How Do Loan Modifications Work

Sphere: Related Content I’ve heard story after story regarding the mortgage crisis, financial struggles, and the amount of borrowers on the verge of foreclosure. The most common alternative to foreclosure is loan modification. Although this is the most common alternative, many people still don’t understand how it truly works.

First of all, loan modifications are VERY common due to the fact that it can be beneficial for both the lender and the borrower (see Benefits of Loan Modifications). Homeowners get to keep their homes and lenders save their investments and prevent additional costs accumulated by legal and maintenance of foreclosed properties.

The following are the necessary facts borrowers need to know about loan modification and how it works:

1) Loan modification must be fully reinstated.
2) The mortgage loan is reinstated, making monthly payments affordable for the borrower.
a. Rates are either reduced or loan term extended.
b. The lender or mortgagee may re-amortize the total unpaid amount due over the remaining term of the loan OR may extend the loan through the lesser one of two ways:
i. Term may be extended no more than 10 years after the original maturity date OR
ii. 30 years (360 months) from the modified mortgage’s first installment’s due date
3) The PITI in arrears may be added to the mortgage balance.
4) The mortgage balance after the loan modification may exceed 100% LTV or may exceed original loan amount.
5) All fees accumulated through the service of the loan modification CANNOT be paid through the newly modified mortgage.
6) The newly modified loan MUST have a fixed rate.
7) The modified loan MUST be in first lien position.

The following are the requirements that borrowers have to meet to qualify for a loan modification:

1) Many lenders require at least 2 late payments, at least 61 days, and/or 3 full payments due. However, it is not impossible for a mortgagor or borrower to be persistent and possibly change a lender’s mind as long as the requirements below are met.
2) Default or financial struggle is evidenced or verifiable.
3) Origination date must be at least 12 months before application of loan modification.
4) Property under the mortgage must be borrower’s primary residence.
5) Ability to repay debt must be verifiable.
6) FHA mortgage is not allowed.
7) Mortgage loan CANNOT be in foreclosure status.
8) Property must be properly maintained and in good, saleable condition.

A borrower can certainly attempt to modify their mortgage on their own. However, borrowers may find difficulty in doing so and sometimes fail due to lack of or too much information disclosed to a lender or mortgagee.

Trusting companies and others who claim to have years of experience in loan modifications may be a difficult thing. There are many dishonest companies and individuals who will say or do whatever it takes to earn the trust of struggling individuals. Many claim to be legally backed by law firms and consultants who “specialize” in loan modifications. It is important to do communicate, get a feel for their true identity, and do a bit of research on these companies before allowing someone to handle very important documents regarding one of or your most valued assets.

Benefits of Loan Modifications

Sphere: Related Content Loan modifications provide benefits for both the borrower and the lender/investor.

Borrower Benefits:

1) Payments are more affordable for the borrower
2) Terms are changed towards borrower(s)' benefits or ability to pay (example would be to change interest rate)
3) Saves borrower's credit
4) Saves borrower's home from foreclosure
5) Faster, easier, and simpler process
6) Can be more affordable and a lot less expensive than a refinance

Lender Benefits:

1) Will still have borrower making mortgage payments and therefore still profiting.
2) Cut back on costs involved when property is foreclosed.
3) Have less delinquencies or mortgage defaults in their portfolio.

Benefits of professional loan modification help vs. attempt to do it on your own:

1) You have one chance to do it right. Therefore, having a professional take care of it will save time and money.
2) The experts have the negotiating skills and know what will be asked by the lender and how to answer them.
3) The experts can expedite the loan modification based on their knowledge and expertise.
4) Frustration is taken from borrower when something as serious as possibly losing their home is handled by a professional.

Below are help information sites regarding loan modifications :

HUD FAQs
HUD Loan modification options
Helping borrowers negotiate their loan modifications
Loan modifications on your own
How to get a loan modification approved
Could a loan modification prevent your foreclosure?

What is being said about Fannie Mae and Freddie Mac's bailout?

Sphere: Related Content “The most astonishing thing about Treasury Secretary Henry Paulson's plan for Fannie Mae and Freddie Mac is that he intends to use taxpayer funds to resuscitate the companies and return them to profitability.” – The Wall Street Journal

This article notes very important information on Fannie Mae and Freddie Mac and their position as government-sponsored enterprises as well as what it means for the American homebuyers.

“Rather than marking the turning point that assures an economic recovery, the support that had to be provided to US mortgage giants Fannie Mae and Freddie Mac last weekend simply underlines the severity of the ongoing credit crisis.” – The Irish Times

The bailout saves the lives of the mortgage giants and the housing market outlook is left for the next president to handle. How does the future of the U.S. economy look from this point?

“Seeking to head off any unloading of Fannie Mae and Freddie Mac bonds by Japanese investors, the U.S. Treasury Department is taking the unusual step of directly contacting Japanese financial institutions about the plan to rescue the mortgage giants, according to a published report.” - MarketWatch

Example of how U.S. handles a situation overseas regarding the mortgage giants’ bailout.

“"The speculation, cronyism and corruption that pervaded the operations of Fannie Mae and Freddie Mac are emblematic of the parasitism and criminality of America's ruling financial elite as a whole," the article's author, Bill Van Auken, asserts. The US financial elite has certainly not come out of this episode well, but the end of capitalism?” – The Australian

The corruption that takes place in the financial structure of Fannie Mae and Freddie Mac are noted along with the prime motivation of the bailout. Chinese economist Yu Yongding states "if the US Government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic. If it is not the end of the world, it is the end of the current international financial system."

