Despite the Government’s best efforts and greatest intentions the wave of foreclosures continues to increase. The borrowers that are now defaulting on their mortgages and not qualifying for loan modifications are no longer people with subprime loans and bad credit rating. The fastest growing demographic in foreclosures are prime borrowers with prime loans that have lost their jobs and cannot afford any kind of deal on their mortgage.
This is a tragedy for the millions of families that face losing their homes. However there is a flip side to the crisis in the housing market. The flip side is that the foreclosure market is doing great. More and more buyers with cash in their pockets are looking for bargains among the millions of homes that are going through a foreclosure.
Many have the idea that the only homes that are on the foreclosure market are located in crime-ridden areas and are run down shacks. This is simply not true, during economic crisis like the one we are now going through all kinds of homes can be found, from beachfront luxury homes to shacks in the ghetto.
There is another myth a serious buyer must forget about as soon as possible. You are not going to find a great property selling at pennies on the dollar. Sometimes you can find amazing deals but this is probably because there are other circumstances that reduce the value of the home besides being on the foreclosure market.
However, you can get some great deals and discounts. A typical discount is probably around 5% less than the market value, although you can sometimes pay up to 30% or 40% less.
If you are savvy enough, this could only be the beginning of your savings. If you buy the property from the lender you could ask/demand for some of the buying costs to be waivered. If you ask nicely you might even get a discount on the interest rate or a break on the down payment.
Buying a home, whether on the foreclosure market or not, is a huge investment for most of us. It is therefore worth us spending some time doing our research and due diligence before we spend tens or even hundreds of thousands of dollars.
The foreclosure ball begins to roll when a borrowers falls behind on mortgage payments. A homeowner that loves his home will try his best to keep his home, making some payments, looking for a loan modification, or any other measure he can. However, if the home still forecloses the chances are that maintenance has not been carried out for some time on the home. Include the costs of bring maintenance up-to-date in your investment research.
What this might include will depend on the property. Some just need some gentle manicuring, while others have underlying structural damage that is prohibitively expensive to fix. It is true that homes in need of some tender lover and care will come at a discount, but it is important to make sure you can afford the cost of providing it.
The sad truth is that most troubled homeowners do not qualify for a trial loan modification. Of these, only a small percentage will receive a permanent modification. Analysts estimate that over 5 million households have underwater mortgages and are struggling with their payments. This represents nearly 20% of all American households. Many of these homeowners are going to lose their houses. The question is how soon can borrowers that foreclose on their homes buy a new home. The answer depends on the type of foreclosure and the extenuating circumstances of your particular case.
Who decides how soon you can get a new home loan?
The answer is the lender and their insurer. Although there is not one central body that sets fixed rules on this issue, there are clear guidelines set by Fannie Mae. Fannie Mae is America’s largest mortgage buyer. You might not even know that Fannie owns your mortgage because “she” does this on the secondary mortgage market. Because this corporation buys such a large percentage of mortgages, lenders will often follow in line with its guidelines.
What are the guidelines?
They can be found in Fannie Mae’s website and documentation. Below I detail the current guidelines, but these can change quite regularly so I encourage you to see them as a ballpark figure and then check for yourself.
How long you must wait after a foreclosure?
The quick answer is 5 to 7 years. However if there are extenuating circumstances the waiting period can be reduced from 3 to 7 years.
What about when you carry out a Deed-in-Lieu of Foreclosure?
It is actually worse; you should expect to wait between 4 to 7 years. However, if there are extenuating circumstances this might be a good option for troubled borrowers that want to buy a new home quickly, as the waiting time is reduced from 2 to 7 years.
What about short sales?
The current waiting period is two years. However, and this is an important point, if you are current on your monthly payments you can purchase a new home immediately. This is a powerful reason to stay up-to-date with your payments if you possibly can.
What are extenuating circumstances?
This refers to the reasons (or excuses) you provide to explain why you cannot pay your mortgage. There are many extenuating circumstances but your bank is only going to accept those you can prove, with documentation, are beyond your control and fall within their list of acceptable extenuating circumstances.
Fannie May will consider death (of a close relative, or partner), illness, job transfer, serious injuries from an accident, and other mitigating factors that dramatically affect your ability to pay your loan and are outside of your control. Unfortunately not being able to afford your payments because the interest rate on your variable interest loan has increased is not considered a mitigating circumstance.
These guidelines can help you make better decisions when trying to find the best choice when foreclosing on your home. Make sure you can prove the financial hardship you are going through and try to work with your lender with an option that will give the best chances of getting a clean start as soon as possible.
