Home Loan Modification Programs Can Help Distressed Homeowners

by admin ~ November 24th, 2008.

Likely, you have already read or heard about the latest loan modification plans offered both privately and publically to provide mortgage relief to financially distressed homeowners cope with their mortgage payments.  But you might not have caught key details that could have an impact on you or people you know — now or in the months ahead.  One of the most ambitious mass-market home loan modification programs was outlined November 11, by the Federal Housing Finance Agency who is the overseer of Fannie Mae and Freddie Mac along with the thirty three banks and mortgage servicing companies who make up the private-sector Hope Now Alliance.

The program, scheduled to start December 15th, targets thousands of sub-prime borrowers who delinquent on their mortgage payments by at least 3months or more, while slipping dangerously close to foreclosure.  To be eligible for intervention, owners need to document that they can handle the proposed home loan payments with up to 38% of their monthly gross income.  They also need to demonstrate that they have experienced some financial hardship that forced them to become delinquent on their mortgage payments and prove that they did not intentionally go into default just to renegotiate better mortgage terms.  If they can pass through these hoops, borrowers may qualify for sharply reduced interest rates, deferrals of principal payments or extended loan terms — whatever combination it takes to get them an affordable payment with their current income.

Even though the formal kickoff isn’t until next month, participating lenders say they want to hear as early as possible from potential beneficiaries. If homeowners can’t connect directly, they can work through the Hope Now Alliance or the U.S. Department of Housing and Urban Development. Hope Now has a toll-free hotline — 888-995-4673 (HOPE) — staffed by counselors.  Also, one of the largest mortgage lenders and servicers Citicorp unveiled loan modifications designed to catch at-risk homeowners before they fall behind.

Beginning this month, Citicorp will reach out to an estimated 500,000 home loan customers who are not delinquent but who appear at risk — either because their credit files show telltale signs of financial stress or because their homes are in markets Citicorp thinks face serious economic strains and job losses in the coming year. The bank said it expects to complete up to $20 billion in “pre-emptive” mortgage modifications in the next six months using rate reductions, term extensions and reductions in principal debt balances in select situations.

While the two new loan modification programs target starkly different segments of homeowners — the walking wounded and those heading for the line of fire — both make use of a streamlined, formula-based systematic approach for mass modifications advocated by FDIC Chairwoman Sheila Bair.  Though most mortgage-industry executives and economists say today’s foreclosure crisis is so serious that only wholesale remedial approaches can prevent home losses from piling up, not everyone agrees with the new programs or the loan-modification options they throw to homeowners.

For example, some experts are critical of the government’s requirement for three months of delinquency, arguing that it could have corrosive effects on borrowers who are straining to keep up with payments, but still making them on time.  Rob Chrisman, of Residential Pacific Mortgage in Walnut Creek, Calif., says he talked with a loan agent who commented, “All I have to do is stop making mortgage payments and I can get a 3% rate?  Sweet! Who needs a mortgage broker?” 

Other critics argue that mass-market modifications are bound to produce high rates of recidivism — essentially waves of loan modifications or foreclosures in the coming years as homeowners with hastily modified mortgage loans find that they cannot afford even those significantly reduced interest rates and better loan terms. That simply pushes the problem down the road, rather than solving it.  Bottom line for borrowers: Definitely pursue a loan modification if you qualify and need a more affordable mortgage loan to avoid foreclosure. But talk with your servicer to make sure that the revised terms you’re signing up for are realistic for your long-range economic situation, and not likely to be just a temporary patch.

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