The usual answer is a fat “no” after which comes a discussion of foreclosures, diving credit scores, ugly credit reports, deficiency judgments, loan denials and higher interest costs for mortgage loans and automobile financing.

And yet there’s a strange and somewhat logical theory floating around that not paying a mortgage could be a plus. The “excess liquidity theory” works like this: If you don’t pay your mortgage you’ll be foreclosed, but for a few months at least you’ll have lots more cash — money that can be used to live better and pay off other debts, such as credit cards and auto loans.

Mortgage lenders aren’t thrilled with the excess liquidity theory — and in no case should anyone expect a lower mortgage quote, a better credit score or think that foreclosure is a joy — but there may actually be some truth to the idea of better personal cashflow.

Timing

The foreclosure process has slowed to a crawl. RealtyTrac reports that nationwide it now takes an average of 400 days to process a foreclosure from initial default to the loss of a home — and better than 900 days in New York and New Jersey.

In other words, home loan borrowers might have months if not several years to live without mortgage payments before they’re tossed out on the street. During that time they’ll still want to have a car and use a credit card so those payments will be made.

New Study

Now, a new study by TransUnion finds that auto and credit card delinquencies are less likely among those who are paying all of their bills except for their mortgage.

Looking at this information, TransUnion says:

The study did not find any strong evidence supporting the widely accepted “excess liquidity theory,” which suggests consumers who stopped paying their mortgage loans during the recent recession had an increased cash flow in the short term, and therefore could repay other debts. In fact, consumers in the foreclosure process performed similarly, if not better, on certain accounts when they opened them further in the foreclosure process.

“There appears to be a pocket of opportunity among mortgage-only defaulters that is not the result of excess liquidity, but rather the unique circumstances of the recent recession,” said Steve Chaouki, group vice president in TransUnion’s financial services business unit. “This new market segment that the recession created is an important one for lenders to understand. They have the potential, today, to be stronger and more reliable customers.”

Additional evidence suggesting the “excess liquidity theory” was not in effect during the recession was witnessed when comparing consumers who were 120 days past due on their mortgages, but opened new auto loans at various times after their delinquency. The percentage of consumers delinquent on those auto loans decreased as more time passed.

A Different View

I disagree. Looking at the same chart it seems very clear that people in the midst of a mortgage default are more likely to make other payments, thus proving the excess liquidity theory. This is NOT to recommend a mortgage default, merely to consider how people behave in such circumstances.

What do you think?

Is it good not to pay your mortgage loan? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: auto, credit, credit card, credit report, credit score, default, excess liquidity theory, foreclosure, loan, mortgage, payment, skip

Imagine that a household has two wage-earners who take in $100,000 per year. Lenders allow them to finance with monthly payments equal to 31 percent of their income or $2,583 per month. If $100 per month goes to property insurance and $400 a month goes for property taxes, that leaves $2,083 per month for mortgage interest and principal payments. At 5 percent interest that’s enough to borrow $388,025.

Okay, now go back to that household income. If the household income is paid out with a check on the 15th and the 30th of each month then each check is worth $4,166 — before taxes, social security and Medicare. Subtract those costs and you’re looking at roughly $3,500 twice a month.

That sounds like a lot of money, at least until you mention auto insurance, car payments, credit card debt, student loans, state income taxes in most jurisdictions, health insurance and other costs. Suddenly the monthly mortgage bill looms large.

But what if interest and principal payments could be reduced to $1,041.50 every two weeks? Not only that, the loan will be paid off several years earlier, saving more than $63,000 in lifetime interest costs. Would you be ahead?

The Bi-Weekly Diversion

With monthly payments for principal and interest we’re paying $2,083 per month for the standard 30-year mortgage. That sum, times 12 monthly payments, equals $24,996 per year.

With the bi-weekly we shell out $1041.50 per payment. A payment every two weeks means there are 26 payments per year or a total of $27,079 annually.

The reason a bi-weekly mortgage results in a shorter loan term is not because of magic, it’s because you’re paying more to reduce the loan balance each year. The result is a shorter loan term, around 25 years rather than 30. Most of the interest savings come from not having to make mortgage payments for the last five years of the mortgage.

Bi-Weekly Marketing

We all routinely receive third-party bi-weekly mortgage offers, third-party meaning not from our lenders. Such third-party companies want to set up a bi-weekly loans for us, usually for a start-up fee and a charge with each payment. And they’re willing to do this without the need for a credit report or loan application.

So what’s the problem?

1. A mortgage is a contract between a borrower and a lender.
2. The third party bi-weekly company is not your lender.
3. Because the third-party bi-weekly company is not a lender it does not need your credit report or a loan application. It has nothing at risk, no money has been advanced to you.
4. While the third-party bi-weekly company collects your money, your lender is not obligated to accept payments every two weeks.
5. In other words, the bi-weekly company collects your money and simply makes 12 larger payments.
6. The money given to a third-party bi-weekly mortgage company is money that could have gone to reduce your mortgage or other debts.
7. If you’re paid on the 15th and 30th of the month you receive 24 paychecks a year — not 26. This means your paycheck schedule differs from a bi-weekly payment plan.

