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Loan Modifications do seem to have finally got moving. Trial loan modifications are heading towards their first million, there has been over a 100,000 completed loan modifications and even Bank of America, the sleeping giant of loan modifications has hit the 200,000 trial modifications line.

However, what is not clear is if loan modifications are actually a good thing for homeowners. Reports published in this website have shown that loan modifications may be pushing homeowners deeper underwater instead of lending them a helping hand, pun intended.

This is because many banks are simply cashing in the Government’s incentives while capitalizing the late payments and interest charges onto the loan modification without reducing interest rates or extending the loan term, reducing the principal balance of the loan is, of course, very rarely even mentioned.

So is it worth going for a loan modification? It depends on:

1)      How good a deal you can get on your loan modification.

2)      How underwater your home is and

3)      How much you care about your home

Let’s analyze these three questions to see if loan modifications are worth it in your particular scenario.

1)      You are getting a good deal on your loan modification if the lender reduces your interest rates and your monthly payments are significantly cheaper. Unfortunately, in the recent past banks have got away with providing loan modifications that simply put borrowers further into debt. However, Government guidelines effective from the 23^rd of November 2009 clearly state that loan modifications under the HAMP program, which provides incentives to lenders, must reduce the interest rate to the current market rate.

This is the pertinent paragraph in the Mortgagee letter 2009-35 from the Government to all approved mortgage providers:

The Mortgagee shall reduce the loan modification note rate to the current Market Rate.  For purposes of this requirement, the Department shall consider Market Rate to be no more than 50 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey Rate for 30-year fixed-rate conforming mortgages (US average), rounded to the nearest one-eighth of one percent (0.125%), as of the date the Modification Agreement is executed.

What does this mean in practice?

The next paragraph in Mortgage letter 2009-35 gives the answer with an example (italics and underlining are ours):

The Mortgagee approves a Loan Modification that is executed by the borrower 35 days after the date of this Mortgagee Letter.  The current note rate is 7 percent and the most recent Freddie Mac Weekly Primary Mortgage Market Survey Rate for 30-year fixed rate conforming mortgages (US average) as of the Modification date is 5.04 percent.  To be eligible for payment of a mortgagee incentive and costs for a title search and/or recording fees on the Loan Modification, the fixed note rate on the modified loan may not exceed 5.50 percent (The Freddie Mac US average rate of 5.04 percent rounded to the nearest eight of a percent plus 50 basis points).

If your mortgage provider reduces your interest rate by nearly 1.5% you are likely and extends the mortgage for 30 years you are likely to see a very significant reduction in your monthly payments. However, don’t forget to check what the term extension will translate to in extra interest and make sure you can live with it.

2)      If your mortgage is so underwater there are little chances it will ever be worth what you bought it for and you just started paying for it, you need to decide if it is even worth trying to save it. Walking away, taking the hit on your credit and starting fresh might be the best option for you.

3)      Of course this depends how much you have emotionally invested in your home. If you can’t find another home in the area and you don’t want to change your children’s school, or you need to live near your parents the financial value of your home might only be one of the factors you have to consider.

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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 23^rd 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.

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Mortgage foreclosures are increasing steadily as home values plummet and layoffs are becoming ever more common while homeowners crumble under the weight of mortgages they can no longer afford.
The administration is working hard to increase the number of loan modifications to help out struggling homeowners. However higher unemployment rates are making it hard for homeowners to afford even good prime mortgages loan modifications struggle to improve. Also, foreclosures often prove to be a cheaper alternative for mortgage providers when the real cost of loan modifications is calculated.
So what can be done to fix this situation? Although far from total solutions I will put forward five possible measures. Some would be unpopular, others hard to implement but the truth is that easy fixes are just not there to be found.
1)    Mandate Loan Modifications.
Up to now the government has tried to court mortgage providers into making loan modifications. Providing incentives and often footing the entire bill of loan modifications. This could be changed if the administration regulates foreclosures and makes it a legal requirement for banks to offer modifications before they can foreclose a loan or mortgage.
2)    Provide Principal Reductions on Existing Loans.