Loan Modifications have taken over the financial news in the last year. This is not at all surprising, with over 11.3 million people, nearly 25 per cent of all homes, with underwater mortgages; this is an issue that has the nation’s attention.
This makes any research into the issue of loan modifications and their effect on foreclosure of great interest to borrowers, banks, and the government.
One professor whose research has received a lot of attention is Sanjiv Ranjan Das, from the University of Santa Clara in California. Last year Das attacked the underwater issue, this refers to borrowers whose mortgage balances are larger than the market value of their homes. The underwater issue is one of the big problems the United States housing market has to deal with.
Professor Sanjiv Ranjan Das had a large and interested audience to his research; one big fan was his namesake Sanjiv Das, a top executive at CitiMortgage, the fourth biggest bank in the US, lender and servicer of over seven hundred billion dollars in mortgages.
Interestingly, these two men, one a professor and the other a banker, share more than just a name. Not least among the things they have in common is an education at the Indian Institute of Management.
Now they are working together on research that seeks to explain the behavior of borrowers that are stuck with underwater homes, unemployment and mortgage payments they cannot afford.
Interestingly the partnership between the two Das, began when the professor started receiving emails meant for the CitiMortgage Das. However, the accidental emails were great for the research of Santa Clara’s professor.
According to Das’ research the perfect or optimal loan modification includes an element of forgiving some of the balance in the loan. This is not easy for bankers to accept. Reducing the balance of the loan increases the speed at which the bank must accept losses and there is the added fear that it will create a counterproductive culture among borrowers.
However research has shown that re-defaulting on mortgages is much higher among borrowers that do not receive a reduction of their mortgage balance. This is because having an underwater home, a house with negative equity, makes many homeowners feel there is no financial sense in keeping their homes. However, when a principal reduction is carried out, even if only a modest one, re-defaulting on mortgages is sharply reduced.
Nevertheless lenders still shy away from this radical loan modification method and prefer using interest rate reductions and term extensions to reduce the monthly payments of troubled homeowners.
The good news is that the research carried out is getting the attention of the right people. The more is studied about the effects of income shock, or wealth shock, on troubled borrowers the more effective loan modifications and debt management as whole will be.
This Thursday the Obama Loan Modification Plan, HAMP, will be a year old. It was on the 4th of March, 2009 that the Obama administration started the largest and most ambitious homeowner’s aid package since the 1930s. The goal was to stop the wave of foreclosures that was destroying the housing market. The Government’s reply was huge. The aim was to help four million homeowners avoid foreclosure and they were willing to spend $75 billion to do so. How are things looking as we approach HAMP’s first birthday. By December 2009 there were nearly 760,000 loans in the trial stage of the program. This three month trial stage is designed to test if the homeowner will pay his modified loan for three months before the modification is final. However, only 31,000 homeowners had actually received a permanent loan modification by the end of 2009. Of these many had seen only the slightest of changes to their monthly payments. The Obama administration realized they needed to do more, and quickly. This triggered a list of amendments and countermeasures designed to speed up the process and open the doors to more homeowners. Soon it became obvious that the issue was not the interest rates of bad loans that were hurting homeowners but the increasing rates of unemployment that was reducing the income of homeowners that could not afford to pay for their mortgage. In fact, the fastest growing demographic in the foreclosure market consisted of homeowners with prime loans that had lost their jobs. From the beginning of the program, the Treasury Department made it very clear that the program would not cater for families that no longer had an income because of losing their job. The aid was focused on families whose income had shrunk but could still afford the payments of a modified loan. Another issue was the complexity of the loan modification process. Homeowners complained that mortgage servicers were not consistent, lost important documents regularly and did not provide accurate information. Mortgage servicers on the other hand explained that homeowners often did not provide the right documentation and were less than honest when filling forms. Treasury reacted by simplifying the system and providing greater concessions to lenders and mortgage servicers. Industry leaders often made the valid point that the HAMP plan incentives did not cover the costs and it was better for them to continue charging fees from delinquent homeowners and foreclosure proceedings than approve loan modifications. The reaction was to increase the incentives and the arm twisting of lenders that would not comply with the program’s expectations. The incentives did become rather generous for both servicers and borrowers. Every loan a servicer modified came with a $1,000 upfront payment, with an extra thousand dollars every year the homeowners was current on payments. This means the Treasury will pay $1,000 every year the borrower is not delinquent, to reduce the loan balance. However the biggest subsidy was offered to reduce the actual monthly payments of mortgages. If the lender could reduce the monthly payments to 38% of the borrower’s income the government would pay for the cost of reducing the payments to 31% of the family’s income. The problem is that these measures have not been sufficient to stem the increase in foreclosures and new guidelines are being worked on to look for a solution. Unfortunately the prospects do not look good for the second year of the Obama Loan Modification Plan.