But wait, isn’t the third-party company audited? Maybe, but so what. Even if a third-party company is audited the point remains that you have to make required payments to your lender every month.

How about insurance for the third-party company? Insurance to cover what? How much coverage is available? Who is the beneficiary? How long will it take to collect? And, again, so what? Your agreement to repay the loan is with your lender and no one else.

Of course, no one mentions what happens if your third-party bi-weekly helper makes your payment late — or worse, doesn’t make the payment at all. It’s your credit that will be impacted, you who will have to quickly come up with any unpaid balance and you who will face foreclosure if you don’t have the money.

Lastly, are you ahead prepaying your mortgage or is the money better spent reducing credit card balances and other debt?

The Right Way To Get Bi-Weekly Benefits

If bi-weekly mortgage payments make sense from a math and personal finance perspective why not take advantage of the concept in a way that costs nothing extra?

First, see if your loan allows prepayments in whole or in part without penalty. Most payment forms allow you to add extra principal with each payment and that’s what you need.

Second, take your current mortgage payment — the amount you pay for principal and interest — and add 8.5 percent. Make the larger payment each month. Example: If you owe $1,000 for principal and interest add $85 for additional principal. Remember that you must also pay taxes, insurance and other required costs.

Third, check your mortgage balance each month to assure the additional payment is being properly recorded.

Notice that if you do it yourself you do not have pay any additional fees or charges. No one else is touching your money but you. No more than 12 payments are being made each year so your lender is happy.

Foreclosure

You can still default and be foreclosed if you prepay your mortgage. You must make your required payment, on time and in full, each month and without exception until the debt is completely repaid. That you have made voluntary prepayments does not change your contractual obligation with the lender.

Calculators

Good bi-weekly mortgage calculators which do not require your name or other information are provided by MortgageCalc.com and BankRate.com.

Can Bi-Weekly Loans Stop Mortgage Foreclosures? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: audit, bi-weekly, calculator, default, foreclosure, insurance, interest, late, loan, math, mortgage, payments, prepay, prepayment, principal, third-party

The problem represented by distressed properties is that they hold down the values of nearby homes. If a house down the street is selling for a third off, or if two of the last eight sales in your neighborhood were foreclosures, you can bet that buyers will not want to pay a premium price for your home — especially if other foreclosures remain on the market. Until the local supply of distressed homes is largely gone nearby housing prices are likely to be stalled, if not falling outright.

RealtyTrac said that 188,748 U.S. properties in some stage of foreclosure, default, scheduled for auction or bank-owned (REO) were sold to third parties in the third quarter. The average sales price of properties in some stage of foreclosure was $169,523, down 0.44 percent from the third quarter of 2009.

The average sales price of properties not in foreclosure was $249,721, says RealtyTrac, up 6.42 percent from the previous quarter and up 4.36 percent from the third quarter of 2009. Sales volume of non-foreclosure properties decreased 29 percent from the previous quarter and nearly 31 percent from the third quarter of 2009.

“The expiration of the homebuyer tax credit in the second quarter created a substantial dip in overall buyer demand in the third quarter,” said James J. Saccacio, chief executive officer of RealtyTrac. “Demand for foreclosures also dipped in the third quarter, but those who did purchase a short sale or REO during the quarter were able to get an average discount of more than 32 percent — the highest average foreclosure discount we’ve seen since the fourth quarter of 2005.”

“The foreclosure-processing controversy, which was brought to light at the very end of the third quarter, could chill demand even further — particularly for foreclosure properties,” Saccacio continued. “A quick but responsible resolution to that issue would be ideal to help the market continue to properly clear out foreclosure inventory and get distressed properties into the hands of qualified buyers and investors who will likely add value to those properties and the neighborhoods they are in.”

Other results from the RealtyTrac survey:

Foreclosure sales by type

A total of 113,933 bank-owned (REO) properties sold to third parties in the third quarter, down nearly 26 percent from the previous quarter and down nearly 35 percent from the third quarter of 2009. REO sales accounted for 15 percent of all sales in the third quarter, the same as the previous quarter and slightly below the 16 percent of all sales reported in the third quarter of 2009. REOs sold for an average discount of nearly 41 percent, up from an average discount of 34 percent in the previous quarter and an average discount of nearly 35 percent in the third quarter of 2009.

A total of 74,815 pre-foreclosure properties in default or scheduled for auction sold to third parties in the third quarter, down nearly 24 percent from the previous quarter and down 24 percent from the third quarter of 2009. Pre-foreclosure sales accounted for nearly 10 percent of all sales, up slightly from 9 percent in the previous quarter and 9 percent in the third quarter of 2009. Pre-foreclosure sales, which are often short sales, sold for an average discount of 19 percent, up from an average discount of nearly 13 percent in the previous quarter and an average discount of 18 percent in the third quarter of 2009.