Unless you actually reduce the principal (amount borrowed) of a loan you are not really helping, just lengthening the loan and making it harder regain equity on the home. Equity is the best incentive for homeowners to pay their mortgage payments. If you feel your home is worth more than you owe on it you see it as an investment worth protecting that you can sell at a profit if things get real bad.

3)    Ease Accounting Rules for Loan Modifications.

Messy accounting procedures and bureaucracy’s red tape is responsible for much of the cost of loan modifications making them hard to enforce and expensive to make. Even the 500,000 plus loan trials the HAMP program has managed to make ahead of schedule will have to undergo further paperwork and potential bureaucracy pits once the three month trials are finished which will probably cause many of the loan trials to fall through.

4)    More Transparent and Uniform Loan Modifications Reports.

Every bank or mortgage provider seems to have their own system to measure eligible borrowers and how they report their loan modifications. This makes it difficult to set uniform procedures, require targets and regulate the efficiency of loan providers.

5)    Limit Fees For Borrowers.

Fees charged to borrowers are so high that even if a homeowner falls in difficult times for brief period he/she can fall into a spiral of debt due to the high fees and penalties he or she incurs. Also, loan modifications tend to include expensive fees for the homeowner just to apply for.

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As part of the Obama’s administration Making Home Affordable Program (HAMP) name and shame (or praise) initiative, every month a list of banks and mortgage providers is issued. The good banks are praised the bad ones are marked. The idea is to provide an extra incentive for providers to speed up their loan modification procedures.

September’s Loan Modification league showed the winners and losers of the HAMP loan modification league. The league shows the order of the “best” and “worst” banks based on the percentage of loan modifications they carried out, or more accurately, they placed on a trial loan modification, from the total of eligible loans they had to work with.

HAMP Winners Top Ten
1.    Saxon Mortgage Services, Irving, Texas (41%)
2.    Aurora Loan Services, Littleton, Colorado (33%)
3.    Citimortgage, O’Fallon, Missouri (33%)
4.    Nationstar Mortgage, Lewisville, Texas (28%)
5.    JP Morgan Chase, New York, New York (27%)
6.    GMAC Mortgage, Fort Washington, Pennsylvania (26%)
7.    Select Portfolio Servicing, Salt Lake City, Utah (26%)
8.    Wells Fargo Bank, San Francisco, California (20%)
9.    Residential Credit Solutions, Fort Worth, Texas (17%)
10.    Green Tree Servicing, Tempe, Arizona (12%)

What conclusions can we get from this data? It is hard to provide a solid interpretation from such a small selection of banks and mortgage providers but what does seem to jump out of the page is that among the top ten HAMP performers are small banks. In fact it would seem that the number of small banks is disproportionate.
One could reasonably expect that larger banks with a higher volume of loan modifications would be better at putting into play the government’s loan modification process. After all, at least in theory the government is covering the cost (and more) for these modifications. However the opposite seems to be true. Smaller operations seem to have done a better job of redesigning their business to face the increase in loan modification requests.

It is also noteworthy that smaller banks with less loan modifications may have to work less to have a higher success rate. If you have 10 loans to modify you only need to carry out 8 to have an 80 percent rate. However if you have 100,000 to modify… the picture changes. Whatever the case, there does seem to be a lot of room for improvement for the big names in banking that have received so much help from government bailouts.

Those were the winners, what about the losers?
The losers are banks and providers that have not modified any loans at all.

HAMP Losers
1.    American Home Mortgage Servicing, Coppell, Texas
2.    HomeEq Servicing, Sacramento, California
3.    Home Loan Services Inc., Pittsburgh, Pennsylvania
4.    MorEquity, Inc., Evansville, Illinois

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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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When HAMP started functioning just a few months ago everybody said it was working too slow that it would never come close to Its ambitious goals. Last Thursday nearly a month before the deadline self imposed by the administration HAMP has enrolled 50,000 troubled home loans for trial loan modifications. Whatever your view on the credit crisis and the angle the Government is dealing with it you have to grant that they have really given this scheme all they have.

After a slow start where few banks were even pretending to try to provide loan modifications and trial loans modifications were trickling few Obama’s Administration got tough on mortgage providers and banks. This was carried out through the friendly diplomacy Obama is becoming famous for and some good old fashioned leaking to the press the dismal figures of the worst service providers at providing loan modifications.