Recent projections estimate that by June, over 5 million homeowners will be heavily underwater. Let us define that a little more precisely. You are heavily underwater if the current market value of your home is only 75% of the balance on your mortgage. Between you and me, this means you are pretty screwed. The scary part is that if this projection proves true 10% of all US homeowners will be in this pickle; not the place you want an economy to be if you are trying to dig yourself out of a recession.
This is why the Obama Administration is running about like headless chickens trying to find solutions to this problem, quick, mid-term, and long term solutions; any kind of solution that will get us out of this.
It was this kind of panic that caused the government to put all their weight behind HAMP, the government’s loan modification program. Loan modifications were and always have been procedures designed to help homeowners stuck with sub-premium loans. Sub-premium loans as you all know is a kind way of talking of usury, loans with interest rates so high they give you vertigo if just to think about them. However loan modifications are not, and never have been a fix for homeowners with great loans that are unemployed and cannot afford their mortgage.
What alternative solutions are there?
One proposal is to buy time by simply banning foreclosures until other options have been looked into by the homeowner and lender. You have to love that proposal, if you cannot stop homes foreclosing by economics just make it illegal. As crazy as this measure seems it is designed to buy time and allow homeowners to find ways of keeping their home. This would take the current guideline of asking lenders to evaluate defaulting homeowners for a loan modification to the next level by making it compulsory.
The Mortgage Bankers Association says its members are already following this principle, and that foreclosure is always a last resort when all other options have been exhausted.
Another plan sponsored by the Mortgage Bankers Association is to not modify permanently the loans of troubled homeowners that have lost their jobs but simply to reduce their mortgage payments substantially for up to nine months to give homeowners a chance of looking for a new job.
As you probably guessed the Banker’s Association is requesting Treasury to pay for the program. Nevertheless, it does seem like a good idea to provide a homeowners with a break until he finds a new job than taking forever to marginally reduce the mortgage payments of an unemployed borrower.
However, many are analysts are saying that the real strategy to follow is to find a way to improve the economy. A strong job market would pull out the housing market from the fix it is in. On this theme, there were some good news last week. The number of homeowners starting to default unexpectedly dropped in the fourth quarter of 2009. However, the government also reported that home prices dropped by 1.6% in December; making it clear that the economy still has a long way to go before it gets a clean bill of health.
Few subjects have created as much debate as the issue of walking away from of your home when there does not seem to be any financial sense in staying. Walking away from your home when it is worth less than the balance on your mortgage seems like the sensible thing to do for many. Research shows that when homes drop in value by over 25% owners start to think seriously about letting their homes go.
Many ask themselves, “why not let the home go in default and rent a better place for less?
It is worth noting that we are talking about people who can afford their mortgages but simply decide to let their home go as a financial strategic calculation. The difference between truly troubled homeowners that would like to keep their homes and those that are defaulting on a mortgage to save money can be separated by a very thin line. But the evidence points to a growing number of borrowers that simply do not want to live under what many are calling “house arrest”.
Some experts are pointing out that around 17% of those that defaulted in 2008, over half a million homeowners, did so because of a strategic calculation and not due to a lack of income to pay the loan.
It does seem like we are at the turning point in society’s psyche, a kind of revolution. People are not as attached to their property. Mortgage brokers are advising many to walk way, and a lot of them are listening. Something that has become common again is for homeowners to simply mail their house keys to the lender as a way of setting off a foreclosure, what is also called jingle mail.
There is nothing new to this reaction; previous recessions and crisis were also characterized by homeowners walking away from their homes. However what is different is the scale of the number of foreclosures. Four years ago, a handful of people had negative equity on their mortgage, now there are over 4.5 million homeowners whose house is worth less than 75% of the balance of their mortgage. The Real Estate is not doing any favors to the economy and is stalling again; causing experts to estimate that by June the number will climb to 5.1 million in June. That is simply a huge figure, it will mean that 1 out of every 10 homes in the United States will be going through a foreclosure.
Still many believe that this so called jingle mail revolution is the product of the media’s imagination. Something that is talked about but not actually carried out. The figures seem to say otherwise, but it is true that people generally do not want to move. They do not enjoying moving neighborhood, or their children’s school, which is what keeps so many underwater homeowners in their homes.