Nevada, Arizona, California post highest percentage of foreclosure sales

Foreclosure sales accounted for nearly 54 percent of all sales in Nevada in the third quarter, the highest percentage of any state but down from nearly 56 percent of all sales in the previous quarter and 62 percent of all sales in the third quarter of 2009. Both pre-foreclosure sales and REO sales in Nevada were down from the previous quarter and from the third quarter of 2009. Nevada properties in some stage of foreclosure sold for an average discount of 19 percent in the third quarter.

Arizona foreclosure sales accounted for nearly 47 percent of all sales in the third quarter, the second highest percentage of any state despite a decrease of 27 percent from the previous quarter and a decrease of 32 percent from the third quarter of 2009. Arizona properties in some stage of foreclosure sold for an average discount of 25 percent in the third quarter.

Foreclosure sales accounted for nearly 40 percent of all sales in California in the third quarter, the third highest percentage nationwide but down from 43 percent of all sales in the previous quarter and nearly 52 percent of all sales in the third quarter of 2009. California foreclosure sales were down nearly 27 percent from the previous quarter and down 43 percent from the third quarter of 2009. California properties in some stage of foreclosure sold for an average discount of nearly 39 percent.

Other states where foreclosure sales accounted for at least one-quarter of all sales were Florida (37 percent), Massachusetts (35 percent), Michigan (32 percent), Georgia (29 percent), Oregon (27 percent), Idaho (25 percent) and Illinois (25 percent).

Ohio, Kentucky, Tennessee post highest foreclosure discounts

Ohio foreclosures sold for an average discount of nearly 45 percent in the third quarter, the biggest discount percentage of any state and up from an average discount of 42 percent in the previous quarter. Ohio pre-foreclosures sold for an average discount of nearly 21 percent, and Ohio REOs sold for an average discount of nearly 51 percent.

With foreclosures selling at an average price that was 44 percent below the average sales price of non-foreclosure properties, Kentucky posted the nation’s second highest average foreclosure discount in the third quarter. Kentucky pre-foreclosures sold for an average discount of nearly 31 percent, and Kentucky REOs sold for an average discount of nearly 51 percent.

Tennessee foreclosures sold for an average discount of 42 percent in the third quarter, the third highest average discount nationwide and up from an average discount of nearly 38 percent in the previous quarter. Tennessee pre-foreclosures sold for an average discount of 28 percent, and Tennessee REOs sold for an average discount of 43 percent.

Other states with average foreclosure discounts of more than 40 percent were Illinois, New Jersey, Michigan, Pennsylvania and Georgia.

Foreclosure discount now 32% — have home values hit bottom? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: 2009, 2010, auction, bank-owned, default, foreclosure, OurBroker.com, RealtyTrac, REO, third quarter

This is a case where the month-to-month numbers are less important than the annual comparisons. Why? In the July to August period the month of July has the major Independence Day holiday so some activity is delayed. In August there are no major holiday weekends and therefore no reductions in activity. The comparison with last August — that 5 percent drop — is thus meaningful, especially when you consider the string of foreclosures we’ve had since 2006.

While the news for August suggests modest improvement. However, a large number of potential foreclosures have been deferred because lenders can only handle so much volume. As well, some lenders are plainly delaying foreclosures to keep red ink off the books and the Making Home Affordable program is also keeping borrowers off the foreclosure rolls as they try to complete three-month trial modification periods.

“The trend lines of decreasing default notices and increasing bank repossessions converged in August, with virtually the same number of new default notices and bank repossessions for the month — a clear indication that the clogged foreclosure pipeline is being carefully managed on both ends by lenders and servicers,– said James J. Saccacio, chief executive officer of RealtyTrac. “On the front end, seriously delinquent loans are rolling into foreclosure at an unusually slow rate, while on the back end the dammed-up inventory of properties already in foreclosure is moving to REO in steady stream rather than a flood — presumably to prevent further erosion of home prices.”

The balance of the release from RealtyTrac is below

Foreclosure Activity by Type

A total of 96,469 U.S. properties received default notices (NOD, LIS) in August, a 1 percent decrease from the previous month and a 30 percent decrease from August 2009 — the seventh straight month where default notices have decreased on a year-over-year basis. Default notices peaked in April 2009, when 142,064 were reported nationwide.

Default notices increased on a monthly basis in some states, counter to the national trend. Default notices in California increased on a month-over-month basis for the third month in a row, and New York, Indiana, Ohio and Florida also registered month-over-month increases in default notices.

Foreclosure auctions (NTS, NFS) were scheduled for the first time on a total of 147,003 U.S. properties in August, a 9 percent increase from the previous month and a 2 percent increase from August 2009. The August total for scheduled auctions was the second highest monthly total in the history of the report, which goes back to April 2005, and was 7 percent below the peak of 158,105 in March 2010.

