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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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A loan modification is a loan modification, right? If it helps you avoid a foreclosure on your home it is good news, right? Not necessarily. It is a little more complicated than all that.

HAMP is a Government sponsored loan modification program. This might not give you much peace of mind but the truth is that mortgagees that are part of this program must follow certain requirements in order to receive the incentives the Government offers for loss mitigation actions, another name for loan modifications.

These requirements have been recently (Nov. 23^rd 2009) updated and include:

1)      Mortgagees must reduce the interest rate of a loan modification to the market rate. Market rate is defined by the Government as the most recent Freddie Mac Weekly Primary Mortgage Survey Rate for a 30 year fixed-rate conforming mortgage.

2)      The Mortgagee must re-amortize the total unpaid amount due over a 360 month period from the due date of the first installment of the modified loan. This is code for: the bank has to offer you a 30 year fixed-rate loan at the market rate.

However, if you go for an in-house loan modification or even for a mortgage refinance your mortgagee is not required to follow these rules. This doesn’t mean the in-house mortgage modification will be bad or any worse than the HAMP loan modification. You might find your mortgage provider is really generous and wants to improve the Government’s deal out of the goodness of his heart. No? You don’t think that is likely?

The problem is that even the relatively good terms HAMP loan modifications offer are no guarantee you will get approved or that you will even get a decision on your loan modification before your mortgage forecloses. Lenders use this fact to push borrowers into choosing a bad loan modification in the belief that a bad loan mod in the hand is worth two in the bush. Is that true?

The alternative to the HAMP loan modification or in-house mortgage modification is to simply walk away from your mortgage, but that is another story.

In conclusion, only you can decide if a loan modification is the right move for you, but if you do decide to go for a loan modification it is most likely you will get a better deal if you go with a HAMP loan modification. Unfortunately many banks are using the fact that HAMP loan modifications are slow and hard to get to push their own in-house subprime loan modifications.

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Short Selling your home could be the win-win-win alternative to loan modifications. Loan modifications can be expensive for lenders and borrowers. Foreclosures are even more expensive costing lenders billions of dollars. According to a study carried out by the congressional Joint Economic Committee (www.jec.senate.gov) each foreclosure can cost lenders as much as $50,000. Homeowners naturally don’t appreciate foreclosures either as they often end up causing borrowers to file for bankruptcy besides losing their home.

The other players in the foreclosure game are the neighbors of the homeowners that lose their home. The empty homes that are dumped on the market bring down the prices of all the homes in the neighborhood.

Short Sales can be a win-win-win situation for the lender, borrower and everybody else.

Why?

Well short sales are not without disadvantages but they do carry three great advantages:

1)      The seller gets out of the mortgage liability without having to face bankruptcy.

2)      The buyer gets a home for a reduced price.

3)      The lender  gets rid of the house at a relatively minimal loss without having to waste money, time and energy on a foreclosure.

So what is a short sale exactly? Short sales are a process by which a home is sold quickly for a reduced price. Typically the lender agrees to “forget” the difference between the debt and the price the house is sold at. It does seem strange that a bank or private lender will be willing to sell a house at a loss and forgive the outstanding debt. However the case is that even though lenders don’t make a profit short selling can be a much better (i.e. cheaper) solution than foreclosing or even modifying a loan.

Let’s illustrate a scenario where a short sale might make sense. Imagine you own a house that is worth $100,000, you owe $120,000 on your mortgage. You approach your mortgage provider and explain you have lost your job and are unlikely to be able to find a good enough job to continue repaying your $2000 a month mortgage. The ank agrees you are unlikely to be able to pay in the future and accepts your proposal of short selling your home. You sell it at $75,000 and the bank absorbs the $50,000. Obviously the key part is to convince your bank that paying the difference of your mortgage and the price of the home is going to be cheaper or better business than foreclosure a full bankruptcy.

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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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Loan modifications seem like a pretty simple concept. You can’t pay your mortgage so the government “encourages” your mortgage provider to give you a break. The break can come in the form of lower interest rates, a longer tenure, deferring a part of your loan or even “forgiving” a chunk of your loan (that doesn’t happen all that often).

