Loan Modification Basics, Part II

Maybe you have been struggling to make your monthly mortgage payment since early last year.  Your payment has not been current in over six months, your total debt is not going down and you feel as if your financial problems are going to swallow you whole.  You feel anxious and frightened as if your financial well-being is out of your hands and there is no way out.

If only your mortgage payment was $500 per month less, you could regain your financial footing and begin to pay down your debt.  Is this your situation?  What if you could make it but it takes the bank reducing your monthly mortgage payment by $250, $500, or $1000 per month.  You are close to making ends meet but need a little help.  If this sounds like your situation, you have a chance of being approved for a loan modification.

Part I of Loan Modification Basics identified homeowners most likely to qualify for a loan modification based on a range of financial criteria and market conditions.  Part II of the series will detail the loan modification process from start to finish. 

I interviewed a number of individuals who are currently in the process of modifying their mortgage or have already completed the process.  I also reviewed dozens of online postings of individuals who successfully modified their mortgages and a number of borrowers who attempted to modify their mortgage and were unsuccessful for a variety of reasons.  The online experiences were limited to five of the largest national mortgage lenders. 

Two of the individuals I spoke to had successfully modified their mortgage using the services of an outside company.  Another family paid a company $3,500 over four months to modify their mortgage, when they stopped making payments the company said they were unable to get the modification approved and did not return further calls.

In late 2008 and early 2009, a number of stories were circulating about loan modification companies preying on desperate homeowners.  No doubt, some of these stories are true but the number of incidents of fraud appears to be way down.  If you hire a Loan Mod company, do your homework.  Check the Better Business Bureau online, ask for legitimate references, and find out how long they have been performing the service.  A good Loan Mod company may save you time and the hassle of paper work and phone calls.  Be wary of upfront fees!

The first step in doing it yourself is to call the bank and ask them what they need to process a loan modification.  The individual who has been calling to collect your payments is not the one who handles loan modifications, but should be able to point you in the right direction.  Ask the associate to give you the direct line for the Loss Mitigation department and then ask to be transferred.  The person who answers the phone will be able to help you or transfer you to a specialist who can.

Finding someone to help you on the first call is the exception, not the rule.  Many borrowers have spent weeks and in some cases six to eight weeks of persistent calling before finally connecting with the right person.  Service levels have improved, but this is a point where your resolve may be tested.

The specialist will conduct a thorough interview and should outline the process from start to finish.  In order to be considered for the loan mod or workout you will need to provide the bank with the information they request, generally within a couple weeks.

• Letter of Explanation of Financial Hardship
• Financial Statement (Detail of Property, Income, Expenses, Assets)
• Copies of last two pay stubs
• Copies of last two or three months bank statements

The letter of explanation will need to be clear, detailed and establish the time line of your financial hardship.  Describe the events leading to your financial situation and how they affected the outcome.  Do not take this step lightly.  Expect to enclose with the paperwork a “Good Faith Payment”.  The payment amount should equal one month’s payment.

 The next step is the hardest.  The wait, the not knowing if you will be approved is the most nerve-wracking part of the process.  Many banks will continue collection activities and may proceed with foreclosure while the Loan Mod is being processed.

If your home is foreclosed on while the loan modification is being considered for approval, show up at the court date with proof that a Loan Mod is in process.  The judge will usually give you an extension between 30 to 45 days.  A representative of the bank will be there in person or more likely on the phone and will confirm your claim.  Remember, foreclosure is not the best outcome for the bank.

Patience is essential for a loan modification.  Banks have a backlog of requests and take four to six months to process the application.  A year ago, you might have to wait 9 to 12 months as some banks had not formalized the process and lacked the staff necessary to follow through on the request. 

The bank will notify the borrower in writing of its decision.  If the loan modification is approved, the new loan terms will be outlined in the agreement.  By signing the agreement, you agree to the new terms of the contract.  If you decline the agreement, the terms of the current contract are still in force. 

Banks are more accommodating to loan modifications than ever before but not every request is approved.  Most Loan Mod denials include a foreclosure date if the mortgage is not paid current.  Borrowers have other legal maneuvers such as bankruptcy to extend foreclosure dates, buying time to save the home or eliminate other debt and increasing chances of qualifying for a Loan Mod, the second time around.