Lenders foreclosed on 95,364 U.S. properties in August, the highest monthly total in the history of the report and about 2 percent higher than the previous peak of 93,777 bank repossessions (REOs) in May 2010. August REO activity increased 3 percent from the previous month and was up 25 percent from August 2009 — the ninth straight month where REOs have increased on a year-over-year basis.

Nevada, Florida, Arizona post top state foreclosure rates in August

Nevada continued to document the nation’s highest state foreclosure rate for the 44^th straight month, with one in every 84 housing units receiving a foreclosure filing in August — 4.5 times the national average. Nevada maintained the nation’s highest state foreclosure rate despite a 25 percent year-over-year decrease in foreclosure activity in August — the 11^th straight month where Nevada foreclosure activity has decreased on a year-over-year basis.

Florida foreclosure activity decreased on a year-over-year basis for the fifth straight month in August, but the state’s foreclosure rate still ranked second highest among all states. One in every 155 Florida housing units received a foreclosure filing in August — 2.5 times the national average.

One in every 165 Arizona housing units received a foreclosure filing in August, the nation’s third highest state foreclosure rate, and one in every 194 Californiahousing units received a foreclosure filing in August, the nation’s fourth highest state foreclosure rate.

One in every 220 Idaho housing
units received a foreclosure filing in August, the nation’s fifth highest state foreclosure rate. A total of 2,915 Idaho properties received a foreclosure filing in August, an increase of nearly 9 percent from the previous month and an increase of 11 percent from August 2009. Idaho was the only state with a top 5 foreclosure rate to document a year-over-year increase in foreclosure activity.

Other states with foreclosure rates ranking among the top 10 in August were Utah, Georgia, Michigan, Illinois and Hawaii.

Five states account for more than 50 percent of national total

California alone accounted for 20 percent of the national total in August, with 69,143 properties receiving a foreclosure filing during the month — a 3 percent increase from the previous month but a 25 percent decrease from August 2009.

Florida accounted for nearly 17 percent of the national total, with 56,877 properties receiving a foreclosure filing — a 10 percent increase from the previous month but a 9 percent decrease from August 2009. Florida default notices were down 46 percent from August 2009 but increased 2 percent from the previous month, ending five straight months of month-over-month decreases in Florida default notices.

Michigan, Illinois and Arizona each accounted for about 5 percent of the national total in August, with 17,764 Michigan properties receiving foreclosure filings, 16,808 Illinois properties receiving foreclosure filings, and 16,510 Arizona properties receiving foreclosure filings.

Other states with foreclosure activity totals among the nation’s 10 highest in August were Georgia (16,366), Texas (14,290), Ohio (13,479), Nevada (13,385), and Washington (6,760).

Metro foreclosure hot spots continue downward trend

All 10 metro areas with the nation’s highest foreclosure rates in August posted year-over-year decreases in foreclosure activity for the second month in a row.

The Las Vegas-Paradise, Nev., metro area documented the highest foreclosure rate among metropolitan areas with a population of 200,000 or more, with one in every 73 housing units receiving a foreclosure filing, despite a 25 percent decrease in foreclosure activity from August 2009.

Foreclosure activity in Modesto, Calif., decreased 10 percent from August 2009, but the city still documented the nation’s second highest metro foreclosure rate, with one in every 95 housing units receiving a foreclosure filing in August. Six other California metro areas had foreclosure rates ranking among the top 10: Stockton at No. 3 (one in every 100 housing units receiving a foreclosure filing); Merced at No. 6 (one in 111); Riverside-San Bernardino-Ontario at No. 7 (one in 113); Bakersfield at No. 8 (one in 120); Vallejo-Fairfield at No. 9 (one in 124); and Sacramento-Arden-Arcade-Roseville at No. 10 (one in 125).

Two Florida metro areas registered foreclosure rates among the top 10: Cape Coral-Fort Myers, Fla., at No. 3, with one in every 104 housing units receiving a foreclosure filing; and Miami-Fort Lauderdale-Pompano Beach at No. 5, with one in every 111 housing units receiving a foreclosure filing.

August Foreclosure Levels Top 300,000 for 18th Month In A Row is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: 2009, 2010, auctions, August, default, Foreclosures, notices, RealtyTrac, repossessions

For much of human history mortgage lenders have been vehemently opposed to loan modifications — except when it’s to their advantage. Now, however, a nationwide foreclosure glut is forcing lenders to re-think the issue and for the first time do-it-yourself mortgage modifications are possible.

Not likely. Not guaranteed. But possible.

What we commonly call a “mortgage” is really a contract between a borrower and a lender. The borrower gets cash up-front and in exchange the lender gets a promise of full repayment with interest over time. Importantly, a mortgage is secured by the property — if the borrower doesn’t pay, the lender has the right to sell the property to get back its money.

