Wednesday, May 20, 2009

Frequent Questions About Federal Loan Mod Plan

Obamas plan to rescue the troubled housing market’s philosophy is based on helping struggling homeowners stay in their homes so that plummeting property values begin to taper off, thus forming a bottom. There are many who refute this idea based on the fact that over 50% of loan mod in the first quarter of 2008 re-defaulted within six months.

The fact is, these modified loans were based on the homeowner calling into the mortgage company directly and not an Attorney acting on behalf of a homeowner. It is a fact that servicer bullied homeowner back into bad loan terms once again as the homeowners didn’t know better and couldn’t fight these large institutions. That is one reason an experienced loan modification Attorney can help homeowners get into a better negotiated plan, as they know what to negotiate and won’t be bullied by these institutions. It is just like trying to complete your taxes on your own. A CPA is better as they know the ropes and can save you more money then if you did it yourself.

Many new details were released on Wednesday about the new restructure plan; let’s see how some of the questions on many homeowners’ minds were answered.

Will I get affordable monthly payments?

In his most recent letter to shareholders, the Oracle of Omaha himself, Warren Buffett, wrote, "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. Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay." The Governments new plan seems to echo this belief and centers on making monthly payments affordable in order to keep people in their homes. Remember not all bank are signing up and supporting The Governments request! And did I mention, it is our tax money that most of these banks are using to bail us out, I believe that is called TARP – Troubled Asset Relief Program!!

What's the magic payment number?

Thirty one percent. Obamas plan requires participating loan lender to reduce payments to no more than thirty eight of the homeowners gross monthly income. The government will then put in money in order to lower payments further to no more than thirty one percent of the gross monthly income. Do keep in mind that there are additional programs that are not based on someone’s debt ratio’s and rather look at a household’s cash flow and base it on their ability to pay. Also, not all banks are participating in this program.

What about my interest rate?

The first thing the lender would do is lower 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 bank would forebear loan principal at no interest. The plan does not require lender to reduce mortgage principal, an important point to remember. It is also important to know that not all lender participate in the program and the ones that do may not go as low as 2%. As a homeowner, do not expect the 2% as it is not a for sure bet, it is only a suggestion. Most homeowners will likely see 3.75% to 5% as a final interest rate. If you are one of the lucky few that receives the 2%, then good for you!

Did someone say incentives?

There are quite a few incentives to both the homeowner and lender. mortgage company will be paid $1,000 for each modification and an additional $1,000 payout each year for up to three years, as long as the homeowner continues making payments. Homeowners can get up to $1,000 knocked off the principal of their loan each year for up to five years in reward for timely payments. Neither party can partake of these incentives until the modified loan payments have been made for at least three months on time.

Who is eligible?

The Presidents plan is an effort to help responsible homeowners —not speculators. 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. 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. Only loans originated on or before Jan. 1, 2009, are eligible.

What if I have a home equity loan?

The details on this are still unclear. While the Presidents plan does address the issue of second liens such as home equity loans by offering incentives to extinguish them, it has not spelled out how it intends to work with second lien holders specifically.

Why would my servicer take part in the new plan?

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 Governments subsidy for the payment on the modification…tips the scale toward loan mod as a better deal for the investor."