The question now is if the initial success at least in numbers of the loan modification is enough to allow for optimism. Let’s have a brief look at what loan modification programs have done and compare it with what is needed.

An estimated 16 percent of troubled borrowers, which is someone that is 60 days behind in his payments, have been placed into trial modifications. Trial modifications are a three month period where the homeowner is expected to keep up with his payments without a glitch. If the borrower is regular in his payments he can keep the loan modification for the term of the loan with some extra bonuses thrown in. All HAMP loan modifications must provide affordable monthly payments to homeowners. By affordable we mean monthly mortgage payments must be below 31 percent of their monthly income.

HAMP and other loan modification programs were designed to help homeowners locked into subprime mortgages with high interests they couldn’t get out of or modify because the value of their homes had fallen drastically taking away all leverage for a possible change of loan or modification.

That was the situation 6 months ago when loan modification programs were starting. According to economists the issue now is not so much that borrowers are locked in subprime mortgages and are defaulting on their payments. It is prime mortgages that are defaulting and prime borrowers that are becoming delinquent on their payments. The loan modification programs now in place provide little help for borrowers that can’t pay their mortgage payments but have excellent interest rates. The only real aid these programs can afford is if the service providers are willing to defer or forgive some of the principal. The former option leads to balloon payments, not always a great deal for the borrower and the latter is unlikely to say the least.

If this analysis is correct we would be dealing with a set of loan modification programs that might or might not be good at what they were set out to do but are no longer needed or at least the main problems cannot be addressed with them. This is unfortunate considering how many billions of dollars are being thrown at them. A lot of this cash is not even going towards the borrowers which could be seen as a way to inject cash into the economy  directly to the families that need it but is paid to corporate banks as compensation for rewiring their business to speed up loan modifications.

Obama’s administration response to this argument is that loan modifications is only one of the ways they are fighting the credit crisis and that it is doing the job is was set out for and is on target to help up to 4 million troubled loans.

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It seems Obama’s administration has a program for every issue. If you are struggling with your mortgage but are keeping up with your payments (wouldn’t that be 90% of us) you can get help with HARP. If you are delinquent (behind in your monthly mortgage payments) you can try your luck with HAMP.

HAMP stands for Home Affordable Modification Program. The program is designed to help borrowers who are struggling to keep their loans current or who are already behind. HAMP does this by providing incentives to mortgage loan servicers to modify existing first lien (primary) mortgages. The Treasure hopes this will motivate mortgage providers to move faster with loan modifications. It doesn’t seem to be working quite as planned but the effort is certainly there.

What makes HAMP any different to the other loan modification programs? To start, as mentioned above you can apply for HAMP even though you are behind in your payments. You can also apply for a HAMP loan modification even if your mortgage is not provided or guaranteed by Fannie or Freddie, a requirement most other government programs have.

So what are the requirements for a HAMP Loan Modification?

1.) You must have a home and live in it. The home must have one to four units.

2.) You must owe a principal balance (the actual amount you borrowed without interest) that is equal or less than:
1 Unit: $729,750
2 Units: $934,200
3 Units: $1,129,250
4 Units: $1,403,400;

3.) Be the primary mortgage and have been contracted before January 2009.
Your monthly payments must be greater than 31 percent of your monthly income. If it isn’t we kind of assume you don’t need a mortgage modification.

Unfortunately for many the mortgage is the least of their “loan problems”.
Have a mortgage that is not affordable due to financial hardship that can be documented (that means you can prove it).

If you answered yes to all the above questions you MAY qualify for a HAMP loan modification. The final yes will have to come from your mortgage provider. You must contact your provider in order to find that out.

But what if you aren’t behind in your payments, can you apply for a HAMP Loan Modification.

Yes, the requirements are those stipulated above, no more, no less.  This is good news for borrowers that are making payments, want a loan modification in order to take advantage of the lower interest rates but can’t do so because their home value has dropped and they don’t have a mortgage with Fannie or Freddie.

What you will need to do is prove why you are struggling to make your payments. This will have to be documented so be ready to show paperwork to back your claim.

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Homeowners in the United States have all asked themselves questions about loan refinance. Whether they are in serious financial trouble or not they all wonder if they could benefit from the governments eagerness to spend taxpayer dollars on loan refinance.

