Thursday, June 4, 2009

Do I Refi or Do I Mod?

Loan Modification and Stimulus Programs are the hot buzz words for distressed homeowners. But exactly what are they and who qualifies for help?

Mortgage loan modification as a means to help folks in financial distress has always been an option --just not widely known. The basic premise is to renegotiate the terms of your existing loan contract with your mortgage holder. Generally, modifications are considered if your financial circumstances have changed, or you simply cannot afford the new adjustable rate reset. Most lenders want a hardship letter that holds water. (Not a good idea to complain that your stated income loan was a sham!)

The key word is 'negotiation'. Few of us have the understanding of win win in a delicate balancing act with that creature we fondly refer to as 'The Bank'. Those friendly folks who loaned you money to buy or refinance just a few years ago, have built a very effective and impenetrable wall built of endless automated phone systems and people who will put you on hold to appreciate just how important they are and how insignificant you are in their view. Sad but true.

Where Do You Start? The phone number on your Mortgage Statement will direct you the accounts payable department who have access to your payment history. In many cases, if your loan was sold or being serviced by say, the contract agency assigned by a defunct bank-- good luck to you! If your loan is in some state of default your case may have been escalated to the not quite so nice folks in 'loss mitigation'.

Debt or Loss Mitigators are hired guns who may never have darkened the door of a bank...they are collection agents hired by your bank to make you pay...or as we fondly refer to them, the fear police. These are the animals who will call you at work and harass you at home after dinner and send you the most anxiety producing letters on attorney's letterheads. They will stop at nothing to get your money or else frankly, they don't get paid. Many of the debt mitigation firms are paid on commission or performance bonuses. And if your bank was kind enough to hire (maybe even train?) their own staff for the task, they are likely using contractors who have a similar goal: keep you in the highest possible loan instrument so the bank makes the most money ad infinitum.

Naturally this is not the most conducive place to be if you happen to be distressed by life's other challenges, like work, family, health or income issues. The one person you need help from to save your home is in many cases, just not that motivated so see your side of the story. It's even harder to negotiate for yourself when you are feeling less than enthusiastic and strong.

Enter: The Loan Modifier! If the level of spam in your inbox offering to "Reduce your interest rate to just 2% in just 10 Days" is any indication...there are scammers seeking to take advantage of desperate home owners. We have seen the service advertised for up to $5000 making outrageous promises. Like most things there are good modifiers and bad modifiers.

So what's a home owner in distress to do? Well first of all don't wait until you are in serious trouble. Contrary to popular opinion, you DON'T have to be behind on your payments to get the ball rolling. Start by finding someone you trust for a professional opinion of your financial circumstances. Your accountant or bookkeeper can help you work up a household budget of what is really going on. This is essentially the first step in credit counseling. It requires you look at the basic facts to explore what measures may be open to you. After all, if you have insufficient income to meet your current obligations, no amount of financing in the world will take away the pain.

Will My Loan Size Be Reduced? Imagine a bank giving money bank? 95 times out of 100, your loan amount will not be reduced unless by some miracle of having fraud or bankruptcy or a serious legal issue involving possible lawsuits or court claims against your bank. A recently proposed congressional bill to allow bankruptcy judges to adjust loan amounts was soundly surprise there.

Expect Interest Rate Reduction = Lower Payments: The main tool of modification is to lower your interest rate for a period of years and/or extend the length of time of your new loan bring your monthly payment in line with what you can actually afford. We have seen up to 600 month terms. No kidding. Do you have any idea how much MORE you would pay for your home if you took 50 years to pay it off? The mind boggles.

If a 45 year old couple gets a 50 year loan they would literally have to live to 95 years to pay it off. Hmmmm. Chances are slim you will be saving for retirement with that endless ball and chain. Of course, if you are in your 20's and your upward career track will make the payment look easier as you get older and richer, you can opt to pay more down as you go. Naturally your bank will never suggest such a thing as early payoff of your loan. That would save you too much money. The Bank wants you paying your mortgage as LOOOONG as they can have you.

FREE Non Profit Counseling via HUD: You can opt for a free counseling session through the Home Preservation Foundation Foundation (originally labeled 'Hope For Homeowners'). To date the BILLIONS of dollars spent setting up Hope for Homeowners has only resulted in 51 loans being negotiated, and only one of those was deemed successful or legal, i.e., 50 of these loans failed. With all that fresh money from the Stimulus Plan, the non profit counseling agencies are booming. But are the programs working? You be the judge.

As Always: Buyer Beware: Several very 'governmental' looking websites are being taken down for passing off as government sponsored and they are actually private companies!

Here's how it works: you call the hot line and a counselor is assigned to you. That person will review your entire household budget with you on the phone: including your income, debts, monthly payments, all costs, maintenance, child care, etc, and all mortgage information about your loan. Expect an hour session. Have your documents handy. The counselor records your information and explores the big picture. They will let you know which program may work for you and they send the recommendation to the lender for either a repayment plan, modification or refinance. You will be asked to fax a lot of information - an astounding pile of tax returns, pay stubs, profit and loss, statements, bank statements, medical bills, you name it --to support your case. Everything has to be updated as you go along. Keep a journal of what you send to whom and when.

After your phone session, your counselor makes a proposal to the servicing company and the servicing company sends your request on to the investor. The decision is batted back and forth and eventually returned from the investor to the servicer, who may present the counter offer to you.

Essentially, modification is an appeal to you lender, though a channel of communication to the actual end investor. According to the counselor I spoke with, "Every investor has their own rules". If you are not behind on your loan payment normally, you only get as far as customer service who tell you you must pay or else. Once you are behind on your payments you are sent to loss mitigation where they have more power to work with you. The shame of this system is how it encourages people to default on their payments in order to be taken seriously!