The eternal question is what the government should do about the whole matter. According to one estimate it would cost around $745 billion to bail out all underwater borrowers in the US. This is a little more than what it cost to bail out the banks in 2008. Most of us think it would be silly and wrong to bail out every troubled homeowner, but if the government does nothing it could cause even more homeowners to walk away, further crippling an already fragile economy.
Unfortunately nothing is free in this world; even dying costs around $5,000 dollars, for an average funeral in the US. Applying for loan modifications can be pricey also. Sadly the procedure that could save you from foreclosing on your home and even bankruptcy is also rather expensive, which scares many homeowners off, pushing them further into debt when sometimes they qualify for a loan modification.
The collateral expenses of a loan modification are various. You have to invest large amounts of time in order to apply and get the paperwork together. If you are self employed or are too busy at work to do this in your spare time, it could cost you a lot in lost work or business.
This has made many borrowers hire the services of loan modification companies so they can take care of all the red tape and complicated paperwork. Unfortunately this has created yet another collateral expense for homeowners. These companies can be very expensive, especially for families that are already on the brink of a financial breakdown.
In order to avoid this cost it is worth investing a little time understanding the requirements for a modification and visiting a free counselor near you. Phone the HOPE hotline and ask which free counseling agency is closer to you. They will be able to help you put your paperwork together without charging you hundreds if not thousands of dollars.
Other types of expenses homeowners must think about when submitting a loan modification are hidden costs like inspection fees, and late payment fees. Banks will often require a home inspection before granting a loan modification. As annoying as it is to have to undergo a second inspection on your home it could be necessary in order to pass the NPV test.
The NPV or Net Present Value test is a requirement for any homeowner that is requesting a loan modification. The test quantifies the profitability for the bank of granting the modification. This means that the bank is only going to give you a modification if doing so is more profitable than simply foreclosing the mortgage. Although there are many factors that make up the test, a current valuation of the home is required. It could even be in your interest if there is a new inspection that shows that the current value of the home is below the value of the mortgage.
Late fees are another issue for troubled homeowners that are seeking financial help. It is possible that your bank will grant you a loan modification but charge you for inspection fees and late charges on the side. This could make your total monthly mortgage payments increase even though your modified loan has lower payments.
It is a good idea to ask your bank for a good faith estimate to the cost of the loan modification and the monthly payments that will result from the modification. Make sure they include all expenses and that they include the expenses back into the mortgage. This way your monthly payments will not consist of two mortgage payments, your modified loan and the collateral expenses.
If loan modifications are not an option and you want to avoid foreclosure or bankruptcy a short sale of your home might be a good option. The key when you are undergoing a bad financial situation is like with every emergency and try to think clearly without letting raw emotions take over. You must analyze the situation and work out what is the best option for you. Although it is a good idea to hire an experienced lawyer in real estate issues, nobody can do all the thinking for you, you have a unique understanding of your situation and more importantly you will be the one that will suffer or enjoy the consequences of your decisions.
A short sale is the sale of your home at a price lower than the purchasing price. It is an option to be considered if you do not qualify for a loan modification, due to a lack of income or when you own a home that is worth less than what you owe on the mortgage.
Obviously the key player in a short sale is the lender. The lender is, after all, the party that may have to take any losses that occur by short selling the house. However, in some short sale agreements the buyer can be made responsible for the difference between the price of the short sale and the balance of the mortgage. Needless to say that is not the ideal type of mortgage for you, the homeowner.
There are three possible outcomes a lender may agree to when negotiating a short sale. The key concept you negotiate in a short sale is what will happen with the deficiency balance or the difference between price of the short sale and the pending balance on the loan.
The first option a lender may try for is to lay the deficiency balance on the lap of the homeowner once the short sale has been carried out. Needless to say homeowners do not often profit all that much from this kind of short sale.
A second option is for the homeowner to sign a promissory note to the lender for the deficiency balance. This means that the homeowner will have to pay whatever agreed in the promissory note if the there is a deficiency balance after the short sale. However if the deficiency balance is larger than what the homeowner agreed to pay in the promissory note the lender will absorb the difference.
The third option is the one you need to aim for if you are the homeowner. In this case the lender agrees to cancel the entire deficiency balance, or difference between the short sale and the pending balance on the mortgage. As you probably guessed lenders are not waiting in line to offer this kind of deal, you will have to work hard for it.
