Wednesday
March 10, 2010

It has been nearly a year since the Treasury Dept issued their guidelines for lenders to offer struggling homeowners a loan modification under the Home Affordable Mortgage Program (HAMP). While it seemed like a real answer to the foreclosure crisis when it was first introduced, it has actually had a very minimal impact on the problem. The word out on the street is that only about 10% of all applications have been approved as a trial loan modification. And only 5% of all temporary loan applications have gone on to become permanent. 

The paperwork involved in a loan modification is similar to refinancing the loan. However, the borrower also needs to write a ‘hardship’ letter explaining how circumstances have changed since they were first approved for the loan and why the lender should agree to a loan modification.

It is almost certain that if a borrower is current with their payments, the lender will not even consider a modification. And while that may not make much sense, the banks are just so overwhelmed dealing with delinquent loans that they just cannot work with a borrower that is current.

To qualify under HAMP, the loan cannot be a jumbo loan (i.e. more than $417,000 when it was placed). It also must be owned or serviced by Fannie Mae or Freddie Mac. Should your loan not meet these criteria, you can still approach the lender about doing a custom modification. However, you are essentially asking the lender to cut off a huge hunk of principal – and the likelihood of them agreeing to that is anyone’s guess.

Most trial loan modifications reduce the interest the borrower is paying – thereby lowering the interest rate. Principal reductions are not being done. However, lenders may agree to a forbearance agreement where you simply don’t make payments for a period of time. Typically, those payments and the interest gets tacked on to the end of the loan.

Although an attorney can be helpful in explaining your rights and various options available to you, you do not need an attorney to negotiate with your lender. You can do that for yourself. And the money you spend on an attorney may be money you need to put food on the table or keep the heat and lights turned on. Utility companies tend to be far less lenient then lenders when it comes time to disconnect their services.

To review your other options in avoiding foreclosure, click here now.

“To Your Success!”
mary!

Monday
March 1, 2010

According to new research by First American CoreLogic, homeowners whose homes are worth less than 75% of the mortgage owed are most likely to just walk away from the property and let it fall into foreclosure – even if theycan afford to pay. So, if you have a mortgage of $400,000 on your home, and it is now worth $300,000 or less, you will begin to seriously consider what these days is being called “a strategic default” – even if you are fully capable of making your payments. In essence, you are choosing to preserve capital as opposed to throwing good money after bad.

The report goes on to say that more than 4 million homeowners are currently underwater on their mortgages - i.e. the mortgage amount is higher than the property is worth. With the slow recovery and housing market’s long trek back, many of these homes may never recover their value. And that number – 4 million - could  jump to over 5 million as the recovery continues to lag. 5 million homes represents 10% of the total number of homeowners in America!

And while it may seem like a good idea to simply “mail your keys back” to the lender, most states allow the lender to come after you for a deficiency judgment for the difference between what they get in a foreclosure sale vs. what you owe. That means – using our previous example  - if you owe $400,000 and, in the foreclosure process, the bank ends up with $200,000, they can come after you for the balance owed. Which means they are able to attach your other assets. And, of course, not only will they look at what the property sold for vs. what you owe, they will add in late fees, penalities, interest, attorney fees, holding costs, etc. to that final number.

Now the final amount can always be “settled” – and it seems likely that the lender will accept something less than the total amount they say you owe. (Although what makes sense and what banks actually DO seem to have little to do with each other.) No doubt, you will need to hire an attorney to represent you in the lawsuit – so you will incur legal fees as well. In the meantime, you are playing Russian Roulette with your entire asset portfolio – looking down the barrel of a loaded gun waiting for the trigger to be pulled. Not an easy scenario for most people to live with.

And, of course, your credit history will also take a beating – though once the lawsuit is settled, you can rebuild that over time. However, you could easily be looking at a 5-10 year window of negative credit consequences.  

So, the consequences of “just walking away” are pretty severe. It seems like a better solution would be to work with the bank to negotiate a short sale – assuming you’ve decided to move on and abandon the home. Otherwise, you may want to negotiate a loan modification. And while those programs haven’t met with much success (the lender isn’t likely to agree to a loan modification if you are still able to afford your payments), it’s always worth a try.

Another option you may want to look into is declaring bankruptcy. Now, if you can afford to make your payments and you still have a positive net worth after deducting the liability of your home, bankruptcy is NOT a practical solution. However, a bankruptcy does have the advantage of more quicklygetting you out from under the onus of your underwater mortgage and MAY allow you to restore your credit more quickly. Of course,  you will want to consult with an attorney that specializes in bankruptcy before taking such a drastic step.

If even 20% of the 5 million homeowners that are underwater choose to ‘strategically default’ on their homes, it will most likely change the mortgage industry as we know it. The days of buying with only a 10% downpayment - or even a 20% down payment - may disappear forever.

mary!

For more information to help you decide whether or not you should sell your home in this environment, click here now.