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There is help on the Way-Maybe

By
Mortgage and Lending with Broker Lic #01859798

Homeowner Affordability and Stability and Making Home Affordable plans are now being offered by the Federal Government. Are these plans really going to help the people they people they are set up for? Maybe.

"Buoyed by new government plans, more loans will be adjusted to fit borrower needs." -Scotsman Guide

Yes there is help on the way but only if you qualify. Loan modifications are available but beware because they will not be handed out as if they were free. Borrowers should know they will be burdened to prove they have a bonified hardship or at a minimum a newly acquired disability. Whatever hardship may become them they will have to prove it with documentation of the  particular hardship.  

I am not saying they will ask for medical records but if a borrower has become ill, medical bills, equipment, medication expenses may be subject to inspection. Borrowers documents will have to be in order when it is time to demonstrate your hardship. 

  • Income taxes
  • payroll stubs 
  • receipts for purchases- Yes they want to know you are spending your money on
  • credit card statements
  • Mortgage statements
  • unemployment payment receipts
  • utility bills
  • any official documentation pertaining to your hardship

If you have lost your job due to a layoff, any severance or unemployment will also need to be accounted for.  Ok so how is this different from previous times when looking to borrow or refinance?

WELL...you see the lender will be using a model to measure the risk of giving the borrower a modification versus forcing a foreclosure.  In other words, how much bloody money is the lender gonna lose? Chances are if it is some, they will force foreclosure.

Of course if you have a high risk loan (hybrid ARMs, option ARMs and interest-only loans) the question is can you really repay this loan? Here is one example where the lender will measure risk in terms of it may be just good business to go to foreclosure because the borrower may not be paying currently. So what is the likelihood they will pay the lender in the near future? Many critics believe once delinquent always delinquent.

 "With real estate prices falling, financial-service firms collapsing and a variety of industries laying off thousands of workers, the need for residential loan modifications continues"-"Scotsman Guide

"The disproportionate use of ARMs in higher-cost real estate markets such as California and
Florida -- already among the hardest-hit in the foreclosure crisis -- exacerbates the potential scope of the problem. Without stemming the foreclosure tide, more defaults and home-price drops are likely to follow".

"Although many of the country's largest banks and mortgage servicers -- including Fannie Mae and Freddie Mac, the former government-sponsored enterprises now under conservatorship -- have or are in the process of introducing large-scale loan-modification programs"-"Scotsman Guide".  

If you are looking to modify make sure all of your ducks are in line because lenders will be evaluating you very carefully and also calculating their risks.  Banks don't like to lose, so if variables are pointing against you, you may be in for some stormy financial times.

Types of Modifications-"Scotsman Guide"

  •  "Case-by-case analysis:With this approach, servicers generally handle delinquencies as they have in the past. Individual collectors and/or workout specialists contact borrowers, learn their financial circumstances and work to develop a solution to address the particular circumstances"
  • "Streamlined modification programs: Using these, servicers apply a set of defined criteria to substantially all -- or a large group -- of their delinquent or at-risk loans. Servicers then contact all borrowers who meet the criteria and offer them a standardized modification plan".
  • "Government-backed-refinancing and
    -modification programs: These plans provide loan-holders with incentives to refinance or modify their loans.The best-known program of this type is H.O.P.E. for Homeowners. Commencing last October, Congress' original plan called for this program to aid as many as 400,000 qualified homeowners. In the plan's first three months, however, fewer than 500 applications arrived -- resulting in only 17 loans".

"Typically, these payments result in housing debt-to-income ratios of 31 percent to 38 percent."-Scotsman Guide""

Most of these programs will require the lender to establish an affordable payment for the borrower but you can be sure there will be a variety of ways to acheive those payments. Such as forebearances on principal balance, interest rate reductions or even loan extensions.

"The U.S. Department of Housing and Urban Development (HUD) administers the program and recently adjusted the criteria to make the program more attractive to prospective lenders, loan-holders and applicants. Changes include increasing the maximum loan-to-value ratio (LTV) from 90 percent to 96.5 percent and allowing lenders to extend mortgage terms from 30 years to 40 years".

While this all sounds hunky dory and all warm and fuzzy,there is a harsh reality here. 

  • Many of the loans already modified during the 1st quarter of last year were 30 or more days late within 6 months of modification. ("the U.S. Office of the Comptroller of the Currency and the Office of Thrift Supervision published a joint report (PDF: bit.ly/ decemberreport")
  • Most loans are serviced by 3rd party investors that prohibit or severly limit modifications
  • If a modification occurs there may be stipulations requiring re-purchase of the modified loan

 

What can  we as professionals do to help our clients?

  • Rumors abound of how people are deliberately not making 1 or 2 months mortgage payment.  Thus attempting to defraud the lender into thinking they cannot afford their payments. 
  • Advise your clients against this one.  It is down right unethical and fraudulent. Your lender will do a thorough examination of borrower's documents, bank statements, savings, investments, taxes etc. Is it worth the risk?  I should say not. Just think not being able to practice your passion.
  • Brokers also can advocate for their clients in terms of looking at  that may be overlooked These include credit scores, mortgage history, overall debt-to-income ratio, net disposable income, employment stability and length of residence. Not every single borrower in default is a deadbeat.  There are exceptions to every rule and if you know your client well enough you may be able to persuade the lender to take a second look at all the variables especially if the client has a plan to recover lost wages.   also should consider the extent of borrower equity after the modification and expected property-value changes.
  • Borrowers must be informed such modifications exists.  Many borrowers, out of fear or embarrasment will not contact the lender when in default. As professional we have a duty to inform borrowers that there may be help for them.  At least we have to try.
  • Remain cognizant of Fair Housing Act Violations

 So as relief comes from our government to our troubled financial institutions, lenders, investors and lastly borrowers let's remember, that capital relief is there to help save homes and provide stability to our current economic hardship. If we misuse it or not ensure it is used responsibly we have not solved the problem but compounded it.

So we shall see if we can get it right this time. Till next time, Rain on Me.

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