There may be different workouts and modifications programs with the same loan servicing company. You could have different investors within the same bank; for example, the loan may be owned by Fannie Mae, Freddie Mac, some giant Mutual Fund or a private group in Utah or China for that matter.

The Home Preservation Foundation is essentially a consumer clearing house who refers you to a counselor. I spoke with a counselor at Springboard, one of ten non profit HUD certified counselors nationwide: 1-800-449-9392. This counselor was better informed than the person I spoke with in December, so that suggests they have hired experienced staff! She told me that whoever secured the loan may be an individual or group in another country...and that party has the power to say yes or no to her proposal. She explained that because investors want insulation from the end-borrower they have a 'servicer' like Chase or Countrywide service their loans.

After your session, you may be contacted by the lender, who may or may not know anything or be helpful. That person is a paper jockey with orders from the bank to protect their interests first. Unfortunately, no one is actually negotiating on your behalf once your counselor steps aside...and you will have no idea what is going on for perhaps months. According to the Springboard counselor, the government Modification program is only good for 5 years because they expect a recovery in the economy during which time "most people in distress would eventually be able to refinance". The Stimulus Refinance version (if you qualify for that) could be good for 30- 40 years. "There is no set time frame or method". Once your proposal goes to the lender you are on your own to either accept their offer or decline it. Then the clock starts ticking again.

What if you are already on the edge? As long as you are registered with the loan servicer in a pending review or default situation, your bank would not normally proceed with foreclosure; but again there is no set standard and this varies lender to lender. We have seen banks negotiating repayment terms from one department, while the same bank was posting foreclosure notices on the home owner's door.

Private Loan Modification: Good news in some states: for example Washington has officially formalized the Loan Modification process, due to the dedication of our State Attorney General, in concert with our Department of Financial Institutions, the governing body of mortgage banks and brokers. After investigating the modifiers and scammers, they have come down hard on the predators making false claims for big bucks. We now have a clear set of what can be done by whom (licensed brokers, loan officers or attorneys) and for how much. $1,500 is a typical broker's fee in Washington for what can be a three month negotiation process (fee and timing depend on many factors).

Modifiers employ the DFI's household budget and standard legal disclosures informing consumers of their rights. Your deposit for the first half of the process ($750) must be held in a Trust fund or Escrow account with the balance due on successful completion. If for any reason, the terms offered are not acceptable or the request is denied, the borrower will be refunded all but $300 for administration costs before submission to the lender. No closing costs or origination fees or appraisals or hidden funny business. Once prequalified and submitted to the lender your request may or may not be accepted so there are no guarantees.

A private modifier must document every contact and keep hounding your lender. Not something your average working person has the energy or knowledge to handle on their own. In spite of your legally assigning a modifier, your lender may contact you behind their back to work a deal.This is not always in your best interest so any contact from your lender should be shared ver batim with your modifier. Likewise, if you receive paperwork from your lender don't sign anything until it has been reviewed by your modifier.

You may also choose to work with your own attorney. Some legal firms offer this service as part of their bankruptcy practice. Expect legal fees in line with their other professional services. Note: Attorneys who represent Washington residents in matters involving real property in Washington must be licensed to practice law in Washington. Check with your State Attorney General if the firm you are working with is licensed!

ARE Modifications Successful? Our anecdotal evidence suggests that private loan modifications are working because your personal negotiator is not motivated by commission or the bank's interest. Your private modifier considers your real situation and will try to find something that works for you. That person is also, in our state, a licensed loan officer who is very familiar with how banks think. Now that the banks are getting PAID to modify your loan with the Stimulus funds they are motivated to make this work and are hiring staff to help clear the backlog of applications. That's right...The bank receives up to $5,000 for successfully modifying your loan and making sure you stay on track for the five year Stimulus plan.

Making Home Affordable Refinance Vs Modification: Thankfully your mortgage professional and your bank have a new choice of Stimulus Refinance programs introduced by Fannie/Freddie called "Making Home Affordable" just now hitting the streets. You must have a have a Fannie Mae or Freddie Mac loan and your lender can verify that over the phone or look up up your home online:

The good news with this program is if your home value has gone down, you can still refinance up to 105% of the current value of your home with the first mortgage. If you have a second mortgage now, it stays in place allowing you to go over 105%. The second mortgage holder has to be willing to 're-subordinate' their lien after the new first mortgage is recorded...which most will if they want you to keep paying them!

There is a hitch: MHA programs require the borrower to absolutely fall into what they term a safe range of debt to income (31-33% maximum). Very few people in financial distress will meet that target. Many folks borrowed originally at 45-50% debt to income ratios. Many may not qualify for these programs. Back to square one: what can you afford and who can help. (With rates going up you may not qualify for an improvement over your current loan!)

If you qualify for the Obama Stimulus Refinance, Pricing your loan has become something of a nightmare with the lenders offering this program. You see, these are 'conventional' loans after all, so the lenders are using the tighter conventional pricing guidelines. For folks with impaired credit due to hardship, you are often priced right out of the ballpark. Unfortunately, some of the advantages of this program are hard to justify, given recent rate increases. This program works best for folks whose loan is higher than their home value in areas hardest hit by property value declines.

The devil's in the details for sure! A long chat with your accountant or mortgage professional is a good start to explore your options.

Know that you are NOT alone: Even celebrities are having some of their homes foreclosed. Nicholas Cage just let his 8.5M mansion go for half what he paid for it in 2006.{scid=new-site-rightlink1}

Happy Stimulus! 

© 2008 susan templeton
Susan Templeton is not a loan modification advocate