The paragraph above pretty-much describes the traditional lending system. A local lender — say a bank, savings and loan association or a credit union — made a loan to a local homeowner. The lender made sure the borrower was qualified for the loan and that the property value was sufficient to repay the debt if something went wrong. Why? The lender kept the loan for as long as it was outstanding. The lender’s profit was in the cashflow from the loan — the difference between the interest being paid each month by the borrower and the lender’s cost of funds.

In other words, mortgages were traditionally made by so-called “spread” lenders, companies that had a vested interest in getting loans right. Such lenders wanted fully-documented loans, careful property appraisals and sizeable downpayments because they were prepared to hold the loan for many years. What they didn’t want were foreclosures because foreclosures mean losses. Examples of spread lenders today include community banks, credit unions, Hudson City Bancorp and ING DIRECT USA.

Lenders Without Cash

In recent years the system has changed. Now we have lots of companies that look like “lenders” and who make loans to local borrowers. The catch is that such “lenders” either don’t have any cash to fund mortgages or they have the money but don’t want to keep the loan.

Huh? How can companies without money make loans? They sell the mortgage in an electronic arena called the secondary market. Money from the sale of the mortgage on the secondary market funds the loan.

The benefit of this system is that by selling a loan the lender now has more dollars to lend. More loans, in turn, mean more fees, charges and profits. No less important, the secondary system means that local lenders will not run out of money. If a lender has $5,00,000 and makes 10 loans for $500,000 each then it might seem as though the lender could not fund any more mortgages. However, by selling the loans in the secondary market the lender gets fresh cash and therefore can make new loans.

Now the loan — most-likely your loan — is owned by an investor, not a lender. That investor paid a given amount for your loan under the assumption that your loan would generate a certain interest rate. No less important, you probably don’t know the investor that owns your loan. Instead, your payments are likely being collected by a servicer.

Fannie & Freddie

We now know that your mortgage most probably is not owned by the company that sold you the loan. If that’s the case then who does own it?

Remember we said the loan was sold in the secondary market to an investor. Buyers on the secondary market include pension funds, insurance companies and investors worldwide. However, the two biggest buyers of local loans are Fannie Mae and Freddie Mac.

To understand the importance of Fannie Mae and Freddie Mac consider some numbers. First, it’s generally estimated that there are about 50 million homes which have been financed with a mortgage. Second, Fannie Mae and Freddie Mac own more than 30 million of those loans.

Because Fannie Mae and Freddie Mac own so many mortgages other mortgage investors — but not all — have generally adopted their standards. If you want to know how the loan system generally works it’s good to keep your eyes on Fannie Mae and Freddie Mac.

No Modifications, Not Now, Not Ever

The mortgage system generally worked well until the past few years. There surely were foreclosures in the past, but typically there were very few foreclosures and most were related to such issues as the loss of a job, the death of a spouse, medical bills and divorce.

In the last few years the situation has changed. As the federal government reported in late 2008, “delinquencies on mortgages have tripled, not just for subprime and Alt-A, but also for prime mortgages. Foreclosures have increased almost 150% from two years ago.” Figures from the foreclosure listing site, RealtyTrac.com, show that during the months of March, April and May 2009 there were more than 1,00,000 foreclosure filings nationwide –more filings than in all of 2005.

Despite new and higher foreclosure levels, investors — the folks who own loans — have generally refused to modify mortgages. Their reasoning goes like this:

First, a contract is a contract. You got the money we promised and you should pay the money you promised.

Second, if loan terms are modified we’ll get a lower rate of return.

Third, if we have an asset with a lower rate of return it’s worth less and we will have made a bad investment.

In fact, investors have a pretty good argument except for one looming problem: Foreclosure rates are high and climbing — and the loss from a foreclosure according to a Congressional report is typically $40,000 to $80,000 per property. Given the lousy choice of foreclosure or the less-lousy choice of a loan modification, investors are beginning to consider modifications.

Workouts

When lenders talk about loan workouts what they typically mean are two options:

• Modifications. A situation where the debt is restructured. For example, the loan term might be increased from 30 years to 40 years, thus reducing the monthly payment.
• Payment Plans. Loans where there’s a change in contract terms. For instance, the interest rate is reduced 1 percent for the next 12 months or penalties and fees are forgiven.

Notice that with workouts there’s one option lenders typically do not offer: A principal reduction. Notice also that in some cases monthly payments can actually rise with new mortgage terms.

Claim Advances

If you have mortgage insurance (MI), if you’re facing foreclosure and if you’re having a tough time that’s temporary then you may be able to get help from your mortgage insurance company with a claim advance.

If the property is foreclosed then the mortgage insurance company can owe big money to the lender. Instead, if your situation is short term, the mortgage insurance company may be willing to lend you money to bring the mortgage current, typically with little interest and very soft terms. Ask your lender and your mortgage insurance company about such help.

The New Deal

In November 2008 the Bush Administration announced that Fannie Mae and Freddie Mac would now offer a streamlined modification program (SMP) so that borrowers could more easily obtain loan modifications.

However, a look at the SMP standards suggests that meaningful modifications — if any — were enormously difficult to get under the program.

