How To Prepare For Your Loan Modification

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At the heart of the President Barack Obama’s ambitious plan to rescue the housing market is the conviction that restructuring distressed mortgages will keep struggling borrowers in their homes and help insert a floor beneath plummeting property values. With $75 billion dedicated to reworking troubled loans, that’s a big bet—especially considering that a top banking regulator said last December that almost 53 percent of loans modified in the first quarter of 2008 went bad again within six months. But supporters argue that mortgage modifications need to be properly engineered to work—and many early ones weren’t. To that end, the Obama administration on Wednesday unveiled fresh details on its plan to restructure at-risk loans and help as many as four million home owners avoid foreclosure. Here are seven things you need to know about Obama’s loan modification program.

1. Payments, not prices: The plan centers on the belief that struggling borrowers will stay in their homes—even as values decline sharply—as long as they can make their monthly payments. Although not everyone agrees with this, billionaire investor Warren Buffett endorsed the philosophy in his most recent letter to shareholders. “Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans),” Buffett wrote. “Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay.”

2. Thirty-one percent: To that end, the administration’s plan requires participating loan servicers to reduce monthly payments to no more than 38 percent of the borrower’s gross monthly income. The government would then chip in to bring payments down further, to no more than 31 percent of the borrower’s monthly income. In lowering the payment, the servicer would first reduce the interest rate to as low as 2 percent. If that’s not enough to hit the 31 percent threshold, they would then extend the terms of the loan to up to 40 years. If that’s still not enough, the servicer would forebear loan principal at no interest. The plan does not, however, require servicers to reduce mortgage principal, which Richard Green, the director of the Lusk Center for Real Estate at USC, considers a shortcoming. “For underwater loans, if you don’t write down the balance to be less than the value of the house, people still have an incentive to default,” Green says. “Writing down the principal first instead of last—which is what [the Obama administration is] proposing—makes sense to me.”

3. Cash incentives: To encourage participation, servicers will be paid $1,000 for each modification and will get an additional $1,000 payout each year for as many as three years, as long as the borrower continues making payments. Borrowers, meanwhile, can get up to $1,000 knocked off the principal of their loan each year for as many as five years if they make their payments on time. Neither party can receive the cash incentives until the modified loan payments have been made for at least three months.

4. Financial hardship: The Obama administration is pitching its plan as an effort to help responsible homeowners ensnared in the historic housing slump and painful recession—not speculators. As such, only owner-occupied, primary residences with outstanding principal balances of up to $729,750 are eligible. Occupancy status will be verified through documents, such as the borrower’s credit report. In addition, the program is designed to target homeowners who are undergoing “serious hardships”—such as a loss of income—which have put them at risk of default. To participate, borrowers will have to sign an affidavit of financial hardship and verify their income with documents. “If we would have had such stringent verification over the last four or five years, we probably wouldn’t be in as bad a position as we are in,” says Richard Moody, the chief economist at Mission Residential. But while Moody has no objection to such verification, obtaining documents from so many homeowners could be an onerous effort. “It’s going to be a very time-consuming process,” he says. Only loans originated on or before Jan. 1, 2009, are eligible, and modified payments will remain in place for five years. Now that the administration’s plan is out, lenders are free to begin modifying loans.

5. Net present value: To determine if a particular mortgage will be modified, the servicer will perform a so-called net present value test. The test compares the expected cash flow that the loan would generate if it is modified with the expected cash flow it would generate if it isn’t. If the modified loan is expected to produce more cash flow for the mortgage holder, the servicer is to restructure the loan. Howard Glaser, a mortgage industry consultant and a U.S. Department of Housing and Urban Development official during the Clinton administration, called this component of the plan “clever,” arguing that it would work to ensure broad participation. “When you apply the formula, the loans that are modified are the ones that are in the best economic interest of the investors to modify,” Glaser says. “The federal subsidy for the payment on the modification…tips the scale toward modification as a better deal for the investor.”

6. Second liens: The Obama plan also addresses the issue of second liens—such as home equity loans or home equity lines of credit—by offering incentives to extinguish them. But key details on this component of the plan remained unclear. “Distinguishing the second lien is really important,” Green says. “[But] exactly how they are going to convince the second lien holder to do this is not clear to me at all.”

7. Will it work?Moody argues that while the plan may reduce foreclosures for primary residences, it could lead to a spike in defaults for another group of homeowners. Although he supports the administration’s efforts to focus the initiative on primary residences, Moody notes that “it could be the case that a lot of [real estate speculators] have been just hanging on waiting to see exactly what the details are of this [plan],” Moody says. Now that it’s clear the Obama plan leaves speculators out, “we could actually see a spike in foreclosures or at least mortgage defaults among this group.”