The most important part of negotiating a short sale is to convince the lender that it is in their best interest to accept a short sale. To do this you must a) prove you cannot afford the mortgage due to a valid hardship and do not have the assets to pay for the mortgage and b) present your home as a business opportunity for the bank.
In order to do all that, you are going to have to submit a whole lot of paperwork to your lender. This will include:
A) A hardship letter that explains why you are in financial trouble and explains how you do not have the income or savings to pay for the mortgage.
B) Proof for all the claims you make in your hardship letter. This will include proof of unemployment or of your current pay if you are still working. You will also need to prove what income you have through bank statements and tax returns. The lender will no doubt ask you if you have access to pension funds, stocks or some other type of investment. You will have to provide a written statement that answers these questions and explains why they are not accessible.
C) You need to provide an up-to-date valuation on your home. This you can carry out with a broker’s appraisal and by providing analysis of closed deals or active listings of similar properties in your neighborhood.
D) Authorization to the lender to release information on you and the property.
It is a good idea to prepare this paperwork with care and hire a good real estate attorney. The good news is that if you play it well you can include the price of the lawyer in the proceedings costs covered by the lender.
If you do not qualify for a loan modification, and foreclosure seems unavoidable, there are steps you can take to make the most of a bad situation. One of these options is arranging with your lender for a Deed in Lieu of Foreclosure.
What does this mean?
It means you hand over the deed, or ownership, of your house to the lender in exchange of clearing your debt. The homeowner loses his home but is left without a debt while the lender takes immediate control of the house.
What advantages does this option have?
In certain circumstances a Deed in Lieu of Foreclosure can have significant advantages for both the lender and the buyer.
1) The lender can take immediate control over the property. A much more efficient method than foreclosure proceedings that can take years to finish.
2) The borrower foregoes his home but is left without any debt.
3) Lenders can save themselves a lot of money in court expenses, time and other complications if they avoid a typical repossession procedure.
4) Borrowers that avoid a foreclosure will remove the stain on their record and in some cases avoid bankruptcy.
What are the requirements for a Deed in Lieu of Foreclosure to be carried out?
1) The market value of the home must be less than the current balance of the mortgage.
2) There must be no third party credits secured by the home, like a second mortgage or a secured car loan.
Although it might seem counterintuitive for a homeowner to let his home, probably his largest investment, go without anything to show for it, it can be a much better alternative than a long and painful foreclosure. Borrowers don’t have to see their credit score hurt and can start again elsewhere, while lenders can cut their losses and try to make the most of a bad loan without having to continue spending money and resources.
In what circumstances should a homeowner think about handing a Deed in Lieu of Foreclosure?
Obviously, homeowners that are going through financial difficulties and cannot afford their monthly mortgage payments. However if they still have some sort of income then they may well qualify for a home modification or some other option. This path is more suited for homeowners that either cannot afford any kind of loan modification or feel that their home is too underwater, worth less than the mortgage balance, to be worth saving.
How is it done?
Both parties must agree to sign an Agreement in Lieu of Foreclosure. This document transfers ownership to the lender. In some cases the homeowner might pay a certain amount of money to reduce the loan and make sure her credit score is not affected. Once the document is signed the lender will issue a waiver to deficiency judgment, which will be used if the sale of the house is below the value of the mortgage. After this an escrow service executes the agreement; releasing both the lender and the borrower from their mortgage contract.
Negotiating a Loan Modification with your lender is not an easy task. We invariably feel we are at a disadvantage when dealing with a large corporation or wealthy investor. However, you might have more tools at your disposal than you think. This article looks into the power of forensic loan audits and how they can be used to create extra leverage for our loan modification application, or as the title states: to speak softly with a big stick.
The idea behind using a forensic mortgage loan document audit is to get lenders on your side, albeit with a little arm twisting. A forensic mortgage loan audit checks your loan documentation for any federal or state violations or errors. Evidence shows that most loan mortgages have significant violations. Once violations have been documented they can be used to take a lender to court and in some cases get the loan cancelled.
How do you carry out a forensic loan audit?
First, you need data to work with. You need all your loan documents. The process starts with a Qualified Written Request, a QWR. This is a formal request for copies of your loan documents. Your lender is required by law to produce these documents and pronto. The documents that are requested include:
- An Initial Loan Application and Final Loan Application.
- Deed of Trust
- Truth in Lending Statements
- Good Faith Estimates
- Copy of Loan Payment History
- Grant Deeds
- Title Report
- Itemization of Amount Financed
- All fees incurred, escrow account disbursements and details on how payments were calculated.