• SMP targets borrowers who have missed three payments or more, own and occupy their property as a primary residence and have not filed for bankruptcy.
• SMP creates a standard definition of an “affordable mortgage payment” — no more than 38 percent of a household’s monthly gross income.
• Servicers will have flexibility in modifying loans, including reducing the mortgage interest rate, extending the life of the loan or even deferring payment on part of the principal. The servicer receives an $800 payment for each modification.

The SMP standards are ridiculously impractical. Here’s why:

First, they require borrowers to miss three or more monthly payments, meaning that homeowners who participate must have lousy credit.

Some lenders counsel borrowers to purposely miss payments so they can qualify for the SMP. The view here is that such advice is terribly harmful because there’s no guarantee that the borrower will, in fact, get SMP relief and also because whether or not an SMP arrangement is possible the borrower will now have terrible credit, meaning that a new loan on sane terms from other sources will be virtually impossible.

Second, the SMP applies only to owner-occupants. This means the SMP effort is useless when an investment owner is in trouble. This anti-investor approach may seem somehow warranted because investors are supposed to face more risks than owner-occupants, but if you think about the consequences of this policy you can see that it’s misguided: If a property down the street is foreclosed and the value of YOUR home declines, no one cares if the foreclosed property was owned by an investor or an owner-occupant. All anyone sees is that there was a foreclosure and therefore a lower price shows when buyers look at local sales.

Third, the SMP says borrowers must devote at least 38 percent of their gross, pre-tax income to housing costs. In comparison, the usual qualification standard for a conventional loan is that 28 percent of the borrower’s income can be devoted to principal, interest, property taxes and insurance, what is known as “PITI” to lenders. In effect, borrowers who qualify for the SMP are required to spend vastly more money on housing than baseline conventional borrowers. The better idea is to lower monthly housing costs for troubled borrowers so their homes are not foreclosed.

Fourth, if you have declared bankruptcy you do not qualify for a loan modification under SMP — the very modification which may prevent the loss of all your assets.

Early Workouts

In December 2008, Fannie Mae — which held 18 million mortgages at the start of 2008 — said it would offer an “early workout” program as an alternative to the SMP.

How does the early workout program differ from the SMP?

• Early workouts, says the company, are “a separate Fannie Mae effort to assist a wider spectrum of distressed borrowers in various stages of delinquency, including those who are current on their loan payments but facing imminent default.” Translation: The new program can apply to borrowers who are current. You don’t have to miss mortgage payments to qualify, you don’t have to lose your credit standing.
• The early workout program has two phases, a trial period and then a modification. During the trial period a non-delinquent borrower must complete four timely, consecutive monthly payments at the new level. A delinquent borrower must make at least three consecutive monthly payments. Translation: Make certain you make all trial-period payments in full and on time. In fact, be smart — pay early.
• “Preforeclosure sales, acceptance of deeds-in-lieu of foreclosure, and short payoffs (accepting a payoff for less than the amount owed), will not be permitted loss mitigation alternatives for use with borrowers whose loans are current but are determined to be in imminent default,” says Fannie Mae. Translation: If you’re not in default why not try to save both the home and the mortgage?

While the early workout program has started with Fannie Mae it will logically be expanded to other lenders and investors. Since investor programs can differ, it’s important to know who or what actually owns your loan. Most probably, the people you identify as your “lender” are actually loan “servicers” and not the loan owners. The ability of servicers to make modification decisions may be limited — or non-existent — depending on the arrangement they have with the loan owner, something usually called a “pooling-and-servicing” (PAS) agreement.

The Obama Plan

In February 2009 the Obama Administration came out with a $75 billion foreclosure prevention plan which combines the best approaches from Fannie Mae and the FDIC.

The program is complex, but in basic terms it has two elements:

First, if you’re facing foreclosure and your loan is one of the 30 million owned by Fannie Mae and Freddie Mac, you may be able to refinance if the value of the property is not more than 25 percent greater than the remaining mortgage balance (originally the government limited refinancing to a 5 percent shortfall). In other words, the program does not require borrowers to have any equity in the property, but it does limit the amount of risk which the government is willing to take.

As the government explains: “The unpaid principal balance of the first lien mortgage does not exceed 125 percent of the current market value of the property. (For example, if the property is worth $200,000, the borrower must owe $250,000 or less on that first lien mortgage).”

Second, imagine that you’re not facing foreclosure but have a toxic loan. Payments have risen rapidly or about to rise. You’re not in trouble yet, you’re making all your payments, but you could be in hot water within the next few months.

In this case, hopefully, the lender will try to reduce your interest rate so that no more than 38 percent of your gross (pre-tax) income is set aside for housing. The government will then subsidize your loan to bring the monthly housing cost down to 31 percent. Note that not all lenders are participating in the Obama plan as of this writing.

In other words, this is the Fannie Mae early workout program supported, finally, with government funds.

