Avoiding foreclosure is a serious concern for millions of American homeowners. There is a lot of advice on methods to avoid losing your home when you are in financial difficulties. The Obama administration has an arsenal of loan modification programs, alternative foreclosure programs, forbearance periods for the unemployed programs and the list goes on and on. However, as it has been widely advertized, these programs have not obtained the results hoped. So what are the best options for a troubled borrower?
1) Do not ignore the problem. A big issue with many homeowners is that they ignore their financial problems until it is too late. This ostrich syndrome of hiding our heads when we are in trouble is natural, but financially very dangerous. It is important to act straight away as soon as you realize you are going to be behind in your mortgage payments. The sooner you act the more options you have.
2) Know your rights. Before you contact your creditors (and you should do that as soon as possible) look into your rights as a borrower. Read your loan documents carefully and refresh your memory on what your lender can do if you do not make payments. Review your state laws on foreclosure. Every state has different foreclosure laws and timeframes.
3) Contact your lender as soon as possible. Did we already say that? I’ll say it again, contact your lenders. They are interested in finding a solution and providing you with a workout so you can continue paying your loan. There are many options to consider: forbearance periods, reinstatements, loan modifications, deed-in-lieu, refinancing… It all depends on your personal circumstances.
4) Contact a legitimate housing counselor. Non-profit organizations sponsored by the government are ready to give you personalized advice. Call (800) 569-4287 and find one near you.
5) Avoid foreclosure prevention companies. Some of them can help, but the bottom line is that you do not need to pay for these services. Unless you believe loan modification programs are part of a government conspiracy to take your home from you, why pay for a service the government provides for free. On the other hand, unscrupulous loan modification agencies and lenders can cause further damage to your financial situation.
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The Treasury’s report on the MHA for March explained the drop of new loan modifications as a result of banks requiring that borrowers present all relevant documentation before trial loan modifications could start. However, there could be another factor that is causing this drop in loan modifications; the rise in the number of houses banks are repossessing. Figures provided by RealtyTrac show that the number of homes repossessed reached 257,944 during the quarter, which is a 35% increase from the same period in 2009.
The whole purpose of government relief programs like HAMP, is to keep people in their homes and stop foreclosures. These programs temporarily stalled the number of foreclosures but as the government’s efforts tail off foreclosures are expected to continue to increase. According to research firm First American CoreLogic, 29% of all house sales were distress sales, i.e. foreclosures and short sales. This is not good news for Obama’s revamped MHA program that seeks to specifically target the troubled homeowners that are spiking figures of distressed home sales.
The results of these efforts are not all that encouraging. According to Treasury’s own data the number of homeowners that have secured a permanent loan modification is 230,000. 150,000 troubled homeowners dropped from the program because of failing on payments during the trial period, because they did not provide the necessary documentation, or because the servicers did not feel they qualified after all. The number of borrowers that have benefited from the program has reached 1 million. These borrowers saw their mortgage payments drop to 31% of their monthly income. However, the majority of these trial modifications do not end up in permanent loan modifications. Needless to say these figures do not create consumer confidence in a turbulent housing market where faith in homeownership is dropping, and fast.
Even though most people still feel owning a home is important and preferable to rentals, a survey by Fannie Mae shows that many are skeptical about the chances of prices rising and underwater mortgages gaining any equity. Underwater mortgages are home loans that are worth more than their current market value. For instance if you owe $100,000 on your home but its market value is only $80,000 you are $20,000 in the red, or underwater. Underwater mortgages are much harder to refinance as lenders are not willing to invest in a property that is no longer a suitable security for the loan it is backing. In many cases the only practical ways to deal with these loans is to short sale or foreclose, which explains the rise in distress sales we are witnessing.
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America’s largest mortgage provider has stopped dragging its corporate feet, and seems set to take a huge leap in what may be one of the boldest steps in the mortgage industry. The details are still a little fuzzy but it seems that BofA is about to start a loan modification scheme that will actually reduce mortgage balances of underwater homeowners.
Traditionally lenders and servicers have resisted this type of loan modification, focusing on interest rate reductions and longer loans to reduce monthly payments. However, this scheme would actually reduce mortgage balances before reducing interest rates.