Mortgage holders are looking to work with homeowners more today than at any time in the past.  If you cannot afford your payments but can afford at least 50 percent of your payment, you have nothing to lose by applying for a loan modification today.

Loan Modification Basics, Part I

Has your home lost 30 to 50% of its value in the last four years?   Did the mortgage company re-set your payments higher beyond your ability to afford the payments?  Do you want to remain in your home and not lose it in a foreclosure or short sale?  If you answered yes to the above questions, you may qualify for a Loan Modification or Loan Mod.

A Mortgage Loan Modification is a modification agreement that the bank makes with the borrower to adjust the loan payments down to an affordable amount that the borrower can afford on a monthly basis. The program keeps the borrower in the house, thus eliminating the need for foreclosure thereby reducing the amount of money the bank needs to write down on the loan. 

“Loan Modification Basics” is a two-part series that will attempt to explain what the banks are looking for when they approve a borrower for a loan modification and what steps the borrower must take to get the Loan Mod done.  The first posting in the series will explain scenarios that are likely to be approved, while part two will detail what it takes to get the modification approved.

I first heard about loan modifications in the fall of 2008.  The numbers of foreclosures were jumping dramatically.  Banks were losing hundreds of thousands of dollars as real estate values dropped and more homeowners were underwater. 

The problem was that the banks had not established a program for handling the Loan Mod requests and wound up declining or stringing along borrowers who would be ideal for a Loan Mod program.  The banking industry found itself in a public relations nightmare.  Foreclosures were rising and losses were mounting at a furious pace while the sentiment in the media was that the banks were getting exactly what they deserved.  President Obama was urging banks to work with borrowers to keep them in the house, but they appeared to be dragging their feet.

Compounding the problem was a lending culture that believed, maybe rightly so, “Why should I reward a borrower who is 90 days past due with principal balance reduction, lower interest rates and payments?”  The banking industry, realizing the quandary it was in, began working with more borrowers by the Summer of 2009.  A $200K loss in a foreclosure or short sale might be a write-down of a $100K for the right borrower in a loan modification program. 

A couple weeks ago, I noticed a surprisingly high number of tax clients who paid 30 to 40 percent less mortgage interest in 2009 when compared to 2008.  Upon questioning the clients as to the difference, all but one said that they had successfully modified their mortgage loan.  It seemed like the mortgage holders were finally coming to grips with the reality of the market.

The most common question is, “How can I find out if I might qualify for a loan modification on my home?”  The bank that holds the deed to your property will make the decision regarding your loan modification.  Fortunately, for “Credit This!” readers, I will attempt to illuminate the factors banks consider when making a Loan Modification decision.

To determine if you can qualify for a Loan Mod, you need to identify the situations and circumstances that have little or no chance of being approved for a Loan Modification.

• If you can afford your mortgage payment, and your income has remained steady or increased, you probably will not be approved for a Loan Mod.

The bank and government programs designed to assist borrowers with loan modifications will require you to provide proof of financial hardship.

Other factors to consider before applying for a loan modification:

Do you have lots of equity in your home?  Don’t waste your time or the bank’s time by applying for a Loan Mod.  If the bank can pay off your mortgage through a foreclosure sale, it will sell your house and move on.  Banks are much more likely to work with you if you owe more on the loan than what the property is worth.

• If you have little or no income, you will not be approved for a Loan Mod. 
• Lets’ say you are paying $2,500/mo on your 1^st mortgage with a loan balance of $450,000 and the bank is willing to forgive $100k in principal and lower your monthly payment to $1500/mo.  If you are making $2,000 per month on unemployment, don’t expect to be approved for a Loan Mod.  You still cannot afford a $1500 per month mortgage payment along with all the other expenses one incurs.
• Do you have a rental or investment property going bad? You probably will not find much sympathy for your plight.  Expect the bank to foreclose on your home.

The one grey area is the status of your loan payment.  A year ago, a borrower had to be 90 days past due before the mortgage holder would consider a Loan Mod.  Today, banks are entertaining modifying loans of borrowers who may be 30 or fewer days past due if the circumstances of the situation make sense.

