August 25, 2019

What Type of Mortgages are Most Likely to be Modified?

prepare for mortgage modificationYour success at modifying your mortgage depends primarily on how much leverage you have in your negotiations with your lender.  If you can convince your lender that it has no realistic chance at recovering full payment from you, or that pursuing you for payment will be expensive and time consuming, you greatly improve your odds.

Banks and mortgage lending institutions are in business to make money.  If you miss payments or pay late, your banker will not be personally offended.  This does not mean that your lender will not employ psychology in its collection efforts.  Representatives from the bank or mortgage company will call you and attempt to make you feel guilty about not paying.  They will suggest that you have a moral and a financial obligation to pay your mortgage obligation.

No doubt you would like to pay your mortgage in full and on time.  However, if your financial circumstances do not allow for this, there is no shame in seeking a modification with your mortgage lender.   Always treat mortgage modification negotiations as business transactions – money, not morality is the only relevant issue.

How, then, do you gain leverage in your negotiations?   Here are some suggestions for a negotiation strategy: [Read more…]

Bank of America to Reduce Mortgage Balances

In an attempt to save struggling borrowers from loosing their homes to foreclosure, Bank of America will be forgiving some mortgage debt. In response to the Obama administration pressuring banks to confront the issues that push millions of homeowners to foreclosure, Bank of America began a program to offer more assistance for delinquent borrowers by reducing their mortgage balances, testing the idea that modifications are better than foreclosure.

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The practice of banks reducing loan balances is not completely new; it has been a growing strategy as a way to tackle the housing crisis. The amount of loan modifications which included some sort of principal reduction has increased from 3.1% to 13.2% in the first nine months of last year. Banks are increasingly willing to experience some short term losses if it would avoid much larger losses in the future if the housing crisis does not improve.

The Bank of America program is for borrowers who received high-risk loans from Countrywide Financial, which was bought in 2008 by Bank of America. At the time of the housing boom, Countrywide was one of the largest and most aggressive lenders. According to Bank of America, the new program will begin with helping around 45,000 Countrywide borrowers. This is a small number considering the 1.2 million delinquent homeowners with Bank of America at this time.

Bank of America does not want to be mistaken for giving delinquent borrowers an easy way out, and it aims to only help homeowners who truly can not afford their mortgages. The program will only help borrowers whose mortgage balance was at least 20 percent greater than the value of the house and also have great financial hardship such as a recent job loss.

It’s promising to see banks finally responding to the housing crises by taking action to help homeowners from facing foreclosure. The action of banks reducing mortgage payments is not without some controversy, but it will be interesting to see if this method will successfully save struggling borrowers and keep them from foreclosure. With Bank of America at the forefront and signs that the housing market may worsen, it’s possible other large banks may begin to offer help for delinquent borrowers as well.

Government announces that help is on the way for underwater or unemployed borrowers

In the last post, we discussed underwater mortgages – the term used to indicate that a homeowner owes more money on the mortgage than the home is actually worth. As the article indicated, these are the number one cause of foreclosures, but fortunately, it looks like there may be hope on the horizon for those people who find themselves in underwater mortgages; If your home is severely underwater or you’re an unemployed homeowner, the government has announced that they will be offering additional options for struggling homeowners.

If your home is underwater and you’re borrowing money, there are two options. If you are making payments on time you may be eligible for a refinance with an FHA loan (a federal assistance loan). If you’re late on payments 60 days or more, however, you must apply for assistance through the Home Affordable Modification Program. Under HAMP, lenders, including many of the major ones, are offering principal reductions.

If you have made your mortgage payments but your loan is underwater, the refinance will be done through an FHA guaranteed loan. Your mortgage debt must be over 115% of the current market value and you must meet all guidelines in order to be eligible for an FHA guaranteed loan and a principal reduction. Your principal could be written down so that your total mortgage debt is less than 115% of the home’s market value.

If you own a home and are unemployed, you can receive a temporary reduction in mortgage loan payments for at least three months (maybe even up to six months), and in certain instances you may be able to skip payments altogether. To be eligible for payment reduction, you must be receiving unemployment checks, and the payment will be set at 31% of income based on your unemployment check. Other factors determining eligibility include that your home is your main residence, you have a mortgage balance less than $729,750, you owe mortgage payments that are not larger than 31% of your income, and you can prove financial hardship.

It’s possible that some borrowers still cannot afford the loan even after the reductions because they own more than they can afford. Lenders will be given incentives by the government to write down loans, including alternatives for short sales and deed-in-lieu of foreclosure. Lenders did not used to be required to try alternatives of principal reductions with a loan modification, but now must look at both a principal reduction and a reduction in interest rate.

Mortgage Loan Modifications: Quick Facts

Who is eligible for mortgage loan modifications and how are the mortgage payments lowered?

Eligibility

Homeowners struggling to make mortgage payments have two mortgage loan modification programs available. If you are behind on your mortgage payments, you are eligible to apply for the “loan modification” program. If you have not yet missed a mortgage payment, but your mortgage payments are over 31% of your monthly income, you are eligible to apply for the “refinance” program.

Home buyers that bought investment properties, multimillion dollar homes, or put false information on their mortgage documents will not qualify for the loan modification programs. Applicants are only eligible if they prove that they:

  • have endured serious hardship; declines in income; increases in expenses; and/or high mortgage debt compared to income
  • are facing an interest rate hike
  • owe more than their house is worth

Payments

If you are eligible for one of these programs, your mortgage payments will be lowered to no more than 31% of your monthly income through lowered interest rates and government support.

The interest rate on the loan must be lowered to meet this requirement, but it cannot fall below 2 percent. If the mortgage payment cannot be lowered enough by reducing the interest rate, then lenders can extend the term up to 40 years. The new interest rate on your loan will be in place for five years and will then increase by 1% every year after until it is back to the original rate.

Loan servicers must only reduce the total amount of your mortgage payment to 38% of your monthly income and then the government will subsidize loans so you only pay 31% of your monthly income.

If you are interested in mortgage loan modification and would like advice regarding your particular case, we welcome you to contact us.