Obama Making Home Affordable Program: Many People Expecting Principal Reductions on Their Loans May Not Get Them
On March 26, 2010 the Obama Administration announced major revisions to theObama making home affordable program. One of these deals with writing down the amount that people facing foreclosure owe on their loans. As the foreclosure crisis has continued, property values have dropped in many areas of the United States. One problem that exists is many people owe far more on their loans than their homes currently are worth. In situations like this some people facing foreclosure are not motivated to try to save their homes. They feel that they will never be able to recover what they pay for their home. So they walk away and let their mortgage company foreclose. Members of congress and various consumer advocacy groups in the past had been unsuccessful in their attempts to get mortgage companies to lower the balance owed on these loans to an amount closer to the value of the home. The thinking here was that if this were done, the people would be more motivated to try to save their homes. The revision to the Making Home Affordable Program announced on March 26 requires mortgage companies to consider writing down the principal balance for certain people who have applied for loan modifications. This is supposed to be done if the balance owed on a loan is greater than 115% of the current value of the home.
Say the value of a home is $100,000. The amount currently owed is $130,000. The mortgage company is being urged to reduce this to $115,000. The mortgage company would run a New Present Value Test. As long as that indicated it was worthwhile to reduce the balance of the loan, the company is supposed to do so. The mortgage company would initially put the amount to be reduced into a separate forbearance account. As long as the person remains current on their loan payments, the mortgage company will forgive the amount reduced in 3 equal payments over 3 years. Let's look at our example above. The mortgage company would reduce the amount owed by $15,000 from $130,000 to $115,000. As long as the payments were made on time, the mortgage company would forgive $5,000 a year. The entire $15,000 would be forgiven at the end of the third year. Those people who have already received a permanent loan modification or are currently in a trial loan modification period will be considered for a principal write down like this as long as they are still current on their monthly payments. Mortgage companies probably won't be able to get to these cases until later in 2010. The Obama Administration is giving mortgage companies an incentive for doing this. They will pay them $.15 on the dollar for the amount that they reduce the loan by if the balance on the loan is from 115% to 140% of the value of the home.
If the balance of the loan is greater than 140% of the balance of the home, they will pay the mortgage company $.10 on the dollar for the amount reduced. If the balance of the loan is less than 115% of the value of the home, The Obama Administration is giving the mortgage company an added incentive. They will pay them $.21 on the dollar for the amount reduced. Going back to our example, the loan balance of $130,000 is 130% of the value of the home ($100,000). The amount that the balance is reduced is $15,000. So the mortgage company would be paid $2,250 (15,000 X $.15). If you are facing foreclosure, you may be thinking that this is great. The balance on your mortgage is far higher than what your home is worth. So your mortgage company is going to reduce it to 115% of the value.
Well there are certain problems which will arise. These were not addressed in the revisions announced on March 26. The first is that this is voluntary for the mortgage companies. What happens if some elect not to do this? The second is that there is no time limit for the mortgage companies to put this in place. Are the mortgage companies going to delay implementing this? Will we see the same type of delays that have plagued the Making Home Affordable Program from the start?The third is that the mortgage company or investor will contact those people who are eligible for this.
Do you know who the investor on your mortgage is? Not many people do. By the way, the mortgage company to whom you are sending your monthly payments is normally not the investor. How will your mortgage company or investor determine who actually qualifies for this? Will anyone monitor them to make sure this is done fairly? What if some mortgage companies do this quickly and others drag their feet?Fourth - What happens in those instances where there are two loans? It looks like the administration assumed that most people who have a first and second loan got these through the same mortgage company. So the balance on the second loan will be reduced first. If the remaining balance is still over 115%, the balance on the first loan is reduced. The guidelines indicate that a mortgage company that has to reduce the balance on a second lien to bring the total down to 115% will be paid $.06 on the dollar for the amount reduced. This payment will only be made if the person had not made a payment on that second loan in more than 6 months. Let's look at the example we have been using. The balance on both loans totals $130,000. The balance on the first mortgage is $109,000. The balance on the second is $21,000. The value of the home again is $100,000. 115% of $100,000 is $115,000. The balance on the second loan would be reduced to $6,000. The balance of $109,000 on the first loan would remain unchanged. If there was a different mortgage company for the second loan, they are being asked to forgive $15,000 of their loan. For that the government may pay them $900 ($15,000X$.06).
What fees are involved? Can I do it myself? No, there are no fees involved in a loan modification when you work directly with your bank. There is no escrow, title or appraisal required. You certainly can work directly with your lender to find a loan workout solution. President Obama is warning homeowners against paying anyone a fee for a loan workout-there are many scams that promise results but leave the homeowner without any results. You can do it yourself, just make sure you have a good understanding of the modification process-once you know what your bank needs to see to approve your application, you can prepare your paperwork properly.
