Loan Modifications: Obama’s Plan

Called the Home Ownership Stability Initiative the heart of Obama’s plan really is the loan modification. As we have all heard, some homeowners are facing payments jumping thousands of dollars a month as adjustable loans readjust. Many homeowners are paying 50% or 60% or more of their income in mortgage payments while the value of their proerties is tumbling.

This plan aims to modify loans for those who qualify at 31% of income. Notice, that just like refinances, modifications require income. That’s the first qualification: income sufficient to pay the modified mortgage.

Until now, banks have been reluctant to offer loan modifications to homeowners who, whatever struggles they were having, remained current on their mortgages. Most banks refused outright to help such borrowers. This plan changes that and makes loan mods available to those who are current in their home loans as well as those who are behind in their payments.

This is important because it allows those who have not missed a payment to maintain their credit. As we all know, often a few dings on the credit and a missed mortgage payment is a major ding, have a cascade effect. Credit card companies find out and jump up rates on credit card debt. It becomes much harder to get any credit at a decent rate, etc.

Let’s say, for instance, that the borrower is paying 43% of his income for his mortgage. He applies for a loan mod and the lender brings the payment down to 38% of his income. Then, the government [Freddie and Fannie] and the lender bring the loan down by equal contributions [3.5% and 3.5%] to 31% of the borrower’s income. That mod stays in place for 5 years. At the end of that time, the rate would be gradually increased to the rate at the time of the loan mod.

Also, and this is important, the government would reinburse the lenders who agree to bring down the principal. Bringing down the principal: all underwater borrowers’ dream and their lenders’ nightmare. Until now, it’s been the rare lender who would touch that principal.

Now, lenders have incentives. If they modify a current loan,servicers receive $500 and lenders [investors] $1500. Borrowers have incentives, too. Every year a borrower stays current in the new mod, he receives $1,000 for up to 5 years. This is clear incentive to help those “good” borrowers who have made tremendous efforts to pay their mortgages during this current crisis and by dint of great sacrifice maintain their credit. Obama’s plan clearly tries to help these people while at least partially answering the persistent critique that responsible homeowners received no help while the irresponsible were being bailed out. Obama’s plan specifically says speculators or flippers cannot particpate.

This, of course, brings up another issue: small investors who own rental properties, especially single family homes or condos, are suffering, too, but seem to be eliminated from this program. Apparently, that is the case except for rental property that was originally a principal residence. So, if you are renting out the condo or 2-bedroom house you bought as your first home before you bought your current residence, then you may be able to participate.

Final details of this plan are supposed to be released this week. The Treasury Department says it will issue clear guidelines for all lenders to follow in doing loan modifications. That would be a relief. At the moment, it’s a free-for-all out there. Some lenders are very cooperative; others refuse to do anything. There’s no doubt we need to do something even if it means helping those who have not, shall we say, been the most prudent in their financial choices. If we don’t the fallout is just too terrible to contemplate.

Loan Restructuring v. Loan Modification: What’s the Difference?

Cover for the first Zombie-Loan manga volume
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Mortgages and foreclosures, never popular topics, are dominating the news lately. Gradually, we are learning ways to halt or at least slow this onslaught of foreclosures ravaging neighborhoods and ruining lives.  One stop-loss method is loan modification. Typically, loan mods are for homeowners who are behind in their payments and are facing  foreclosure. In fact, I’ve even done a previous post about Loan Mod Myths.

Yet, loan mods do work. Here’s who will benefit from a loan mod:

Loan Modification Eligibility

  • Minimum of 12 months elapsed since loan origination date.

  • The mortgagor [homeowner]  most be delinquent (3 full payments due and unpaid) or more.

  • Default due to a verifiable loss of income or increase in living expenses.

  • The Loan Modification mortgage must remain in the first lien position.

  • Loan may not be in foreclosure when executed.

  • Owner occupant, committed to occupy property as primary residence.

  • Mortgagor has stabilized surplus income sufficient to support the Loan Modification mortgage.

  • Does not have another FHAinsured mortgage.

In some cases, the banks today will modify loans for those who are less than three months late. And, banks will modify investor-owned or non-owner occupied. Banks do require financial information, such as pay stubs and tax returns, but credit scores are not an issue.

What this all means is that you must have enough income to support the new payment. Banks will not modify your loan if you cannot show you have the income to sustain the new, lower, payment.

If you can’t show the income, then the best option for you is probably a short sale which will do less damage to your credit than a foreclosure and allow you to purchase another home within 2 years, provided, of course, you’ve paid your debts during these years and you can qualify for a loan.

What about those who are not behind in their payments?

For those current in their payments, Loan Restructuring , may be the answer. If you have not missed payments or perhaps find yourself owing more than your home is worth, you may be able to  redo your  loans without having to bear the cost of refinancing.

How is this possible?  Who is eligible for loan restructuring? Essentially, if you do not fall into any of the loan mod categories, then you may be eligible for a loan restructuring.

Loan Restructuring Criteria

  • Homeowner may be current in mortgage payments or  have missed a payment or two
  • Mortgagor does not have to reside in the property; investment property qualifies.
  • Mortgagor may receive a reduction in principal, interest and a cash refund.
  • No “Hardship” letter is required.
  • Existing income, debt, credit scores  do not matter.

A loan restructuring may enable you to reduce your principal, especially in areas where property values have fallen drastically and many owners are thinking of “walking away.” How exactly can this happen?

In seeking to restructure a loan, the homeowner re-examines the loan at the point when it was originated.  Attorneys or real estate brokers, like myself, working with attorneys search the documentation of the loan to see if it was  predatory in nature or, if not, if it  did not fully comply with federal Real Estate Settlement Procedures Act [RESPA] requirements. If a flaw is found,  the original loan is voided and restructured (not modified). This allows the homeowner or his representative  to negotiate with the lender from a position of strength. If the loan was “bad” from the beginning, why modify a loan to the advantage of the lender? Restructuring is clearly the best option for the homeowner.