This initiative is meant to start in May, but has already pushed the entire industry into a fresh debate over what measures to take with underwater mortgages. These mortgages are the most vulnerable because they cannot be sold or refinanced if the borrower experiences a financial setback and can no longer afford the monthly payments. Bank of America’s own projections estimate the total amount of “forgiven” debt in this program will reach $3 billion.
The scheme is designed to target high risk borrowers that have missed a minimum of two mortgage payments. They must also be at least 20% underwater. That means they must owe on their homes 20% more than the current value of the property. It is also limited to borrowers with subprime and other risky loans like “option” adjustable rate mortgages. Option adjustable rate mortgages allow the borrower to decide how much to pay each month. Many borrowers choose to pay less than the monthly interest. The unpaid interest is tagged onto the back of the loan.
This program could be a first step in the right direction to help the over 11 million households that are estimated to be underwater. Until now few banks had used principal reductions in a significant way in loan modifications. One of the few exceptions was Wells Fargo that reduced principal balances by $2.6 billion last year. The fact that BofA, the biggest lender in the country, and one of the worst loan modification performers until now, seems willing to make innovative steps sets the scene for a brand new loan modification initiative.
BofA have designed the plan to encourage homeowners to be regular on their monthly payments even though their house is underwater. In order to do that it will consider reducing the mortgage balance by up to 30%. This “forgiven balance” is set aside in another account that is gradually disappears, if the borrower keeps up with their monthly payments. If they don’t they face having the “forgiven” balance reattached to their mortgage in a final balloon payment.
HAMP, the Obama administration signature loan modification program does include principal balance reductions in their recommended loan payment reduction methods, but does not required that lenders do it, and very few did. HAMP incentivizes regular payments by giving up to $5,000 to borrowers that keep up with their payments. However, up to now this has only resulted in a total of 200,000 permanent loan modifications; a far cry from the 4 to 5 million it set out to help.
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HAMP, the Obama administration foremost measure against the wave of foreclosures triggered by the financial meltdown is not working as planned. What do you do when something does not work as planned? You clarify how it was never designed to work like that anyway, and patiently explain what it really was meant to do.
When HAMP, the Making Homes Affordable Plan started, the Treasury Department claimed it would help as many as four million troubled homeowners. However the revised projections of the program now are that it will only help 1.5 to 2 million borrowers.
Is this a failure for the government? Of course, it depends how you look at it. Treasury’s spin on it is that the 4 million homeowners the program set out to help did not refer to the number of borrowers that would receive a modification but to those that would be offered one, whether they finally got it or not.
Analysts, even some from within TARP (Troubled Assets Relief Program) are skeptical of if simply offering the possibility of a loan modification is a meaningful or even useful goal. It would be like a shelter home setting the goal of preparing 1,000 meals but not necessarily feeding 1000 hungry people.
The HAMP program was launched by Obama’s administration with the goal of lowering the mortgage payments of troubled homeowners by paying lenders to carry out loan modifications on the mortgages of troubled borrowers.
The bill was going to be footed by tapping 50 billion dollars from TARP and 25 billion dollars from Fannie and Freddie, the government controlled mortgage financing juggernauts. However, so far only 200,000 borrowers have a permanent modification and only 31 million dollars have been used from the billion earmarked for the program.
The Treasury has been quick to point out that permanent loan modifications should not be the only measuring stick of success. There are, Treasure claims, other avenues that are being pursued to help troubled homeowners avoid foreclosure. For instance, Treasury is now looking into the use of short sales, where the owner sells the home for less than the balance of the mortgage, as alternatives to foreclosures.
A fairer measurement of success, again according to Treasury, would be to see how many eligible homeowners are helped to avoid foreclosure and “relocate to a more suitable home” without having to undergo the embarrassment and pain of a foreclosure.
I believe most homeowners do not care so much about the embarrassment of foreclosing as the pain of losing their home and having to move. Whether you swallow the spin coming from the Treasury Department or not, there is no doubt the wave of foreclosures that is hitting our economy has no quick fixes. The expectations the HAMP program started with were obviously too optimistic, and a reality check was well overdo. The real question is not if HAMP is reaching its goals or not, but what measures CAN or SHOULD (not always the same thing) be taken now to help the plight of troubled homeowners.
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Loan Modifications are going through an interesting stage. Enormous efforts are being made to save homes from foreclosure, and while some results seem to be made, millions are still heading straight to a foreclosure. The government has increased the pressure on loan servicers and lender, and relaxed the requirements for a HAMP modification. What have been the results? Is there any good news to share? This short article will look into the good news, and the bad, of loan modifications at the end of March 2010, and try and separate the spin (a.k.a propaganda) from the real news.
