For millions of homeowners, the past few months (or years) have been very confusing and frustrating as multiple government ‘fixes’ have turned out to be both inaccessible and, in many cases, downright imaginary. With estimates that one in five homes has a mortgage that is underwater, it is important to remember that there are plenty of options to pursue before you walk away from your home. From the FHA Hope Program to grand speeches by numerous politicians, we’re constantly being told that hope is on the way. But who do you talk to? When you call your lender, you get the run around, and you send documentation to get your loan modified, only to find that it sat on someone’s desk for three weeks. Will any of this change with Obama’s new plan that was announced yesterday? Here is who it helps, and what to do if you aren’t in the segment of the population that is eligible.
Who does this program help? First of all, you must be employed or receiving some type of income. If you are not receiving any income from any source, you will need to pursue a short sale or deed in lieu of foreclosure. This specific program helps people who have primary residence loans that are owned or backed by Fannie Mae and Freddie Mac up to $729,750 (although your loan servicing company could be anyone). Keep in mind that not all loans below this ceiling are Fannie or Freddie loans, and that this does not address another important issue – the piggyback, or 2nd mortgage. Of course, there is also a percentage of the population with loans higher than the threshold, but the authors of this package chose to help as many people as possible with the money allocated to staving off foreclosures, while the people who bought the multi-million dollar homes will need to pursue other courses of action.
If you do meet the initial criteria, your lender could potentially lower your rate as low as 2% in order to get you into the ideal range of 31% to 38% of your monthly income. Every scenario and rate will be unique as lenders weigh the cost of modifying the loan vs. foreclosing. The implementation of the program and the timing will vary among lenders and loan servicing companies, so you will have to be patient and will most likely start experiencing longer hold times, so just dial and put the phone on speaker and bake a cake while you are waiting.
The past year of course has seen an explosion of new loan modification and debt consolidation companies. The new industry shares some similarities with the mortgage business five years ago, when the lure of a fast buck drew plenty of good, honest people but even more people who took advantage of people to maximize commissions. You can almost imagine a scenario where the guy who made five percent commission on your loan and stuck you with a prepayment penalty on a loan that adjusted after one month is now on the other end of the phone offering to help you get your loan modified.
So, how do you find a reputable attorney and/or loan modification company to help you through the process. First, never go with the first person you talk to. There are companies that charge from $695 to $5,000 and higher to help you out, and it can be a daunting task to choose someone to help you out. You do not need to give each of the companies actual documentation, but you should be forthcoming about your exact scenario including loan amounts for both mortgages, approximate value of your home, and what your level of delinquency is. Once you have talked to three or four different companies, you should have a good feel for how they compare in terms of some of the following important criteria:
- What is the upfront fee?
- When is the next payment due, or is there a payment plan?
- What is the total fee?
- Is there an additional fee to have them handle a second mortgage concurrently?
- How long until you hear back from their initial review of your documentation?
- If the modification is not successful, how much of the fee is refundable and when?
- VERY IMPORTANT: How do they define a successful loan modification? Is the bare minimum that they guarantee enough of a savings to actually make the home affordable?
Once they complete an initial review of your documentation, they will move forward by sending your documentation to your lender. Some lenders are offering blanket proposals that are sent out en masse overnight to struggling homeowners, and they simply offer to recapitalize the past due interest, which adds the interest amount to your principal balance and actually increases your monthly payment. Basically, the lender is seeing if you will bite on that offer and start making payments again. There are definitely people out there who are doing good work for homeowners, and if you can’t get a personal referral, at least search for recommendations or warnings about the local person you are dealing with.
Moving forward, we can expect to see many new programs as Congress seeks to address the housing crisis from all angles. In particular, there is an important measure, the so-called ‘cramdown bill’ in the Senate (which was approved in a slightly different version by the House today) to give judges authority in certain bankruptcy hearings to order lenders to modify loan terms and balances on a primary residence rather than foreclosing. Additionally, we can expect to see packages that deal with the larger and more complex problem of second mortgages. Of course, it also remains to be seen how long these changes will take and on a macro scale, how much it will ultimately prevent foreclosures on a wide scale and bring relative stability to the housing market.