The key word of the above paragraph is “seems”. The truth is not even close to simple. Banks are businesses and like all businesses, successful ones anyway, they need to know where they are going, what the future will look like in order to decide what decisions to make today.
Investors and business analysts also want to know what the future of business looks like. Mortgage and securities analysts have a difficult job on their hands because the future is so difficult (read impossible) to predict accurately.

Loan modifications depend on how the future looks to analysts because mortgage providers decide what interest rates, conditions and how generous (how much they can afford to call a loss) they are going to be depending on how good or how bad things look.
Analysts look at how big companies prepare themselves for the future as a way of checking their own predictions. How can an analyst see how a big company like a bank or mortgage provider is preparing for the future?

One way is to see how much they are setting aside for bad loans and delinquent payments. If a bank predicts the economic future is looking bleak they will set aside larger amounts of cash in case their customers (borrowers) fail to pay. Of course even this is not as simple as all that. If a company wishes to boost their profit or improve how their accounting looks they can play with these figures.

Nevertheless, alarm bells ring in analysts ears when big companies, like Citigroup, reduce their contingency reserves and they can’t figure out why. This is what happened this week and analysts are still asking why.

Normally when banks stock away less cash to cover for loan losses it can be interpreted as a sign of improving credit conditions, but when analysts looked at the rest of Citigroup’s earnings report there was little if any proof of borrower difficulties easing off. What analysts have noticed is that non-performing loans has gone up by 16%, 7% and in the last quarter by 5% which would indicate an improvement in borrowers’ ability to pay but seems to be more of a reaction to the loan modification effort by the government that is improving underlying credit quality.

So is Citigroup being too optimistic or do they believe that the government’s programs have a chance to control the credit crisis? One thing is for sure in business, time will tell.

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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).

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Loan Modifications have been put forward as the great savior of the current credit crisis. Whether this is true or not is a matter of debate. I personally feel that dealing with a credit crisis by trying to fix mortgage issues is not going to deal with the big picture.

Nevertheless it is a fact that many are benefiting from the taxpayer subsidized loan modifications that are being grudgingly supplied by banks and other mortgage providers.

However many are not benefiting at all from this service, what is worse many have considerably worse off because they tried to get a loan modification and bumped into a scam artist or organization that duped him out of the little money he had left. Nobody wants to become a statistic, especially when it is the number of borrowers that are conned out of their homes by dishonest “loan modification consultants”.

What can you do? Here are 6 easy steps:

1)    Know the beast. Understanding what your options are and who qualifies for aid is vital. Reading www.blownmortgage.com and other mortgage help articles will provide you with inside information about loan modifications and mortgages. Other websites that should be on your list are: WWW.hud.gov www.makinghomeaffordable.gov and www.financialstability.gov . In fact wherever you go for help make sure it is free. The best help out there on loan modifications is, believe it or not, is free.

2)   Beware and be alert. If you are struggling with your mortgage you are a prime target for scams, recognize and avoid common scams.

3)  Avoid fast loan modifications. Companies who want you to sign papers immediately or who claim they can save your home if you sign of the deeds of your house to them are scam artist. Nobody can save your home except you and your mortgage provider. Organizations and individuals can provide valuable information but they can’t guarantee anything because they don’t make the decisions.

4)  Again, DO NOT sign the deed of your house to anybody unless you are working directly with the mortgage company to forgive your debt. In other words only sign off the deed of your house if you are selling it back to the bank.

5)    Only make mortgage payments to your bank. A common scam is for a “consultant” or loan modification company to ask you to pay them so they can deal directly with your mortgagee and make the payments for you. As you probably guessed this payments stay in the pockets of the scam artists while you get deeper in debt.

6)  Don’t pay anybody for advice on your loan modification or for counseling services on a delinquent loan. This is not to say they are all scam artists but even the kosher variety or not as good as the organizations that provide free counseling as a public service.

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HARP, the government Home Affordable Refinance Program has consistently grown and expanded the help provided as more power and finances are invested in this program.
If you are in danger of losing your home or are struggling to make payments HARP could provide you with the break you need to get back on your feet.
If you are in that situation you probably have many questions you would like answering. How can I know if I am eligible for aid under HARP? How do I know if I will actually benefit from a HARP loan refinance? Or probably the scariest, I owe more on my property that it is worth, do I still qualify for a refinance with HARP?