The Spin: There has been a 45% increase in the number of permanent loan modifications in February 2010, according to HAMP.
The Truth: The total number of permanent loan modifications is still only around 170,000 loan modifications.
The Spin: Homeowners that receive a loan modification will enjoy much lower mortgage payments because they are granted a fixed 2% interest rate for five years.
The Truth: This is true, payments can be lower for borrowers that receive a modification. Unfortunately there are still more than 830,000 homeowners that are awaiting a decision on their temporary loan modification, and are languishing in loan modification limbo.
The Spin: The figures look worse than they are because there are over 91,000 troubled borrowers that have been approved for a permanent modification, but has not signed the final paperwork yet.
The Truth: Granted, however there were also 90,000 trial loan mods cancelled.
The Spin: More than 1.35 million trial loan mods have been extended, which includes over a million HAMP modifications.
The Truth: The vast majority of these mods are trial loan modifications, and in any case, only represent a 35% of the troubled homeowners the Obama administration predicted the plan would help. It must also be noted that half a million of these troubled homeowners could easily lose their trial modifications. A even more worrying fact is that more than half a million of borrowers on a trial modification have already made the three monthly payments. Why? Apparently many will not receive the permanent modification because lenders have finally decided their income is too high, or too low, to justify a modification. The benchmark for qualifying, or not, is set in such a way that having just a few hundred dollars more or less in your banking account can make the difference between approval or denial.
This had created in many the feeling that trial loans are often just a way for banks to squeeze a few months mortgage payments out borrowers that either had no hope of qualifying or the bank feels they are hopeless cases that will most likely re-default whatever measures are taken.
In conclusion, and to be fair, there has been some progress in the last months. However, this is too little, too late for most homeowners. However, a new problem now arises. Now a new wave of unemployed troubled homeowners with prime mortgages is hitting the housing crisis shore. It is unclear what solution loan modifications can provide when the mortgage already has low interest rates and a long tenure.
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Troubled homeowners are so worried about losing their home they will do anything to save it. This generally ends up including a loan modification. Loan modifications are a way of reducing monthly payments by a) reducing interest rates, b) extending the tenure of the loan, and c) in some rare cases even by reducing the principal balance of a mortgage.
However, many home owners are starting to realize that interest rates and mortgage payments are not the only things that are being lowered. The credit score of homeowners is being reduced by up to 100 points just for entering a loan modification program. 100 points in a scale that generally goes from 300 to 850 points is a significant blow to a homeowner that has taken good care to protect his credit rating.
The big question is: is it fair? Should it be done?
The main argument housing counselors are putting forward against this practice is the lack of transparency. Most of the times troubled homeowners that ask for a loan modification feel like they are doing the right thing by trying their best to pay for their mortgage despite financial problems. When they realize that there credit score has been hit despite their efforts the sometimes feel cheated.
Are they justified? It seems reasonable to me that lenders and mortgage servicers provide clear information on the consequences of taking on a loan modification. But would a troubled homeowner applying for a loan mod change his mind just because he realizes his credit will be affected? If they do, it probably means they did not really need it to start with.
Why should a loan modification affect your credit rating?
Credit scores and rating are in place to do one thing, help banks and lenders know how reliable a borrower you are. Reliability in this industry is proven by your credit history that is how good you have been at paying your debts, your income and your commitment to the security of the loan, in this case your home.
A credit score is a numeric value assigned to you that qualifies your credit history and how desirable you are as a lender. Now, let us try and detach the emotional aspect of being a troubled homeowner and think about the consequences of a loan modification. A loan modification will in the vast majority of cases mean a reduction in interest, principal balance, or both. This means the bank is losing money. Losing money the borrower agreed to pay. By applying for a loan modification the borrower is stating he or she is struggling to make the payments they agreed to make. Shouldn’t that affect their credit rating, their reliability as a borrower?
Even though applying for a modification will take a chunk from your credit rating it is probably going to shade into insignificance compared to the effect falling behind in your mortgage payments and God forbid, foreclosing on your home. These actions can leave your credit score in tatters for years, and fade into insignificance when compared with a 100 point hit.
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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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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.
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