Many lenders have been rejecting the efforts of their borrowers to negotiate a “loan modification” or “loan workout”. A loan modification is an attempt on the part of the borrower to rework their current loan with the lending institution in an effort to avoid foreclosure.
The issues facing today’s troubled homeowners are varied.
• Many borrowers are upside down on their mortgages —meaning that they owe more than their house is worth.
• Others are locked into mortgage payments that they can no longer afford due to loss of employment.
• Still others cannot afford their house payments because they have adjustable rate mortgages that have risen too high for their budgets.
Regardless of the reason, a large number of these troubled homeowners have approached their lenders and asked for a possible loan modification of their home mortgage.
• Some borrowers ask for a reduced loan amount that more closely reflects the value of the home.
• Some ask for a reduced interest rate that will bring the payment down to an affordable amount.
• And still others ask for reductions of both loan amount and interest rate—gutsy!
Until lately, most of these efforts have been rejected by the lenders. In other words, the lenders opted to foreclose. Now that there are a flood of foreclosures in the market, lenders are being overwhelmed—and humbled. More and more, the attempts of honest people to re-work their mortgages are actually working. Borrowers who tried to negotiate with their lenders and were rejected even as recently as 6 months ago, may now find that the lender is a bit more open—especially if the borrower has a high sub-prime or adjustable rate mortgage.
Before approaching the lender to attempt a loan workout (or loan modification), you should familiarize yourself with the “FHA – Hope for Homeowners Program” which was activated on October 1, 2008. It is hoped that the program will save over 400,000 homeowners from the tragedy of foreclosure. Even if you are currently in the process of foreclosure, you may qualify for the program. This new FHA program will also be available to those who have high interest, sub-prime mortgages and those who are facing a possible foreclosure.
Here’s how a loan workout (or loan modification) differs from the FHA program:
Loan Modification:1. You can have your current loan restructured with new terms such as a lower fixed interest rate and/or a lower loan amount.
2. A Loan modification is not free. Just as there were costs involved in creating the original loan, there will be costs involved in re-structuring it. Just as many borrowers tacked the closing costs onto the original loan, the re-structuring costs usually can be added to the new loan amount. So be prepared to have a bigger loan than you might think.
3. The loss mitigation department of your lending institution will process the changes to your loan. It is their call as to whether or not they will lower your loan amount. Lowering your loan amount is important if you owe more than your house is worth. But, even if they do lower the amount, it may not be enough to really help you. What good does it do to get a reduction if you still can’t afford the payment, right? If the reduction is not significant enough to make the payment affordable, you may find yourself in financial trouble again in the future.
4. Servicing your loan is lucrative for your lender, but with so many foreclosures, many lenders have gone under and have sold the servicing rights to your loan. The new lender incurs expenses as they transfer the loan and all the documents into their system. This transfer not only takes money, it takes time as well. Homeowners are completely unaware of the “behind the scenes” activities involved in this process. But this transfer can severely bog down the loan modification process. In the meantime, the homeowner could be facing foreclosure. Therefore, loan modification has the best chance for success if it is initiated months before foreclosure proceedings begin.
5. For the most part, loan modification requests are not well documented by lenders. That’s not a bad thing for you. If you request a modification and you are rejected, wait a few months and give it another try. If the market is shaky, that makes lenders nervous, and they may be more open to your request. You will need someone who is experienced in real estate, mortgage lending and loan modifications. Hook up with a loan officer or real estate attorney you trust and let them speak to your lender’s loss mitigation department. Their services will be well worth their fees. However, these fees are not part of the costs of re-structuring, so you will be responsible for paying anyone you hire to represent you.
6. Oftentimes, a loan modification specialist working together with an attorney can speed up the process for you. The attorney can assure that your original loan documents are legally sound and can spot anything fraudulent. Again, these fees cannot be added onto the loan. Using these professionals is advised, but not mandatory, therefore these expenses are solely the responsibility of the borrower. It is like using a real estate agent when buying a home. You do not have to use one, but most people benefit greatly from their services. Using a loan mod specialists and attorneys can cost you anywhere from $1000 to $5000. Payment plans are usually available, but most require 50% of their fees up front. Fees are due even if the lender rejects your request for modification of your loan.
7. A great number of loan workout requests are accepted by the lender. Your chances of being accepted are better if you are working with people who know what they are doing.
8. Most times, the lender will not require a new appraisal. That’s good because appraisals cost money. Your representative can provide data to substantiate your home’s value. This is important info because it will determine your new loan amount.