Glaser, meanwhile, worries that lenders may soon be overwhelmed by inquiries from homeowners looking to participate. “Starting today, millions of borrowers are going to start to call their lenders to see whether or not they are eligible,” he said. “And I’m not sure that the financial services industry has the capacity to handle these inquiries.”

The $700 billion bank bailout funds has tens of billions of dollars left!  There’s a huge debate in Congress over what to do with the remaining funds, but what about the intention of that bailout?

When Congress passed the bailout it was supposed to help homeowner’s stay in their homes. Why then is foreclosure on the rise? Why are people still losing their homes? Why aren’t the lenders helping homeowner’s stay in their homes? Tens of billions of dollars is there, and yet people are still being displaced. Does this make sense to anyone?

The Chairman of the House of Financial Services Committee, Rep. Barney Frank, acknowledges that we face a new wave of foreclosures. Because of layoffs even the prime mortgages are in jeopardy at this time. The Troubled Asset Relief Program (TARP) was put in place so that banks could assist homeowners. But even as the economy continues to stumble, and huge unemployment rates threaten the prospect of a speedy recovery, there has been $70 billion repaid by banks. They prefer, it seems, to function without government assistance.

It is estimated that about $259 billion remains unused, not including the $70 billion banks have repaid. That’s $329 billion dollars that should be being used to assist more homeowner’s.  And now congress debates on what to do with the funds.

Is it true?  Is the economy rebounding?  Everyday I read that the recession is ending, that home sales are increasing, that everything will be okay. But yet for every positive article I read, I find five showing contradictory information. As consumer spending continues to decline, stocks lose ground, and even our once strong dollar loses footing against the yen, it’s hard to imagine that “Happily Ever After” is back.

It appears as if the economic downturn may last longer than previously anticipated. Consumers personal finances may not recover as quickly as previously hoped. With unemployment at an all time high and income gains reported by fewer consumers than previously in the fifty year history of the Reuter/Univeristy of Michigan Surveys fo Consumers, it seems that the economic stimulus wasn’t enough.

Everyday purchases for milk, bread, cheese have continued to increase.  Everyday purchases are costing consumers more and more each day, and the increased price of gasoline costing us more just to get to work, and most of us aren’t getting raises to compensate the increases.  The focus doesn’t appear to be on spending, it seems as if we are focusing on things like our mortgages and outstanding debts, rather than a new pair of shoes.

It has become apparent that those who name it a “recession” or a “depression” simply on the basis of a few numbers, are surely not out here among the real world. It’s odd for me, as I have always been an optimist, but lately, I find myself more and more pessimistic about the outcome of this financial mess.

Not only do I deal day in and day out with my own financial woes, but I hear from so many REAL people who are fighting just to stay afloat. It’s a hard thing to do, keep your head above water, when your home is underwater. When you hear in whispered and hushed tones throughout the office about layoffs in the making or when the idea of a new school year, and having to spend the money for new clothes, paper, pens, and backpacks sends you into panic. When you fear your home may be lost.

I don’t know if we are on the path to a recession ending, or the road to financial recovery, but what I do know is that somehow we’ll all make it through this. They did in the depression, they lived to tell their stories, and came to appreciate the small things. Maybe this is a chance to truly get back to basics, and appreciate those things that we took for granted. I may not buy as many new pairs of shoes (sigh), I may not vacation in far away exotic places, but what I can do is appreciate my family, my home, my friends.

Don’t let this trying time discourage you from your hopes, your dreams, your aspirations, instead let it instill upon you the truly important things in life. Let it give us the chance to show our children how important their decisions are, and let it help them become a stronger generation. Your voice may be small when alone, but you are not alone in your fears, and together we will be heard. Our homes are important, they are our foundation, our stability, our protection and we must fight for them.

As he does every Saturday morning, President Barack Obama did his radio broadcast.  During this broadcast he dismissed the idea of a second stimuls to help the economy. While encouraging American’s to be patient, he reminded us that the initial stimulus plan was meant to help over a two year period, and not the mere four months since it was initiated.  He said we need to give it time.

Skeptics believe we are facing the worst recession since the Great Depression, but President Obama rejected talk of a second stimulus. While unemployment continues to rise, and more layoffs in the future, and foreclosure rates continuing an an exceptional speed there seems to be little our President intends to do.  More than 2 milion jobs have been lost since he signed the stimulus into law, but President Obama continues to encouraged us as a nation to be patient.

It’s painfully difficult as a nation to sit idle during this economic decline. The previous stimulus package essentially borrowed nearly $10,000 from every American household advises Rep. Eric Cantor from the House of Representatives. Cantor went on to ask, “Do you feel $10,000 richer today?”

Although the media keeps saying we are seeing a turnaround in the economy, consumers seem to be hesitant to spend.  It appears the economy may be slow to stabilize.