This series of articles seeks to answer in a simple, jargon-free manner to the all-important questions that are on your mind.

Question 1.) I am current with my mortgage payments. Can a refinance under the Home Affordable Refinance Program (HARP) actually help me?

Oh yes. If you are current on your loan payments but want to modify your loan to take advantage of the current lower interest rates but can’t do it because your home has decreased in value you are one of the demographics HARP is specifically targeting. A loan refinance that lowers your interest rate can provide significant savings now and for the entire lifetime of your loan.

If you take advantage of a refinance under HARP, Fannie Mae and Freddie Mac will allow you to modify a loan they provided or guaranteed with mortgage backed securities.

Question 2.) I want a loan refinance but how do I know if am eligible for a HARP loan refinance?

The answer to this question deserves an article of its own but here are five basic requirements.

-    The loan or mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac. If you don’t know who owns or guarantees your mortgage check below for how to find out. It does not mean you can’t get a loan refinance if your mortgage is not with Fannie or Freddie just that you won’t get it under the HARP program. However many banks and mortgage providers are willing to provide loan refinances for premium borrowers.

-    You are current on your payments. Yes sir, despite what some “experts” might have told you, you DO NOT have to be delinquent in your payments to qualify, in fact that disqualifies you.

-    What you owe on your primary mortgage must not be more than 125 percent of the value (today) of your property.

-    You must be able to afford to pay the modified monthly payments.

-    The loan refinance actually improves your overall and long term financial stability.

Question 3. How do I know if my mortgage is with Fannie or Freddie?

Call your mortgage lender or servicer, which means whoever you pay your monthly payments to and ask about the HARP program.  You can also contact Fannie or Freddie by phone or online and find out directly from them:

o     Fannie Mae
1-800-7FANNIE (8am to 8pm EST).
www.fanniemae.com/loanlookup

o    Freddie Mac
-800-FREDDIE (8am to 8pm EST)
www.freddiemac.com/mymortgage

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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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The Obama administration loan modification is out to help those that can help themselves not lost causes that is the claim anyway. The idea is not to bail out greedy homebuyers that took more than they could chew.

That is all very good in theory but how do you regulate that in practice? Not easily. Especially when those that “deserve” the loan modification could fall through the cracks if the requirements for loan modifications are not designed properly.

Understanding the rules can and does help people abuse the system and get breaks they don’t “deserve”. Of course if anybody deserves a loan modification sponsored by the tax payers is a point of dissent I’m not certain of.

However it might be the only way to know how to get the most of your loan modification is to understand the system. And the only way to learn anything is to ask questions. These are a few you might consider asking.

Are banks and mortgage providers required to perform an escrow analysis when completing a loan modification?

That would be an affirmative. Mortgage providers must perform a retroactive escrow analysis before completing a loan modification to ensure delinquent payments capitalized reflect the real escrow requirements required for those months capitalized. Put simply it is worth telling the truth from the word go. Or you are just wasting everybody’s time.

Some mortgages provide a premium refund when at mortgage payoff. Is the mortgagor eligible for the upfront premium refund at payoff of a modified loan?

This is a tricky one, it depends when the closing date occurred.
If your closing date occurred:
-    After July 1, 1991 but before January 1, 2001. The existing 7 year unearned premium refund schedule shown in Mortgagee letter 1994 remains in effect.
-    On or after January 1, 2001 that are refinanced, a 5 year refund schedule as shown in Mortagee Letter 2000-46 applies.
-    On or after December 8, 2004 refunds are eliminated except whne the mortgagor refinances to another FHA insured mortgage, but to a modified 3 year repayment period.

Lets imagine you lose your job. Not a very happy thought, but hey it happens. Can a mortgagee qualify an asset for the loan modification option when the mortgagor (that being you) is unemployed but your wife is employed although she is not on the mortgage?

It depends on the mortgage provider which admittedly is not very comforting. The mortgagee (that is the bank or lender) should conduct a financial review of the household income and determine if there is enough to pay for a modified loan payment but not enough to pay back what is owed.

If this is established the bank must consult it’s legal counsel to determine if the loan modification is possible as the spouse is not included in the original mortgage.

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