9. When your lender starts foreclosure proceedings, there are expenses involved. Foreclosure is a legal maneuver involving legal fees, title costs, and possibly ad fees for posting your property for sale. The lender may require you to reimburse them for those expenses before they approve the modification.
10. You do not have to accept their terms and conditions for modification. If the loss mitigation department offers you a tiered-fixed loan or an adjustable rate mortgage, make sure it will work for you. Be diligent in making sure you understand what you are signing. If you have representation, have them explain everything to you. You probably got into this mess by not having a full understanding of what you were getting into. You do not want to make the same mistakes again.
FHA (Federal Housing Administration)- Hope for Homeowners Program:
1. In order to qualify for this program, you must accept a 30-year fixed rate loan. No other loan types are offered under the Hope for Homeowners Program.
2. FHA will loan up to 90% of the property’s current value. The lender may take a loss if you owe more than your property is worth.
• For example, if you owe $250,000 to your current lender, and your home is only worth $200,000, then
• FHA will loan you 90% of $200,000, which is $180,000.
• That translates to a $70,000 loss for your current lender.
3. If you have other mortgage liens on your home, those lenders stand to lose all their investment unless they purchase the primary lien. Most do not.
4. Obviously, the goal of the Hope for Homeowners Program is to help homeowners avoid losing their homes to foreclosure. This is not only good for individual homeowners, but it benefits the real estate market by preserving home values. The flood of foreclosed homes on the market has driven down the value of real estate. When home values are healthy the overall economy is positively affected as well.
5. The FHA has less stringent requirements for approval than conventional lenders. FHA exists to put families in homes. They are more lenient with their borrowers regarding income level, employment record, and credit history.
6. Qualifications for a Hope for Homeowners loan include the following:
• The home must be a principal place of residence.
• Home owners can’t own any other property.
• The existing mortgage payments must exceed 31% of the home owner’s gross monthly income.
• The home owner did not obtain the existing mortgage by falsifying loan documents.
• The home owner has not been convicted of fraud within the past 10 years.
• The home owner is struggling to meet the mortgage obligations and can no longer afford to pay on the mortgage.
NOTE: FHA will not insure the loan if the borrower fails to make the first payment.
7. Since the activation of Hope for Homeowners on October 1, no lenders have stepped forward to participate in the program. It seems, at this point, lenders are willing to take their chances on getting their money back the old-fashioned way—foreclosure. The bank will take a sure loss on the property by going the foreclosure route. At this point, lenders seem to be betting that their losses will be less by foreclosing on the property than by participating in the Hope for Homeowners Program. And it is their call to make. No lenders will be required to participate.
8. Your lender may not have your actual loan documents in house. With the high volume of requests coming in from worried home owners, loss mitigation personnel feel the pressure to make a decision quickly even without the benefit of having the documents. That may work in your favor. Be diligent in providing items requested so that you do not slow down the process.
9. Heavily populated areas like Los Angeles, Orange County, San Francisco, Seattle, Portland, Denver, Miami, etc., have a high volume of foreclosures, so homeowners in these areas will probably fair better in dealing with a loss mitigation department.
10. HERE IS THE CATCH associated with participation in the Hope for Homeowners Program!!! The home owner must agree to give some future appreciation (money) to FHA and the lenders. During the first year, if the home owner sells, FHA and the lender can collect 100% of the equity. Their right to the equity reduces on a diminishing scale and bottoms out at 50% by the fifth year after the loan closes. Understand this money refers to the dollar amount of equity in the house, not the full value of the home. This provision is fair in the sense that the lender has taken a loss, and FHA has taken a chance on you. From the homebuyers perspective, this deal may be better than the alternative, if the alternative is losing their home and ruining their credit.
11. Make sure you ask if your lender is an FHA approved lender. If so, they will probably require that your loan be recast within their FHA department. This will save some confusion. Your loan officer may try to do the loan on your behalf without determining if your current lender wants the new loan on their books, so talk to your loan officer about whether or not your lender is licensed to do FHA loans.
12. You will not be required to pay the expenses that we discussed in loan reworking like, attorney fees, loss mitigation fees, foreclosure posting fees, etc. These costs will be written off as a loss by your lender.
13. If you are a first time homebuyer, you should purchase your home before July 2009. The Foreclosure Prevention Act of 2008 gives first time home buyers up to $7500 dollars in tax credits. This program is intended to stimulate the housing market. If it works, the economy in general will get a much needed shot in the arm.