Loan Modification - Title I Property Improvement Program

Sphere: Related Content About loan modifications as found on the HUD website:

The intent of a loan modification is to eliminate the arrearage and to reduce the monthly payment (by lowering the interest rate for the remaining term) which will allow the Title I loan to be brought current before or by the end of the loan term. Homeowners may be considered for a loan modification if they have recently experienced (1) an involuntary reduction in income or an unexpected increase in living expenses and (2) the lender determines the borrower has a reasonable ability to pay under the terms of the loan modification plan to eliminate the arrearage.

As loan modifications do not make sense in every situation, lenders should carefully review each borrower to determine if this option is viable. Loan modifications are most advantageous when implemented during periods of low interest rates and when the stability of the mortgage can be enhanced by modifying the debt over the remaining term. The original principal balance, interest rate and term may not be exceeded in any modification agreement.

Lenders may enter into these loan modifications without HUD’s permission and they do not have to be recorded.

Pros and Cons of the extended FHASecure Program

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The FHASecure program began September 5, 2007 allowing borrowers with non-FHA ARM mortgages to refinance their loan into an existing FHA program. It was expanded this July 14, 2008. Below are the some of the revisions and the pros and cons of the new program.

OLD

1) There is no limit on how far behind you can be on your mortgage or how many payments you’ve missed as long as you have sufficient equity .

2) Interest-Only fixed rate mortgages are NOT eligible.

3) The borrower must be delinquent on a non-FHA to ARM that has recently reset.

4) The borrower’s ARM mortgage must have already reset and must have been making payments on time for up to 6 months prior to reset or delinquent payments.

5) Non-FHA payment option ARMs are NOT eligible.

NEW

1) There is a maximum of 3 months delinquency in a 12 month period with at least 10% equity.

2) Interest-Only fixed rate mortgages ARE eligible as long as the borrower’s mortgage is current or delinquent due to payment shock of an interest rate increase.

3) The borrower does not have to be delinquent to qualify. FHA encourages borrowers to refinance before they fall behind on their mortgage.

4) The borrower does not have to be delinquent or have had their payment reset in order to qualify.

5) Non-FHA payment option ARMs ARE eligible.

Advantage of expanded FHASecure program

1) Extends help for more struggling homeowners (include those with non-FHA subprime ARMs) who are on the verge of foreclosure.

2) Increases options for delinquent homeowners who have had at least 3 delinquencies in the past 12 months.

3) It increases help for struggling homeowners without affecting taxpayers.

4) Extends help for homeowners who have mortgages that are more than their property is worth.

5) Charged premiums can give borrowers an incentive to improve their credit by charging them lower premiums depending on their credit status.

6) FHA insurance under program gives subprime borrowers access to lower rates, which can provide a lower mortgage payment.

Disadvantage of expanded FHASecure program

1) A large majority of struggling homeowners also have a lack of equity issue. FHASecure has a maximum limit. Programs states to have lender carry 2nd mortgage if this occurs. Overall payment may not help borrowers.

2) Taxpayers do not have to pay for this program. However, borrower does with mortgage insurance premiums that can range from .55 percent to 2.25 percent.

How Can I Take Advantage of FHA's FHASecure Program?

Sphere: Related Content First of all, the website http://www.hud.gov is VERY informative. If you have the patience, and I'm sure most people have or can give themselves at least one hour of research time to go into this site and find all the available programs out there.

For example, FHASecure is available for people who are at least two or three months late on their mortgage. With this program, borrowers are offered a chance to reinstate their mortgage situation and prevent foreclosure from taking place. Of course there are certain requirements, but it may be best to call HUD's customer service or their mortgage counselor to help you find the right program.

It really is best to go into this site before giving up and thinking there is no hope left. Borrowers, homeowners, citizens, and most individuals have rights. You'd be surprised about the different programs available that your local mortgage company won't tell you.

Alternative to Foreclosure

Sphere: Related Content There are alternatives to going into foreclosure. As a professional in the mortgage and real estate industries, I have witnessed many people go into depression thinking they were never going to get out of the financial slump they were in. I certainly don’t encourage anyone to go into foreclosure, of course, due to the unfortunate circumstances that the previous homeowner would have to go through.
First and foremost, borrowers and homeowners who feel they are having problems making monthly payments towards their debt should talk to their bank about any alternatives or suggestions they may have for the borrowers. Some lenders will not tolerate late payments and may issue the foreclosure process to begin as soon as possible, without giving the homeowner a chance to make handle the situation with the alternative options.
There are three options the borrower or homeowner may qualify for.
1. A repayment plan, which gives the borrower(s) the opportunity to make their monthly payment including a few extra to make up for the missed payments.
2. A forbearance agreement, which is an agreement between the lender and the borrower, which allows the borrower to make reduced payments, or none at all, until the mortgage is brought current.
3. A loan modification, which reduces the borrower's monthly mortgage payment through the re-amortization of the loan, extends the term of the loan, or reduces the interest rate.
In addition, a new law was just signed by the president that will implement a program, starting October 11, 2008, to help struggling homeowners. Therefore, if you are having problems paying some of your bills, you may want to consider contacting FHA to find out if you would qualify for their new program and if there was anything else they could do to help you. Also, some very knowledgeable mortgage professionals may be able to help you out with that matter as well.