Now that we highlighted the factors that will disqualify you for a Loan Modification, we will touch on some of the criteria necessary to be approved for a Loan Mod. 

• Most banks will look for borrowers who have all-inclusive debt ratios between 38 and 45 percent.  This means that the monthly payment on all your debt cannot exceed 45 percent of your gross income.  The federal HAMP loan modification program may qualify borrowers up to a 52% debt ratio.
• The federal government requires that your mortgage loan balance is less than $729,750 to qualify for the Making Homes Affordable Program.
• Do you have a toxic loan?  Does your loan balance increase each month due to the minimum interest payment being less than the monthly-accrued interest on the loan balance?  If so, your chances of qualifying for a Loan Modification are greater as the banks are looking to mitigate the exposure these loans add to its loan portfolio.

If you find yourself in financial hardship and are worried about staying in your home, you are, at the minimum, better informed and educated on the criteria banks consider when making a decision regarding Loan Modifications.

Part II of this blog series will provide an overview of the Loan Modification process.  If you are contemplating tackling the loan modification process on your own or are curious as to what is required to get approved, don’t miss my next blog titled “Loan Modification Basics” Part II.

High Negative Equity Supresses Auto Sales

The media has trumpeted  loud and often the real estate market is in trouble.  Home values have dropped nationwide leaving 23 percent of the homes underwater. (1)

Lesser mentioned is the number of vehicles underwater or upside-down to borrow a term used in the auto industry.  Being upside down simply means you owe more on the vehicle than it’s worth. 

 The auto industry does not have available statistics on the extent of upside-down auto loans but the numbers may be greater than the number of homes that are underwater.

How did this happen?  What impact does the prevalence of upside-down auto loans have on the number of vehicles sold today?

Twenty or so years ago a car buyer needed at least 10 percent of the purchase price of the auto as a down payment before the dealer would put the customer on the street.   If your credit was less than perfect, you were looking at a cash down payment of 20 to 30% of the purchase price.

In the 1990’s credit loosened up as more money was made available by the banks, finance companies and credit unions for financing vehicles.  The dealerships had more financing options to offer the buyers, creating an environment where a broader segment of society was able to finance a vehicle. 

After the World Trade Center Bombings, the prior guidelines governing auto financing began to disappear and an era  resembling the wild west of auto lending began to take its place.  In the 1980’s auto financing was limited to 36 or 48 months max for a new vehicle.  Five years ago 72 month financing terms was the norm to get the car buyer in the vehicle of their dreams at the lowest possible payment.  Terms of 84 months and in rare circumstances 96 months stretched financing terms  to the extreme all in the name of rolling another unit off the lot. 

Combine a loan term of 72 months with first year depreciation as much as 30 to 40 percent in some models, the borrower may not see positive equity in the vehicle until 60 payments have been made.

Zero down, Zero percent APR was the  incentive U.S. auto manufactures offered on some models to get buyers back in the dealership after 9-11.  The zero down enticement which at one time had been the exception had turned into the expectation for many buyers, putting pressure on the dealers and lenders alike, pushing the average loan to value to record heights.  The car buyer was calling the shots in many cases.

The paradigm in the auto industry had shifted but the habits of many buyers had not.  A new vehicle every two or three years is a fact of life for many drivers.  What had changed was zero down combined with extended financing terms and auto lenders adjusting loan policy to accomodate the escalating negative equity in an increasing number of trade ins.  As the economy tanked and unemployment rose, the increasing number of repossessions carried with them in a greater severity of loss.

Reality dealt a harsh blow to the auto industry in the fall of 2008 when vehicle values plummeted at the auctions just as the available credit for financing dried up.  The car buyers who had been accustomed to trading in their vehicle every two or three years was now sitting on the sideline as the auto lenders were now unwilling to absorb the negative equity some drivers had been rolling from one purchase to the next for the better part of a decade.

What impact does this have on auto sales?  The car buyers who had purchased their last two or three vehicle with little or no down payment are finding that they will have to postpone their next vehicle purchase until the loan on their current vehicle is paid off.

(1) credit.com article by John Conroy 8/13/09

Jeff Hubbell has been in the auto finance industry for the last 13 years.