (total amount borrowed) has actually increased, increasing the interest paid and the length of the loan. In other words if you get the wrong loan refinance it could actually cost you money instead of helping you out.
The key as always is to understand how the game is played. The advice is free and simple to follow so you should be fine as long as you follow the advice you are given by reputable sources and not dubious companies that promise to “save” your house, lower your interest rate, get loans waivered and of course cure cancer.
Ask for a “Good Faith Estimate” and a Truth in Lending Statement. These two disclosures will help you see your new interest rate, mortgage payment and the amount you will pay over the life of the payment, the real cost of your loan. Armed with these figures you can now compare them with your current loan terms. You can request your current terms from your mortgage provider if you have lost them. If there is no improvement then a loan refinance is probably not for you.
However make sure you take into account more subtle benefits than straightforward lower monthly payments. For instance even if there is little change in your monthly payments but you change your mortgage from an adjustable rate loan (ARM loan) to a fixed rate loan it could be worth your time. Fixed rate loans provide more security, taking away the risk of rising interest rates or interest only payments that increase the overall cost of your loan.
Loan Refinance Question 5) What happens if I owe more than my house is worth? Can I still qualify for a refinance under HARP?
Yes, up to a certain point. The whole point of the HARP program is to enable homeowners whose homes have dropped in value take advantage of the current lower interest rates. The important thing is that your primary mortgage (the mortgage that has first bidding rights if your foreclose) is less than 125 percent of the current market value of your house (sorry sentimental value doesn’t count here).
Let’s illustrate: If your mortgage is worth 99,000 dollars but your house is worth 80,000 dollars you are eligible for a loan refinance on the requirement of house value because 99,000 is just under 125% of 80,000 (which would be $100,000).
Related posts:
If you are considering taking on a loan modification the chances are this is your first loan modification and you have many questions you need answered. The problem when you are doing something for the first time is that often you don’t even know what are the smart questions to ask. This series of articles on Blown Mortgage is designed to ask the questions you should be asking yourself and provide the simplest possible answers.
Fees.
Loan Modifications have an option to bring an asset current. Can I use this option to include all fees and corporate advances?
This option is designed to consolidate all expenses and fees related to the mortgage in as much as it is reasonable. This means you can include in your loan modification any legal fees and related foreclosure costs for any work that has already been done and is applicable to the current default event. This is great news for homeowners that have accrued significant amounts of money in loan modification costs and fees as these can be capitalized into the modified principal balance of the loan modification and therefore enjoy the benefits this affords in principal reduction and monthly income / payment cap.
Inspections.
Mortgagees are always concerned that their loan is secured and that the collateral on the loan is sufficient. Can mortgagees (banks and mortgage providers) carry out an interior inspection on your property if they are worried about the condition of the property?
As annoying as having an inspector check out your home is the mortgagee may conduct any review it finds necessary in order to verify the physical conditions of the property and make sure the value of the property is still sufficient to support the modified mortgage payment.
This is especially important if the loan modification actually increases the amount a homeowner borrows from the loan provider as the bank must make sure the security (i.e. the home) is still good to cover the principal (plus costs) of the loan.
Late Charges
If you are looking for a loan modification you are probably struggling to pay your mortgage or are already behind in your monthly payments. Late payments accrue late charges which carry hefty interest payments. Can a mortgagee include late charges in the loan modifications?
Mortgage letter 2008-21 clearly indicates that “accrued late charges should be waived by the mortgagee at the time of the loan modification.” The key word here is “should”. As we all know what should happen does not always occur by itself, it often needs a gentle (or not so gentle) push for it to materialize.
Make sure you ask your bank or mortgage provider for a breakdown of what is included in the modified principal balance. If your late charges are not waived then they could be charged separately from your modified monthly payments.
I hope the answer to these questions were useful. Our next blog in this series will cover escrow advances, partial claims and interest rates.
Related posts:
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:
Buying your first home can seem intimidating, especially when faced with many different loan types. When researching general information about the most popular home loan types, remember it is not as simple as finding the cheapest interest rate. At first taking out a mortgage may appear daunting, but once you break it down, it becomes straightforward. As with any financial decision, the first step in the process is to educate yourself about the process.
What IS a Mortgage?