If the loan is found to be predatory or in violation of RESPA, the homeowner may also be eligible for a refund of all or part of the original closing costs.


As we have all heard, banks packaged our mortgage loans into so-called “exotic” financial instruments and sold them all over the world. It’s these mortgage-backed securities and credit default swaps which are the original cause of our Current Recession. In their bottomless greed, banks sold and resold mortgages, slicing and dicing them into parts which they cannot now put back together. It is these mortgages which are great candidates for restructuring.

If you think you might qualify for a restructuring, call or email me and for a small fee we can find out. If your loan is not eligible for restructuring, the fee will be returned.

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Mortgage Rates At 37-Year Lows!!

Finally, some good news.  Mortgage rates are now at their lowest since 1971 as the Federal Reserve continued to pour money into the morgage market in an effort to jump-start  housing sales. Freddie Mac announced that rates for 30-year, fixed conventional mortgages have dropped to 5.19%. This is the lowest rate since Freddie began its weekly mortgage survey in April 1971. Subsequently, nationwide rates fell to 5.06, the lowest since the 1960s.

All this comes as a result of the Federal Reserve buying up $600 billion of mortgage-related securities and other debt issued by Fannie Mae, Freddie Mac and other Federal Home Loan banks.

This has resulted in a surge of homeowners seeking to refinance adjustable-rate mortgages.  Refinancing, however, has become a much more difficult game than in the past few years when home owners seemed to view their homes as alternative ATM machines, refinancing sometimes two or even three times in the same year. Refinancing is now far more difficult.

First, homeowners must have equity in their homes.  Here in SoCal where prices have dropped over 35% in the past year, this means either the very conservative who did not participate in the refi craze or those who have owned their homes in good areas for a long time.  Second, the old days of no qualifying and no verification are over. Now homeowners must  qualify, providing evidence of   income via tax returns, W-2s  and bank statements. Also, even qualifying homeowners must be aware that refinancing costs money for points, title and  escrow fees as well as appraisal fees.  Yes, the fees are integrated into the new loan, but in these days of plummeting equity is that a good idea?

For those near or in foreclosure these new rates will mean little or nothing as the foreclosure will continue. However,Fannie and Freddie do plan to help distressed more homeowners via loan modifications. In fact, the plan is to up the loan mods from the 60,000 last year to 75,000 this year.  Loan modifications typically are applicable only to those who’ve missed at least three loan payments, have sufficient income to make a modified payment and still live in their homes.  Recent data have shown that, distressingly,  even those who get loan mods wind up in foreclosure a few months later.

Falling interest rates are a godsend to the economy. Just as consumers have benefited from falling gas prices, homeowners who buy now or who can refinance will find themselves with quite a windfall of extra money in their pockets. In the aggregate, this should account for billions of dollars of extra spending power and may accomplish its goal of stimulating the now-moribund housing sector.

It looks like good news for the new year. We could certainly use some.

Fannie and Freddie Holiday Halt to Foreclosures

foreclosure-house

Fannie Mae and Freddie Mac recently announced they will postpone foreclosure sales and evictions on occupied single-family residences scheduled to occur between November 26, 2008 and January  9, 2009.

During this time, the companies will streamline their mortgage modification programs, scheduled to launch December  15. Foreclosure attorneys and loan servicers will continue to contact borrowers who have defaulted on their mortgage loans owned or guaranteed by Fannie Mae or Freddie Mac, and continue to pursue workout options.
Note: this is a holiday halt only. Companies are attempting to contact homeowners and trying to arrange loan modifications for those who qualify.

The companies said they would enact a program to restructure mortgages for borrowers who are falling behind in their payments. That effort would seek to help homeowners who haven’t paid their loans for three months but whose homes had not been foreclosed upon yet. In a foreclosure, Fannie Mae or Freddie Mac seizes control of a home and, usually, tries to sell it.

This program extends aid to those who are in immediate danger of foreclosure. The companies estimate that means about 16,000 homes.

Under the mortgage modifications program unveiled last week, Fannie and Freddie will seek to modify loan terms to ensure borrowers aren’t paying more than 38 percent of their monthly pretax salary on their mortgage. The companies will do this by extending the total term of loans to up to 40 years, reducing the interest rate, and, in some cases, delaying payment on part of the loan.

Notice, though, that lenders do not want to reduce loan balances even for borrowers who are seriously upside down on their home’s value as is the case for almost anyone in California who bought or refinanced between 2003 and 2007.

Under Water? Reduce Your Loan Balance

The foreclosure rate continues to climb. Millions of Californians owe far more than their homes are now worth. What to do?

If you owe more than your home is worth, one option is to ask your lender for a loan modification.. This is similar to a refinance except the lender agrees to reduce the balance, the total amount you owe on the loan, to at or nearer its current market rate.

In the Economic Stimulus Bill passed earlier this year can be found an obscure provision: lenders may reduce loan balances to 90% of current market value. This sounds good, right? The problem here is that this program is voluntary. Many lenders, of course, hope that borrowers who are “underwater” on their mortgages will pay them anyway.

If you fall into this category, ask your lender to modify your loan. You will need to submit a brief financial statement and supporting documents, but the potential payoff is great.

Another option if you can no longer pay your mortgage due to divorce, job loss, medical issues or other financial problems, is to sell your home. By cooperating with your lender, you can sell your home for less than you owe. This is called a short sale. Again, you submit financials and supporting documents.

If you are having difficulty with either of these options, contact me  by calling 626-641-0346 or email me at drdbroker@yahoo.com,  and I will help you.