The list goes on and should be as thorough as possible. The more documents you revise the more chances you have to find a violation in procedure.
Second, an audit must be carried out on your loan. There are many mistakes and violations that can be discovered by a forensic audit. These include violations to the Truth in Lending Act (TILA), usury violations, misleading disclosures, overstated home values, predatory lending, and lack of good faith estimate compliance, to mention just a few.
How does this help? If I violation is discovered, however serious you get leverage with your lender. If for instance you are overcharged, even by a small amount, or the annual percentage rate (APR) is a fraction higher than what you were told, your lender could be in breach of the Truth in Lending Act. This will make your lender feel much more motivated to giving you a beneficial loan modification.
Carrying out a forensic loan audit is not a simple task. Unless you have experience in loan modifications and Real Estate law you are probably better off contracting the services of a lawyer. This will of course cost money, but the return on your investment could be well worth it if it helps you get the loan modification you need.
Hardship letters are like any type of tale, they must be clear, they must be simple, and must drive your argument like a B52 in a battlefield – powerfully. Unfortunately, many loan modifications get thrown in the wrong stack simply because homeowners fail to explain their situation effectively.
Step 1. KISS
Keep it simple stupid! The hackneyed cliché holds true in hardship letters also. Loss mitigation departments, those that have the fascinating job of reading about every lender and his mother´s problems are overwhelmed with loan modification applications. They don´t want your autobiography, they certainly do not want 10 pages of you crying on their corporate shoulder. A good hardship letter does not have to be more than a page long.
Step 2. Address the Hardship clearly.
The key point you need to make is why you can´t afford your current mortgage, or why you won´t be able to once your mortgage rate adjusts or some other tragedy occurs. This needs to be specific, vague musings on how difficult life is will get you nowhere. Try for a reduction in income, the death of a spouse, illness or a change in the interest rate. It needs to be something specific you can prove not some vague musings on the difficulties of life.
Step 3. Express commitment.
It is very important you make it crystal clear you WANT TO PAY FOR YOUR MORTGAGE. As you probably guessed lenders do not appreciate borrowers changing their mind on paying for a loan they were very happy to sign for when they wanted to buy their home with somebody else´s cash. The letter needs show you do not want to continue delinquent, or become delinquent, but you want to find a solution so you can keep your home and they can get paid for the loan.
Let us illustrate these three points with a sample letter that follows these three steps.
You can use this sample and apply it to your personal circumstances. Keep in mind there is no one “RIGHT WAY” of writing a hardship letter, although there are plenty of wrong ways.
Some feel that a handwritten letter is more personal and has more chances of being empathized with. However, this only works if the handwriting is clear enough to be read easily.
Date:
To: (Lender Name)
Address of lender.
Re: Loan Number. (It is always a good idea to give all the reference numbers and information you can to make things as easy as possible for the loss mitigation officer, keeps him in a good mood)
(STEP 1. Remember to keep it simple and short)
To Whom It May Concern: (Generally it is better to address a specific person, however your hardship letter will probably be read by many people so there is not great advantage in being specific in this case)
The purpose of this letter is to explain the reasons why I am behind in my mortgage payments (or will be soon due to the hardship you are about to explain). After exhausting all my resources I have only one alternative left and that is to apply for a mortgage loan modification.
The main reason I am late in my payments is (STEP 2. Here is where your hardship reason comes, keep it simple and clear, and avoid vague generalities). This has caused me to become further and further behind in my payments. I cannot refinance my home because the value of my home has dropped by xxxx (this is generally viewed as a preferable option to lenders so it is a good idea to explain why it is not possible, which with the number of underwater homes is not difficult)
I am confident that if I obtain a loan modification I will be able to afford my mortgage and pay for the modified loan. I trust you will consider working with me on resolving this situation. (STEP 3. Show you are eager to pay for your mortgage if you are granted a loan modification)
Sincerely and Respectfully,
Your signature,
Co-Borrower Signature (if applicable)
Loan modifications are often presented to us as a murky, obscure and scary financial world of shadows where normal people like you and me should not even dare to tread without the faithful advice of an expert, or preferably two, for fear of being swallowed up by an ARM, or something worse, hiding behind the bushes. Fortunately, although there is some truth in the previous depiction, we can understand the mechanics behind loan modifications and work with along with a trusted expert without playing the part of the helpless victim.
Lenders, like most predators, are simple creatures; they just use complicated jargon and scary formulas as a smoke screen. Lenders are only interested in two things: your hardship and your income, which when you really think about it, is the same thing.
