Mortgage News

It is official. The government is behind the movement to encourage banks to modify the mortgages of many Americans. The President’s foreclosure prevention plan sets out standards for these modifications as well as financial incentives for the banks to move forward. So you want to have your own loan modified? Who would not want a lower payment on their mortgage! Obtaining new loan terms is not necessarily easy and it is definitely not for everyone. In this special report we will present what criteria is likely to give you the best chance at success.

First, what is a loan modification? In simple terms, a loan modification is a temporary or permanent change to the terms of your mortgage. A loan modification can result in a lower payment through an interest rate reduction, increasing the length of the loan, lowering of the principal balance or setting up payments for back-interest owed. A modification may include one or more of these elements.

Why would the bank modify my loan? The cost of modification is much less than the cost of foreclosure. If the bank forecloses, it will incur the costs of carrying the property, marketing and maintaining the home, and legal expenses. After foreclosure the bank still must sell the home at or below today’s market value which is likely to be lower.

Who is likely to get a modification? There are two criteria that are essential in order to obtain a loan modification. First, the homeowner must have a hardship. This means that the homeowner must not be able to make the present payment. Evidence of a hardship would include being behind on the payment but the homeowner can be current and in danger of falling behind. The President’s plan specifically encourages the banks to work with those who are current but can show that the payment is a burden. Note that a hardship can occur because of a loss of income or the payment rising in the case of an increased rate with an adjustable rate mortgage. The fact that the home has gone down in value by itself is not considered a hardship.

The second criteria necessary to achieve modification would be for the homeowner to be able to make a lower payment. There is a balance here in which the higher payment is not affordable, but a lower payment would be affordable. That is why the bank will verify all debts and the income of the homeowner. Each bank has its own criteria but you should ask yourself if you would adjust the payment for someone who can’t make this new payment? The goal here is to prevent foreclosures and the bank must make sure the payment has a reasonable chance of being made in the future.

The President’s plan has additional criteria for those who qualify to participate. The homeowner must have obtained his/her mortgage before Jan. 1, 2009, have a primary mortgage of less than $729,500 and live in the property.

Note that participation in the President’s plan is voluntary for banks. That is the bad news. The good news is that most banks are participating in the plan and if you don’t meet the President’s criteria, the bank still has the ability to modify your mortgage.

Your expectations must be reasonable. Do not expect the bank to cut your payments in half or lower the principal you owe by hundreds of thousands of dollars. The bank still must make a profit on the loan and the resulting loan must make economic sense.

The keys to getting the deal done. Navigating the waters of a bank modification department is very tricky. These are large organizations and they are inundated with requests because of the present housing crisis. The keys are to make sure you meet the criteria up-front, have reasonable expectations, reach the right personnel and get the paperwork in promptly. Following up is a key because of the back-log at financial institutions.

Not an expert? Consider getting help. Should you contact your bank yourself or get help? Many could obtain a divorce themselves but there is a reason to have attorneys or a mediator involved. With modifications, it makes sense to have representation. Remember, the bank has an incentive to give back as little as possible. Unless you are a professional negotiator, it is not likely you will obtain professional results. Another way of looking at it: how much would you pay to gain another $200 per month in relief? If you hire someone, make sure you select them carefully. Check out the organization, its experience level and track record. The President has warned that there are many scams out there and you should be careful. Just make sure you act because saving your home is a worthy goal...q