The Real Deal about Loan Modifications
If you are like every other concerned homeowner, you've already spent countless hours online, wondering if you qualify for Obama's modification plan. Instead of writing about actual specifics, here are two useful links to help you make that determination on your own:
The Boston Globe has put together a simple list of key points, offering a simple Q&A of the plan >>
Meltdown 101. Will Obamas housing plan help me?
Financialstability.gov is a government sponsored site intended to provide troubled homeowners with sources for free relief. What you'll find however, is that the site will direct you back to your lender or servicer to apply. No matter what your financial situation, I would highly suggest that you obtain expert representation (whether it's paid or free) before facing a lender on your own. Typically, you have only one shot at making a lender see that you should be considered for relief. To locate a HUD approved counselor, search here.
Now that you know what the plan entails, what is the likelihood that you will be approved? What is the likelihood that ANYONE will be approved? That remains to be seen, as the plan has been less than two weeks into effect. Lots of patience will be required here because lenders will take considerable time to evaluate, approve, and implement the final workouts - months perhaps. We could be will into 2009 before we hear that anyone has truly benefited from this latest government subsidy. But in the meantime "hope springs," consumer confidence is restored, the economy recovers, and the government will have done its job. That's how hope works. Nothing actually has to happen, just "hope" that something will.
It is important to keep in mind that lender participation is voluntary, much like the Hope for Homeowners program as passed by President Bush in October of last year was voluntary. Very few people have been able to get their mortgages reduced to 90% of their homes' value, as that plan had promised. Please understand I am not trying to diminish hope for the 4 million homeowners that this modification plan targets to help, but people should not be surprised if they do not get approved - even if they truly do qualify on paper. There is a substantial government subsidy here, in which the lender has incentive to reduce a borrower's debt down to 31% of income, BUT the lender must first agree to take a substantial loss on the loan. As this plan has been designed, the lender (not the government) ultimately decides if it wants to avoid foreclosure and give the homeowner a workout they can afford. *But I am cautiously optimistic about the refinance aspect of the plan, since the government now has controlling interest in Fannie Mae & Freddie Mac. Again, more on that piece at a later time.
The innate characteristic that lenders and their investors all share in common is GREED. If a lender's own workout program is more financially feasible (than the government program) and it results in a reduced net loss to their investor(s), than a lender will choose their own workout plan 99% of the time. Let me give you a quick example:
Take for instance that you have a monthly mortgage payment of $2000/mo, which includes taxes and insurance, and you have never been late. Let's assume that you have no other credit related debt, such as credit cards, car loans, student loans, etc. On a monthly income of $3500/mo (gross before taxes), you would have a calculated debt-to-income ratio of 57% [2000/3500= .57]. 57% debt-to-income or "dti" as we would call it in mortgage is widely considered as unacceptable. If you also take into account regular living expenses, such as gas, food, and utilities, you would not be able to afford your home. Under the Obama plan, your lender would need to be willing to reduce your monthly mortgage payment down to $1330/mo (38% of $3500), before the government splits an additional $245/mo with the lender, for a net reduced mortgage payment of $1085/mo (31% of $3500). This means your lender must make the larger financial sacrifice before the government makes their contribution, and even after that, the government only pays for half of the difference.
Ethically, this makes perfect sense for the homeowner. And personally, I have no issues whatsoever in negotiating for this specific result. Without a doubt, $1085 is more affordable than $2000. But in order to bring that payment down, someone has to lose money, and in most cases it will be the lender and its investors. For this reason, there is a stipulation that a borrower must be at risk of imminent foreclosure if nothing is done. Most of the time, imminent foreclosure is tough to prove unless a homeowner is actually in foreclosure or seriously delinquent on payments. This is why many customer service representatives have difficulty explaining that they cannot help you unless you are late, because according to their definition, foreclosure is considered imminent only when the loan payments cease for 90 days. So in this particular situation - where the borrower has never been late on payments, and a servicing company must ask the investor whether it will approve a 50% reduction in monthly payments for 3 years - what is the most common response to the servicing company?
a) Approved. It's a better alternative than foreclosure and the government supports it.
b) Let's meet halfway and reduce the monthly mortgage liability down to $1600/mo.
c) Do nothing. Let's wait and see.
If you answered c), you are thinking like an investor. Lenders are more likely to wait and see if you truly cannot afford to make the payment before taking a large loss on your loan. Remember, investors are driven by a desire to make a profit. Otherwise, they would not have lent you the money to purchase the home in the first place. If there remains a possibility that you may continue to pay the mortgage regardless of what your financials show, the investor may hang on to that possibility in order to maintain profitability on your loan. Only when an investor is faced with the decision to modify or lose it all, will they be willing to agree to the terms I've outlined in the example above. With that said, I would never advise that a homeowner intentionally miss several payments in order to be considered for relief. Know that you will likely be considered, but there is a real possibility that you might not get lender assistance in the end. There are many cases I have seen, where intentionally missed payments have only resulted in foreclosure of the home.
If you answered b), you are being a bit more realistic about the situation at hand. Perhaps the investor may not agree to a 50% reduction in monthly interest income, but 20% might make financial sense in order to avoid the borrower from walking away. The picture I am trying to paint is a literal interpretation of what lenders and their investors consider, before agreeing to a modification of any sort. Know that a loan modification causes a loss of revenue. Do they really want to lose revenue? Not unless they absolutely have to. This is why GOOD workouts, or ones that result in principal balance reductions, typically only happen when foreclosure will result in a much greater loss to the investor AND when foreclosure is imminent.
If you answered a), you are amongst the few lenders, who are willing to sacrifice their investors' interests in order to help the economy as a whole. I've paid particular attention to the larger banks' reactions to the new government plan, issuing statements that they like the "spirit" of it and that it remains consistent with what they are already doing on their own. Dare that a lender say they offer full support and participation of adjusting homeowners payments down to 31% of what they make and you'll see their stock prices plummet instantly to less than $1 per share. Greed is good, so investors feel, and a) is not a greedy answer.
In conclusion, I too like the spirit of the Making Home Affordable program. In fact, I am presently knocking down lender doors to demand that they participate. Sadly, unless the government mandates lender participation, most investors would simply say thanks but no thanks. In the same breath, I am very anxious to hear of success stories related to government subsidized loan modifications. In the coming months, if you or anyone else you personally know receives real government aid, I encourage you to share your experience with me so I can model the same success in workouts for others. Likewise, if I am able to obtain Making Home Affordable workouts for my existing clients, you'll be amongst the first to hear of it. In direct loan modification attempts with lenders, I have been highly successful, so I can tell you that seeking relief is not a waste of your time. Just put yourself in the investor's shoes, and you'll be prepared for realistic results.
God bless,
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