The Obama plan, for the first time, uses federal dollars for real people with real mortgage problems, not just bankers and Wall Street insiders.

It’s estimated that as many as 7 to 9 million borrowers will be helped by the Obama program, however the program will not protect everyone against foreclosure. If the value of your home is too low, if you do not earn enough income or if you have a rental property that’s in trouble, you won’t be eligible for help. Unfortunately, for millions of people who have bought in recent years with little or no money down, or have bought with loans that negatively amortize, or who have lost their jobs, the Obama program will not work for them. For a list of specific limitations and exclusions, press here.

The Obama plan if successful could substantially reduce the inventory of unsold homes in many areas and thus bring a halt to home-price declines — assuming job losses can be contained. We should get some sense of the program’s success or failure by mid- to late-summer, 2009.

For additional information, try:

• http://www.financialstability.gov/makinghomeaffordable/
• http://www.freddiemac.com/avoidforeclosure/
• http://www.fanniemae.com/homeowners/index.html

Steps To Take

As you look at loan modification options you can see that loan owners logically do not want to make such arrangements if they can be avoided and they are not required to modify loans. Thus, if you want a loan modification, if you want to avoid foreclosure, you must make the first move.

What should you do? The first step is to analyze your financial situation,

1. What percentage of your gross income (your income before tax deductions) is now devoted to housing costs, meaning mortgage principal, interest, taxes and insurance — PITI.
2. How much could you pay each month if PITI was limited to 38 percent of your gross income?
3. How much could you pay each month if PITI was limited to 31 percent of your gross income? This is an important question because the FDIC has been using a 31-percent benchmark when modifying loans made by IndyMac, the lender taken over by the FDIC in 2008. The 31-percent standard has now spread to other programs.
4. What are your assets? Include such items as savings accounts, IRAs, other retirement accounts, certificates of deposit, stock, bonds, vehicles, other real estate. Be sure to include account numbers, the date when valued, contact information for the account holder such as a brokerage or bank, balances and required payments.
5. What is the value of your home? Local real estate brokers may be willing to help provide a general valuation on a pro bono basis with a comparative market analysis (CMA) or a broker’s price opinion (BPO)– it’s good PR for the broker and you could be a future source of referrals and business.
6. What are your debts? Include credit cards with account numbers, account information, total debt and required monthly payments. Also, student debts, auto loans, other mortgages, etc. Again, show account numbers, balances, required payments and contact information.
7. What are your typical monthly expenses for utilities, condo fees, gasoline, health insurance, child care, alimony, etc.
8. Have in hand your tax returns for the past three years and payment stubs for the last three payment periods.
9. Make sure your information is accurate and current. Have receipts and documents to support your statements.
10. No matter how enticing, do NOT sell your home with a quitclaim deed, especially if the property is being sold “subject to” the mortgage without FIRST speaking with a real estate attorney or legal clinic of your choice or to your state attorney general.
11. No matter how enticing, do NOT sell your home by making a payment to someone else. Remember, when you sell a home buyers pay YOU — not the other way around. Again, for specifics FIRST speak with a real estate attorney or legal clinic of your choice or to your state attorney general.

Once you’ve gathered baseline information arrange your data with a spreadsheet so it’s easy to follow — income, assets, debts, etc. Then review your numbers and write out a one-page letter explaining why your need for a modification is compelling.

One useful approach is to download and complete the free loan modification forms used under the Obama Administration’s Make Homes Affordable loan modification program.

1. Request Form (Request for Modification and Affidavit)
2. The Help Guide you can use to complete the Request Form (Request for Modification and Affidavit)
3. Tax Authorization (IRS 4506T-EZ Form)
4. Proof of Income
5. Proof of Income Checklist
6. Get contact information for major mortgage servicers that are participating in the program.

Your goal is to convince the loan owner that a modification is in HIS best interest. This is a business matter, it must reflect cold hard facts and it must be documented. Make sure your letter is properly written, properly spelled and grammatically correct. Write and re-write your letter until it discusses only the need for a modification and the probable consequences to the lender if you cannot modify the loan.

To see an example, go to LoanSafe.org and read their model hardship letter and related information.

Contacting The Lender

Take a look at your loan document. What is the loan number?

Who do you contact regarding mortgage payments? This will be the lender or the loan servicer, most likely there is an 800-number on your monthly bill. Check and see if there’s a specific number for the “loss mitigation” department or something similar.

As you communicate with the lender take these steps.

• Always write down the name of the person with whom you are speaking, the date and the time. Get their direct phone number if possible. Keep notes in a file of each and every phone call you make, with whom you spoke, the date and time, the number you called and what was said.
• Never yell at the person on the other end of the line. Their goal in life is not to make things hard for you. They may have instructions from the loan owner which makes it difficult or impossible for them to help in your situation. Always assume they’re trying their best. Remember the old saying, you catch more flies with honey than with vinegar. Treat lender representatives with respect and dignity.
• Ask for the name and number of people who actually make modification decisions. This usually means someone in the loss mitigation department. If you can’t get such information by phone, search around the lender’s website or search Google for the lender and the term “loss mitigation.”