What are the requirements to qualify for HARP?
1.)    Your loan must be owned or guaranteed by Fannie Mae or Freddie Mac. Most people don’t  actually know if this is the case and unfortunately in many of the hardest hit areas by the economy in the United Sates Freddie and Fannie don’t guarantee a large percentage of the loans. For you to find out if your loan is guaranteed or owned by Freddie and Fannie you can either contact your mortgage provider or find out at their respective websites.
For Fannie Mae  1-800-7FANNIE (8am to 8pm EST). www.fanniemae.com/loanlookup .  For Freddie Mac  contact  -800-FREDDIE (8am to 8pm EST)
o    www.freddiemac.com/mymortgage
2.)    The amount you owe on your FIRST mortgage cannot exceed 125% of the value of your home. This figure has been increased a few times in an effort to include those that really need the HARP program.
3.)    You must be current on your mortgage payments. Current means not having being later than 30 days on your payment in the last months or never having missed a payment if you have had the loan for less than 12 months. It seems strange that a mortgage aid program will only allow people that are “current” on their payments to participate, however the idea of the program is to provide long term help allowing homeowners that can reasonably rearrange their finances to pay their mortgage not provide emergency help to people who simply cannot meet their mortgage payments.
4.)    The loan modification must improve the overall long term affordability of the loan. This can me an different things depending on the mortgage. For instance if you switch from a variable interest or ARM mortgage to a fixed interest mortgage your initial payments might rise a little but your long term stability and ability to pay for your mortgage may increase.

How can you know if you a HARP loan modification will benefit you? The key is to understand the cost and benefits of your loan and to get that information you need to documents, a “Good Faith Estimate” and a Truth in Lending Statement”. The two disclosures will spell out for your new interest rate, mortgage payments, fees and other expenses. You can then compare the “new deal” with your current mortgage to assess if it is actually beneficial for you.

I hope this article has answered some of your questions on HARP. However if you are thinking of applying for help you have probably got many more questions, the best thing you can do is visit HARP’s website at www.makinghomeaffordable.gov where you will find these and other questions answered.

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Mortgage modifications are the only hope for millions of Americans that cannot continue paying their monthly payments. One of the typical reactions when people are behind in their payments and cannot see a way out is to simply ignore the bank or mortgage lender. This is a terrible idea that only makes things worse.

HOPE NOW the government run free mortgage counseling program explains the reasons why you must contact your mortgage provider as soon as possible in a new Video narrated by Queen Latifah. The video explains the consequences of not contacting your bank when you are behind in your payments or fear you will be in the near future.
The video illustrates this point through various real life cases of people that initially were reticent to calling their bank but were able to face their fears and solve the situation.
Another issue that the video deals with is that many banks are completely overwhelmed with the volume of borrowers that are calling to ask for loan modifications. Hope provides a way out by advising borrowers to head to theHUD.gov website to find advice and help when lenders cannot (or will not) reply to their calls.

This video deals with two serious issues that are causing many to lose their homes unnecessarily:

1) Borrowers not contacting their banks and finding a negotiated solution to the debt and

2) The apparent inability of banks and lenders to deal with the great number of borrowers in need of help.

Borrowers don’t contact their banks for various reasons. As illustrated in the new HOPE NOW video many borrowers don’t contact their bank about their late payments because they don’t have a good payback plan to present to their lender and feel embarrassed to contact them. Other’s have little understanding of the options at their disposal and simply ignore the efforts of the bank to contact them. Still others are not even sure who their lender is or how to contact them. The video illustrated how to find out by checking one of the mortgages payment slips which carries the lender’s name and telephone on the back.

The speed at which banks are dealing with customers loan modifications has caused many to feel that banks are not committed to providing loan modifications and are dragging their feet going through the motions. Although loan modifications can in many cases be beneficial to both the bank and the borrower, allowing the homeowner to keep his home while the bank can make more money on the same loan, in some cases they are not cost efficient for lenders that would do better foreclosing the loan.

The government has recently committed extra funds to incentivize banks into accelerate their mortgage modification programs in order to help the millions of Americans that risk foreclosure on their mortgages this year.

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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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