Under the federal foreclosure prevention plan, borrowers granted a trial modification pay no more than 31% of their income towards their mortgage payment. If the borrower makes three timely payments on his trial modification, he becomes eligible for permanent modification. During the trial period, loan servicers verify the borrowers’ financial status and determine whether to grant a permanent modification. Now that half a million borrowers across America have been paying on their trial loan modifications for some months, what are their chances of receiving a full, permanent modification?
The bridge from trial to permanent modification is just as fraught with bureaucratic pitfalls as the process of obtaining the original trial modification. Loan servicers complain that borrowers are failing to submit the required documentation during the trial period needed to qualify the borrower for a permanent modification. Borrowers are equally accusatory, blaming loan services of losing their paperwork and moving at glacial speeds. Not surprisingly, these are the exact same complaints that were levied by both parties during the first steps of the trial modification process.
It has still yet to be seen how many borrowers will actually be able to upgrade their trial modifications to permanent status. Even if they ultimately do, it’s clear that they have a long, bumpy road ahead to get the deal done.
first tuesday take: And even if a borrower’s trial modification is converted to a permanent modification, just how helpful will be it? Most modifications simply extend the loan term or reduce the interest rate, leaving the principal balance – the real albatross around the borrower’s neck – snugly intact. As has historically been the case, most (65%) of these superficial “extend-and-pretend” modifications, trial and permanent, end with the borrower defaulting again and slipping back into troubled waters. Thus, even a “permanent” modification will likely prove temporary and ineffectual for most negative equity borrowers.
A reduction of the principal balance, a cramdown, equips the borrower with a durable loan-to-value ratio and provides the borrower an honest shot at sustained solvency, not the quick fix offered by the lesser forms of modification which actually increase negative equity.
Re: “Long-term Obama loan modifications prove elusive,” from CNNMoney.
Whatever happened to the Hope4Homeowners Home Affordable Refinance program that offered Homeowners immediate relief and eventual equity sharing when property sold or refiances?
Since September of 2008 we have met with over 1,000 people seeking loan modification. We have found that over 50% do not qualify for any program. They either have too much debt, including consumer debt, or have too much income, even though they owe up to 3 x’s the value of their home.
Of the nearly 300 active modifications, over 100 have made more than 5 trial payments now, with no permanent modification yet offered. Some made 4 trial period payments and were then turned down due to the “net present value test”, with their homes set for sale date within one week of the denial.
This system is badly broken and not getting better. Bank of America Home Loans is clearly one of the worst performers in the market, they look like the Titanic right after it hit the iceberg. That ship is going down and there are not enough life rafts. Examples of doing it right include Wachovia and Litton. Wachovia was way ahead of the curve in both short sales resolution and offering common sense work out’s for loan mods. Litton has the best trained staff in the industry and they rarely lose papers or fail to see the entire picture.
Dorothy:
In most instances, a homeowner’s workout actions have nothing but a negative impact on his credit score. The severity of the impact varies dramatically depending on the corrective remedy employed. After a short sale, a credit score can drop 120-130 points. If the troubled homeowner intentionally walks away from his mortgage despite his ability to pay, called a strategic default, his credit may suffer a 140-150 deduction. In the most extreme case, the credit score of a homeowner who applies for bankruptcy protection will take a massive pummeling of 355-365 points. Lenders really despise bankruptcies and severely punish those who seek court protection from excess debt. [for further information see our Sept. 2009 first tuesday news blog, “Mortgage workouts take a toll on credit scores.”]
I have a client who went through the loan modification with his mortgage servicer. They told him he made too much money to qualify for a loan modification after 6 months of review. He is a newly retired teacher this year his mortgage interest rate is at 9.25%. I tried to refinance him into a lower interest rate and he did not qualify do to credit score. He has lived in his home for the past 15 plus years and never has missed a payment up until his interest went from 6% to 9.25%. This mortgage servicing company is expecting him to contiue paying at the 9.25% interest rate that they say he qualifies for but doesn’t qualify for a lower interest rate. This is probalby the number 1 reason people who can make their mortgage payment stop making their mortgage payment and walk away from their homes. He has been dealing with this since last year 08/08/2008.
For some folks, in view of the horror of loan modifications, bankruptcy may be the best way out of this mess but most people don’t want this on their credit. So which is worst low credit score or bankruptcy what do you do besides pray?