So, how do I get started with the loan modification process? IMPORTANT! Before you contact your lender or a loan modification company, do your homework-learn as much as you can about the process so that you can make informed decisions. You must be able to prepare your financial statement so that it shows you fit into the federal HAMP guidelines. Use a software program designed just for homeowners that mimics the federal program. Simply input your own income and expenses, and all the calculations are done for you. You see immediately if you need to make any adjustments to your budget.
This is not rocket science, but you do need to have a general understanding of what it takes to get your loan modification application approved. All of your time and effort will be well spent if you can save your home!
Say the value of a home is $100,000. The amount currently owed is $130,000. The mortgage company is being urged to reduce this to $115,000. The mortgage company would run a New Present Value Test. As long as that indicated it was worthwhile to reduce the balance of the loan, the company is supposed to do so. The mortgage company would initially put the amount to be reduced into a separate forbearance account. As long as the person remains current on their loan payments, the mortgage company will forgive the amount reduced in 3 equal payments over 3 years. Let's look at our example above. The mortgage company would reduce the amount owed by $15,000 from $130,000 to $115,000. As long as the payments were made on time, the mortgage company would forgive $5,000 a year. The entire $15,000 would be forgiven at the end of the third year. Those people who have already received a permanent loan modification or are currently in a trial loan modification period will be considered for a principal write down like this as long as they are still current on their monthly payments. Mortgage companies probably won't be able to get to these cases until later in 2010. The Obama Administration is giving mortgage companies an incentive for doing this. They will pay them $.15 on the dollar for the amount that they reduce the loan by if the balance on the loan is from 115% to 140% of the value of the home.
If the balance of the loan is greater than 140% of the balance of the home, they will pay the mortgage company $.10 on the dollar for the amount reduced. If the balance of the loan is less than 115% of the value of the home, The Obama Administration is giving the mortgage company an added incentive. They will pay them $.21 on the dollar for the amount reduced. Going back to our example, the loan balance of $130,000 is 130% of the value of the home ($100,000). The amount that the balance is reduced is $15,000. So the mortgage company would be paid $2,250 (15,000 X $.15). If you are facing foreclosure, you may be thinking that this is great. The balance on your mortgage is far higher than what your home is worth. So your mortgage company is going to reduce it to 115% of the value.
Well there are certain problems which will arise. These were not addressed in the revisions announced on March 26. The first is that this is voluntary for the mortgage companies. What happens if some elect not to do this? The second is that there is no time limit for the mortgage companies to put this in place. Are the mortgage companies going to delay implementing this? Will we see the same type of delays that have plagued the Making Home Affordable Program from the start?The third is that the mortgage company or investor will contact those people who are eligible for this.
Do you know who the investor on your mortgage is? Not many people do. By the way, the mortgage company to whom you are sending your monthly payments is normally not the investor. How will your mortgage company or investor determine who actually qualifies for this? Will anyone monitor them to make sure this is done fairly? What if some mortgage companies do this quickly and others drag their feet?Fourth - What happens in those instances where there are two loans? It looks like the administration assumed that most people who have a first and second loan got these through the same mortgage company. So the balance on the second loan will be reduced first. If the remaining balance is still over 115%, the balance on the first loan is reduced. The guidelines indicate that a mortgage company that has to reduce the balance on a second lien to bring the total down to 115% will be paid $.06 on the dollar for the amount reduced. This payment will only be made if the person had not made a payment on that second loan in more than 6 months. Let's look at the example we have been using. The balance on both loans totals $130,000. The balance on the first mortgage is $109,000. The balance on the second is $21,000. The value of the home again is $100,000. 115% of $100,000 is $115,000. The balance on the second loan would be reduced to $6,000. The balance of $109,000 on the first loan would remain unchanged. If there was a different mortgage company for the second loan, they are being asked to forgive $15,000 of their loan. For that the government may pay them $900 ($15,000X$.06).
What fees are involved? Can I do it myself? No, there are no fees involved in a loan modification when you work directly with your bank. There is no escrow, title or appraisal required. You certainly can work directly with your lender to find a loan workout solution. President Obama is warning homeowners against paying anyone a fee for a loan workout-there are many scams that promise results but leave the homeowner without any results. You can do it yourself, just make sure you have a good understanding of the modification process-once you know what your bank needs to see to approve your application, you can prepare your paperwork properly.
So, how do I get started with the loan modification process? IMPORTANT! Before you contact your lender or a loan modification company, do your homework-learn as much as you can about the process so that you can make informed decisions. You must be able to prepare your financial statement so that it shows you fit into the federal HAMP guidelines. Use a software program designed just for homeowners that mimics the federal program. Simply input your own income and expenses, and all the calculations are done for you. You see immediately if you need to make any adjustments to your budget.
This is not rocket science, but you do need to have a general understanding of what it takes to get your loan modification application approved. All of your time and effort will be well spent if you can save your home!