What is a mortgage really? A mortgage is a lien on the real property that gives the lender the right to take the property by foreclosure if you default on the loan. Because most people cannot afford to buy real estate with cash, nearly every real estate transaction involves a mortgage. Contrary to popular belief, a mortgage is not a loan; it creates a lien on the property, which serves as a lender’s security for the debt. The party who borrows the money is the mortgagor; the party who provides the money is the mortgagee. A mortgage gives the lender the right to sell the secured property to recover funds if you do not pay the debt. .
While the choice of mortgage product affects the amount of the monthly mortgage payments, there are plenty of other aspects of homeownership, such as homeowner’s insurance, property taxes, maintenance, and homeowner’s dues, that need to be factored into your overall cost. The mortgage note, in which the borrower promises to repay the debt, sets out the terms of the transaction:
When comparing monthly payments from various lenders, be sure to ask if the lender included monthly taxes and insurance costs in the total payment. Often times if your downpayment is large enough, inclusion of taxes and insurance won’t be required, but you will instead pay your insurance company and real estate taxes directly.
It can not be emphasized enough that preparation is the key to ensure a smooth process. If you are working with a real estate attorney, he or she should walk you through the entire process in advance.
Pre-Qualified vs Pre-Approved
First, its important to understand the differences between a home mortgage prequalification and preapproval. Pre-Qualifying helps you determine what you can realistically afford in order to start your shopping. It provides an indication of what you expect to be qualified for. However, it is not a sure thing and doesn’t carry the same weight as being pre-approved. Home loan pre-approval is a more involved process, which includes submitting a formal application and documentation and provides a conditional commitment from the lender for the exact loan amount. Essentially you are getting your home loan approved prior to selecting a property. A pre-approval will require income and asset documentation. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying. A pre-approval can help you negotiate a better price with the seller, since being pre-approved is very close to having the cash to pay for the house.
Formal Application
Once you locate your property you wish to purchase and have a successful offer, it’s time to begin the formal application process. If you were not pre-approved, at this stage you will need to provide more detailed documentation to your lender, including assembling your financial records. Mortgage loan qualification guidelines typically differ depending on the loan program and the lender. The costs of your transaction may vary depending on the loan program you select with your lender, and any changes you decide upon during the loan process. The type of loan you choose is a very important aspect of the loan process, and one you should completely understand before making any kind of commitment. Once the lender receives all this information, they will verify them and start the decision making process. The appraisal is ordered and is done during the same time that the processor is verifying information. Whether it’s during the pre-approval stage or during the approval process itself, the essential question the lender’s underwriters are asking is “How good of a long term risk is the borrower?”
Approval
The loan processing (approval) stage is typically the longest in the process. During this step there isn’t really much you can do but wait. Again, be aware that any material changes in your financial situation can impact this stage, so before you do anything that could have an affect, make sure you discuss it with your lender. When the underwriter is satisfied, the borrower will receive an approval and be cleared to close.
As well as your home loan costs, there are other fees and charges associated with buying a property you need to consider, such as loan origination or underwriting fees, broker fees, transaction, settlement, and third party costs. Costs associated with property surveys and searches may be required. Make sure you look into the closing costs and other costs in detail. It is very important that each client fully understands all of the costs associated with their mortgage loan. Be aware that other fees and costs vary by program and by lender, so when you are shopping for a loan, make sure to get all of the associated costs so you can make a proper comparison.
Closing
The final step in the mortgage process is the closing meeting. You should have a good understanding of what is involved in the closing process, because there are a number of things that you can do to make sure that it goes smoothly and on time. The closing is a meeting, most often at the title insurance company, where the lender, homebuyer and seller meet to complete the sale and mortgage process. Closing costs may vary among companies and also throughout the nation because of differing local laws and customs.
A couple of fees to be aware of:
As with all the fees, rates, and points involved in a mortgage transaction, don’t shy away from negotiating these down or even out of the agreement. Keep in mind that knowing the process and having knowledge of the competitive marketplace enables you to be a more successful negotiator.
Parting Thoughts
With all of the finance programs available to the consumer, from conventional, adjustable rate mortgage and interest only, having an experienced mortgage professional on your side will help you achieve your goal of buying a home and should save you money in the process. Certainly your interest rate is important, but getting the right mortgage, receiving the true costs of the transaction, and getting sound counsel can be far more valuable than a fraction of a percentage difference in your rate. Improving your expertise and knowledge before you start will help the whole loan process be a smooth and relatively painless one.