This is one of the dirty secrets of loan modifications, unfortunately there are many, but this is a big one. Lenders are only interested in what you can afford to pay. If you can’t afford to pay any reasonably priced mortgage they are not interested in you as a client and will foreclose or short sale your home before you can say Jack Robinson.
Therefore, it doesn’t take a rocket scientist to realize that it is of vital importance to present yourself to your lender in the right financial light to stand a chance of success. This is tricky. You need to be able to prove there is no way you can afford the current mortgage payments while establishing without a shadow of a doubt that you are a perfect candidate to a modified loan with lower monthly payments. Get that right, and you have just increased your chances of success beyond recognition.
How do you get it right?
The key is to understand your enemy – I mean your lender. You must see through his eyes and understand how a lender calculates your income. The way lenders calculate your income when assessing your loan modification application is different to the methods used for traditional home loans. Surprisingly, this is good of thing, because guidelines are set in your favor.
The first step is to write a hardship letter deserving of a Pulitzer Prize, more on that later. Second, you must prove you do have the income to pay for your modified loan. The first step disqualifies you from your present loan, while the second is designed to qualify you for your new one.
When you calculate your income for a loan modification you can use any income, that you can prove, of course. And I mean any, it doesn’t even have to be completely legal, as long as you can prove it. For instance you can include income from a second job you get paid for… let’s call it informally, without a problem. You can include your grandparent’s SSI, or your spouse’s income, even if they aren’t on the mortgage, just as long as you can prove it.
Proof must be provided in the form of bank statements, 1099 forms or in some other documentable form. The specific guidelines change and will be detailed in your submission paperwork. All this evidence of your income is the backbone of your loan modification application, get it right! You will need it to write an effective hardship letter and to pass the NPV test, both of which you need to do to qualify for a loan modification.
This seems a rather basic question to be asking in a website dedicated to commenting on blown mortgages and how to pick up the pieces. However, it is sometimes useful to sit back and ask ourselves the basics again to reassess our understanding and check we are still on the same page.
Loan Modifications are a change to a loan contract between the lender and the homeowner. The whole purpose is to adjust the terms of the contract so that the loan is affordable for the borrower. Loan Modifications have changed in the last years. Previously they existed only in the form of an interest rate reduction for a period of time when a delinquent borrower was suffering from a specific type of hardship, as a divorce, illness or a job loss.
Now loan modifications are provided for a wider set of circumstances and usually change the terms of the mortgage permanently.
What has not changed is the raison d’être of loan modifications; to help homeowners that can afford their home but not their current mortgage. This means that the homeowner has the ability to make reasonable monthly payments on their home but their current mortgage payments are to high.
Understanding this is vital to understand why so many homeowners apply for a trial loan but will never get one.
The second key factor that makes a homeowner eligible for a loan modification is the existence of a valid situation of hardship. A borrower must make sure they can prove the hardship and that it qualifies them to apply for a loan modification.
These are examples of hardship that give you a good chance of getting approved: ARM, adjustable rate Mortgage, reset payment shock, illness of a close family member dependant on you, loss of job (as long as there is proof you will be able to meet the modified payments), reduced income, death of the borrower (that is an excellent one), death of spouse or co-borrower, military duty, medical bills, damage to your home, not being able to sell or rent the property.
However excuses like: I didn’t realize how expensive it would be, or my realtor/lawyer/wife lied to me are just not going to work.
The third factor is accurate documentation. You don’t only have to be able to afford your home and undergo a valid situation of hardship; you also need to prove it with proper documentation.
These three points are the ABC of successful loan modifications:
a) You must be able to afford the payments of a reasonable loan modification.
b) You must be experiencing some type of valid hardship.
c) You must be able to prove it.
Convincing your lender or loan servicer of the truth of those three factors is the most important part of applying for a loan modification. You must focus all your energy in making these three points loud and clear when you communicate with your lender, whether your are speaking on the phone or writing your hardship letter.
HAMP’s loan modification program seems to be finally speeding up its conversion rate from trial loan modifications to converted modifications. However, the 4 million troubled homeowners targeted by the program are not even close to receiving the help they need.
The debate continues on exactly how much responsibility the Government has towards troubled homeowners. Should they simply shoulder their responsibility, lose their home and start from scratch?