Once you get to speak with a loss mitigator offer all the data you’ve put together. Make certain to send your materials by certified mail with a return receipt requested — this way you will have proof showing when the material was mailed, that it was received and when it was received.

Once the lender has your materials the real question then becomes will he make the modification? If yes, what changes will be made and how long will they last?

Be persistent. You must follow-up because there is no chance that a modification can be done with one letter or one phone call. Always ask what you can do to make the matter easier and faster for the loan owner — and then do it.

In the end what is your goal, what would you like from the lender? The best possible result would be a smaller and more-affordable monthly mortgage payment which has been created by a lower interest rate, a longer loan term, or both. In addition, getting the lender to waive accumulated fees, penalties and charges is also a benefit.

Once you have a lower payment then you must keep your end of the bargain — every payment, without exception, must be made in full and on time. This is not only fair to the lender, it will also help build your credit standing.

Getting Help

If you have mortgage problems there are plenty of people who are willing to help you — for a fee. Unfortunately, while there are experienced individuals and organizations who can provide assistance, there are others who simply want your money.

You are vastly more-likely to get a loan modification if you have assistance. Good sources of such assistance include:

• Local attorneys and legal clinics that specialize in real estate.
• Local law schools with pro bono or low-cost programs to assist members of the community.
• Local bar associations with pro bono programs. In Maryland, for example, the Washington Post reports that more than 600 lawyers have volunteered to help homeowners with mortgage problems.
• HUD has a list of foreclosure avoidance counselors at: http://www.hud.gov/offices/hsg/sfh/hcc/fc/.
• Your state attorney general. State attorneys general often have existing contacts with lenders. Contact your state attorney general directly for help and assistance.
• Community housing organizations — they often have contacts with local attorneys.
• Legal Services Corporation — Funds 900 offices around the country to help the poor obtain legal services.
• National Consumer Law Center — An excellent source of legal information for the public.
• LoanSafe.org has online tools and information and has been featured in the New York Times.
• The Neighborhood Assistance Corporation of America has been a forceful and effective advocate for those facing foreclosure.

Homeowners Assistance Program (HAP) For Military & Civilian Personnel

The government has established a Homeowners Assistance Program (HAP) to “assist eligible homeowners who face financial loss when selling their primary residence homes in areas where real estate values have declined because of a base closure or realignment announcement.” Translation: It’s a program to help those who may be forced to have a short sale or foreclosure because a local base has closed or contracted.

HAP offers significant benefits — if you have any association with the military please go to the HAP site to see who qualifies and what benefits are available.

Making Home Affordable

Be certain to check the government’s loan modification web site, MakingHomeAffordable.com. This site is entirely-free and contains the latest information regarding loan modifications under the Obama program.

To Check The Stats

To see how lenders are doing, look for the latest Making Home Affordable Program Reports issued by the Treasury Department.

To Contact Lenders

The government maintains an extensive list of individual lender foreclosure and modification contacts including names, addresses, websites, phone numbers and fax numbers. Be sure to press the show all servicers link if you cannot find a lender in the search box.

Help for Lenders

If you’re a lender and want additional information, information, policies and news regarding the Making Home Affordable program, please see HUD’s special site for lenders at www.hmpadmin.com.

How To Get A Successful Loan Modification (With Obama Update) is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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• A Notice of Default — a public notice that loan payments have been missed.
• A Lis Penden — notice of a suit against a property owner.
• A Notice of Sale — essentially an announcement giving the time and date of a planned foreclosure sale.

If you receive any notice from your lender which is or seems to be one of the three notification forms above — or any document from your lender or servicer which claims that a payment is late or has not been made — contact your lender immediately. Don’t wait. This is not a problem that will go away, get better or which can be put off.

Your first step should be to see if you can bring the loan current. If not, ask if you can work out an arrangement (a loan modification) with the lender.

In some states a lender may need to go to court to get a foreclosure order, in other states the mortgage agreement alone will allow the lender to foreclose. Note that foreclosure rules and notifications vary by state and that in some jurisdictions you can lose your home in as little as 37 days.

For help, immediately contact an attorney, legal clinic or community housing group. For additional information online, go to the RealtyTrac Foreclosure Education Center.

What Are The Three Basic Forms of Foreclosure Notices? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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This is an important matter because if an application is not made, then a buyer may be in violation of the sale agreement. A violation of the sale agreement, in turn, could be grounds to forfeit the deposit.

Thus, buyers should go through the sale agreement with great care before signing to assure that all obligations are known and understood. Work with an appropriate professional such as a broker or attorney when reviewing a sale agreement.

When you meet with a lender, be certain to obtain a letter stating that you met and showing when. Immediately provide this letter to the seller’s broker in the manner required by the sale agreement.

How Quickly Must I Apply For A Mortgage? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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