The simplest way to explain the difference between amortization and depreciation is understand the type of the financial events that they are associated with. Depreciation is a term used to define an asset (cash or non-cash) that loses value over time. Mortgage amortization is the periodic reduction of the principal balance of a home mortgage that is usually fixed in the terms of the loan.
For the purposes of a home mortgage, amortization is the reduction of the principal or capital on a loan over a specified time and at a specified interest rate. Interest is the fee paid by the borrower to reimburse the lender for the use of credit or currency. At the beginning of the amortization schedule a greater amount of the payment is applied to interest, while more money is applied to principal at the end. In other words, a borrower will start out paying mostly interest and in the end the majority of the monthly payment goes toward cutting down the actual loan amount.
A mortgage is amortized when it is repaid with periodic payments over a defined term. The goal is for the mortgage to be fully amortized, an elaborate way of saying paid off, at the end of the term of the loan. As more and more of the principal is paid down, the interest declines, leading to greater mortgage amortization in the later years of the loan and a subsequent increase in the borrower’s equity in the property.
One thing to consider when taking out a mortgage is the amount of money which will be paid out over the life of the loan. A mortgage calculator which provides an estimate of monthly payments and amortizations can make it easier to see the entire schedule and impact to the borrower. Negative amortization, which can occur in financing instruments like a balloon loan, exists when the monthly mortgage payment is not big enough to cover the full amount of interest due.
The process of amortization is an easy one to understand once you know the basics and get the idea of how it all works. Mortgage amortization, as used in real estate, is when the principal balance on a mortgage is reduced over time as the home owner makes monthly payments. Amortization describes the process of paying off a loan in regular, typically monthly, installments. As a general rule, amortization is desirable, because if a mortgage is not amortizing, it means that the borrower is not making any headway on the loan.
An increasingly popular alternative to foreclosure is the loan modification, an agreement where the bank and borrowers reduce the cost of the loan for a period of time to allow payments to be made on time. A loan modification is much like a mortgage refinance in that the objective is to find you a more affordable mortgage payment for your financial situation. Refinancing your existing mortgage to obtain a more affordable mortgage payment could still be an option. However loan modification is often the best solution for the homeowner that has incurred a financial hardship that prevents other mortgage financing or payment options. The purpose of a loan modification is to help make the loan more affordable to the borrower.
A Loan Modification is a permanent change in one or more of the terms of a mortgagor’s loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford. Loan modification is a relatively new term for most people, but with the current market conditions and mortgage crisis, it is becoming increasingly popular. When possible, loan modification is a preferable alternative to bankruptcy. Additionally, loan modification is a more fiscally attractive solution for any lender.
Loan modification programs are typically designed for homeowners who are having difficulty making their mortgage payment, but who can’t qualify to refinance their mortgage. Loan modification may include reducing the interest rate, extending the term of the loan from 30 to 40 years, or adding missed payments to loan balance. Loan modifications are not the same as debt consolidations, refinancing loans, or even forbearances. Loan modifications stop foreclosure proceedings and instead reinstate the loans as they are being modified.
The lenders motivation in modifying a loan is that this is a better alternative to foreclosure. However, homeowners today are under the false impression that they cannot apply for a home loan modification if they are not in foreclosure. A loan modification allows the lender to transform a non-performing asset into a performing one and avoid the cost of foreclosure. The bottom line is that a loan modification is intended to reduce the payments for the borrower, make it more affordable, and reduce the risk that the homeowner will default on the loan.
So here again, loan modification is preferable, in that a renegotiated loan agreement allows you to keep paying down your monthly mortgage while maintaining your credit rating. Whether it’s reducing the borrower’s note rate or monthly payment, or extending the maturity date, a loan modification is a possible option for a borrower in default.
Understanding the plight facing homeowners today and the very real threat of foreclosure, assistance during the process of applying for a loan modification is essential. It is important to make the lender work with the homeowner to provide the best possible solution before it is too late. In the final analysis, loan modification is usually preferable to filing for bankruptcy and is a fundamentally sounder strategy than defaulting on the entire mortgage and creating costly foreclosure proceedings.