One, obviously upset, commentator had this to say about the issue:
How many people seeking home loan modifications used their home as their own personal ATM’S? How many people who are seeking loan modifications bought homes using an interest only ARM, and purchased a home they could not afford? How many people “fudged” their mortgage apps in order to qualify? I have no sympathy for them. I do feel sorry for those who were really victims of poor mortgages, and job loss. I think more people made poor personal choices and want others to bear the responsibility for their poor financial choices.(Quoted from a comment on the RGJ.com, Reno Gazette Journal online edition 31/1/2010)
This opinion is by no means unique. Many, especially those that didn’t buy a home because they felt they couldn’t afford it, feel people are being unfairly shielded from their own bad financial decisions.
However , the distress and misery the current credit crisis has created does make most of us feel the Government has some responsibility to stabilize the situation just as it did when the banks were the ones that needed bailing out.
Sadly, even those that do receive some kind of “financial help” on their mortgage are often just taken advantage of. The media is full of cases of troubled homeowners that qualify for a loan modification just to see their monthly mortgage payments are more expensive and they are deeper in debt and deeper underwater on their mortgage.
The Government has issued some new guidelines that put more pressure on servicers and lenders to reduce monthly payments by extending the loan term to 30 years and dropping the interest rate to current low levels of 2%-3% for a fixed 30 year loan. Unfortunately, servicers were often simply picking up the months the borrowers were behind on and loading them on the mortgage, without actually modifying the loans in any useful way for the homeowner.
The lessons we can learn from these situations are important although often of little value for the homeowners that are suffering the consequences of poor financial judgment and unfair lenders.
Lesson 1.) Do not spend your life savings paying a loan modification company to manage your application. If you do decide to hire such a company check their credentials and find out their history.
Lesson 2.) Never pay for any services before they have been carried out. This is not only illegal in most states it is also rather stupid. Would you pay a day worker on a farm before he started?
Lesson 3.) Contact the HAMP free counseling services before you are committed to a loan. Even if you later decide to go a different route you will at least have one opinion you can use as a benchmark. Contact a lawyer and ask him what your options are. Is there any way to fight the legality of the loan? Do you have any leverage on your bank?
Lesson 4.) Loan Modifications are not the holy grail of mortgage woes, they are not for everyone and they don’t always improve your mortgage payments all that much. Even though it will severely affect your credit score foreclosures and short sales are often a way to have a fresh start and are sometimes more practical than hanging on to a sinking mortgage. They are, obviously, not an ideal option but sometimes they are best of two evils.
The media has been rife with horror stories of scam artists preying on one of the most vulnerable sectors of our population, troubled homeowners and their families. However, many homeowners just haven’t got the message so we shall revise a few of the signs that can help us spot a loan modification scammer.
These leeches of society will ask for exorbitant fees from homeowners too worried or clueless to see they are paying a thief for something they could do for free.
It must be said beforehand that, as in so many other industries, the many pay for the sins of the few, and that most loan modification agents are just trying to make a decent living providing a service.
Scam Alert 1. Charging Upfront Fees.
It is illegal in many states to charge upfront fees, or fees for services that have not been provided yet. Even for states where it is not illegal it is certainly a clear sign you are dealing with a potential scammer. Stay well away from any company that tries to charge you with upfront fees.
Scam Alert 2. They Guarantee They Can Stop Your Mortgage From Foreclosing.
This is another red flag for loan modification companies you don’t want to touch with a seven foot pole. Nobody can guarantee a servicer will provide a loan modification and stop a mortgage from foreclosing. Not even the Government has been successful at forcing servicers do that, it is unlikely your loan modification company downtown is going to be able to.
The truth is that there are free loan modification counseling agencies that will provide you with all the information you need. We are used to paying for a good service and feel that the free option must be in some way of inferior quality than HAMP counselors. These counselors are not volunteers working out of charity; they are paid by the Government, just not by you.
Scam Alert 3. They Ask You To Stop Paying Your Lender And Start Paying Them.
It is amazing that anybody would fall for this, but we do. The companies will claim that you need to be behind in your payments in order to qualify for a certain loan modification or that they will take care of the payments or any other kind of bogus explanation. Don’t believe it. You do not need to be behind in your payments to get a loan modification you just need to have proof that you can’t afford the current payments. Work on your hardship affidavit, but whatever you do don’t stop making payments. It will only make things worse by further dropping your credit rating.
What Should You Do?
Your best option is to call your state’s HOPE hotline at 877-462-7555 and ask for your closest nonprofit housing counselor or check it out yourself here.
Loan Modification Companies will tell you that you need their help to fill in forms and that nonprofit counselors don’t have your interests in mind like they do. It can be faster and easier to use a loan modification company if you can afford it. Just be careful you don’t become another mortgage modification scam statistic.
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