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Loan Modification The Case For It


Thursday, November 19th, 2009

This past February the President announced the Homeowner Affordability and Stability Plan which was intended to help up to 9 million homeowners restructure or refinance their mortgages to avoid foreclosure.  Within this Plan the Treasury Department announced a national loan modification program to help those who were in default or at “imminent risk” of defaulting by reducing monthly mortgage payments. This plan called the Homeowner Modification Program (HMP) is designed to implement a uniform modification process to provide eligible borrowers with “sustainable monthly payments”.

Why is this program needed? Well, everyone has heard a lot about foreclosures crisis but how bad is it? Let me give you a snapshot of the magnitude of the problem. In the third quarter 2009 there were 937,840 foreclosure filings recorded the worst third quarter ever. In October there were another 332,292 foreclosure filings. This data comes from RealtyTrac. At the end of the third quarter the Census Department said there were 18.8 million homes vacant in the U.S. The Center for Responsible Lending said recently that there are 6600 new foreclosure filings DAILY! At that pace there will be 2.4 million foreclosures in the country this year alone.

What is driving the foreclosure problem? As you might imagine jobs is at the head of the line which leads to mortgage delinquency the precursor to foreclosure. For the third quarter mortgage delinquency of 60 days or more was 6.25% compared to a year ago when it was 3.96%. But what else is contributing to the foreclosure crisis? Loss or lack of equity is another reason. In a recent study Zillow.com identified the percentage of homes where the loan amount exceeded the value (negative equity). The top five metro areas with the highest percentages were Phoenix (63.5%), Stockton (66.9%), Modesto (70.4%), Merced (72.2%) and Las Vegas (81.1%). There were another 7 metro areas with at least 50% of the homes upside down.

One solution to the crisis is to lower homeowner’s payments so that they can afford to stay in the home. This is where the HMP comes in. The program can reduce a typical homeowner’s monthly payment by 25-35% or more. The thinking goes if the payment is reduced to what you would pay in rent for a comparable home then most people will stay in their homes. As more people stay in their homes the fewer foreclosures there are, the less distressed sales that take place and the more home values are stabilized. Once values are stabilized then we can start to expect to see them increase over time.

What does it take to qualify for a loan modification? Borrowers are required to do a Hardship Letter and verify income. They also have to complete a Financial Information form. In the initial months of the program lenders were slow getting ramped up to handle the program but by most accounts serious progress is being made now. Nevertheless, be prepared to be frustrated by the process and paperwork but if you are successful the savings will be well worth it. Also, the loan must be held by or guaranteed by Fannie Mae or Freddie Mac (combined they account for about 70% of the mortgages in the country). To see if your loan qualifies you can go to www.makinghomeaffordabe.gov or contact your lender. When you contact your lender ask about loan modification. You can also call (888) 995-HOPE for assistance.  So how well has the program done so far? According to the most recent monthly Treasury Department report thru October 31 there have been 651,000 active Trial and Permanent Modifications extended to borrowers and 920,000 trial plans offered to borrowers. It is likely this pace will accelerate in the months ahead as lenders become more efficient in administering the program. The program is scheduled to end in 2012.



Article by Burt Carlson

The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com



Tags: adl , foreclosures , homeowner , homeowner modification program , loan modification