Monthly Archive for January, 2010

Bank of America announced that it signed an agreement to commit to the pending second-lien plan of the federal government's Home Affordable Modification Program (HAMP). The mortgage lending giant says its the first lender to do so. Bank of America has put systems in place to start implementing the Second Lien Modification Program (2MP) as soon as final program policies and guidelines by federal regulatory agencies are released. 2MP will require mortgage modifications that reduce the monthly payments on qualifying home lines of credit and fixed loans under certain conditions, such as the completion of HAMP modifications on the borrowers' first mortgages.

Worthless Second Mortgages

This is a big step; in the past, the sticky wicket in the modification process or the short sale of property was often the holder of a junior lien against property. Because they are subordinate to or positioned behind the first mortgage holder, second mortgage lenders have little expectation of getting paid once the balance on the mortgages exceeds the value of the home and foreclosure becomes imminent.

What a Nuisance

Holders of home equity loans often deliberately hold up loan workouts to extract money from deals when their junior liens are technically worthless, claimed Dave Walker, chief credit officer of PennyMac Mortgage Investment Trust in a Business Week article. So their strategy is to exploit the loan's nuisance value and gum up the works until someone pays them to release the lien and go away. First mortgage holders are reluctant to reduce the principal balance on their first mortgage when the holders of second mortgages refuse to take any hit to the value of their own loans. Getting second lien-holders to the table may break the deadlock.

There has been a lot of talk in Washington about mortgage assistance, and how ineffective it is because it fails to address a top cause of foreclosure--unemployment. The Home Affordable Modification Plan (HAMP) is there for those who have experienced an income reduction but few lenders are modifying mortgages for borrowers who have lost their jobs. The Treasury Department, the lenders of the HOPE coalition, and Congress began talking over solutions back in July 2009. It's nearly February 2010 and still, nothing.

You May Get a Mortgage Modification when Unemployed

If your mortgage is owned or serviced by Fannie Mae, Freddie Mac, or FHA, there are provisions for helping unemployed borrowers. Make sure that your lender is aware that you know this. Here are Fannie's guidelines:

"If the borrower receives public assistance or collects unemployment:
Acceptable documentation includes letters, exhibits or a benefits statement from the provider that states the amount, frequency, and duration of the benefit. The servicer must determine that the income will continue for at least nine months."

The difficulty? Modifications take so long that your unemployment may get within nine months of the end before the loan servicer gets around to modifying your mortgage. You can speed up the process by have every bit of requested paperwork to the lender as soon as possible. Get an accountant or bookkeeper to help you fill out the forms if you need help. And act the very day you lose your job for your best shot at a modification.

What if You Income Is Too Low to Qualify for a Modification?

There may be help for you there, too. Get a roommate. Have a family member with income or a friend move in. Here's why, per Fannie Mae:

"Servicers should include non-borrower household income in monthly gross income if it is voluntarily provided by the borrower and if there is documentary evidence that the income has been, and can reasonably continue to be, relied upon to support the mortgage payment. All non-borrower household income included in monthly gross income must be documented and verified by the servicer using the same standards for verifying a borrower's income. (An example of non-borrower income is boarder income.)"

What if You Have Too Much Debt?

Call your creditors. Let them know that you have just lost your job and are trying to avoid bankruptcy (that's the magic word when you need to um, motivate a creditor to help you). Try to get lower interest rates and payments for at least six months--longer if possible. If that fails, consider bankruptcy. Some lenders will work in a loan modification as part of a bankruptcy reorganization, others will pull the plug on your modification. In general, I recommend not filing bankruptcy before your modification has been approved or denied, unless foreclosure proceedings have been started.

Other Mortgage Assistance

If you have a loan with Citi mortgage, you may be in luck. Their Homeowner Unemployment Assist program lowers monthly mortgage payments to $500 for three months if you're unemployed. If you live in Connecticut, try a program called EMAP, the Emergency Mortgage Assistance Program, created to help the unemployed keep their homes out of foreclosure. And finally, hit up your mortgage insurer. The company may grant you granting you a no-cost loan to bring your mortgage current and keep you out of foreclosure. FHA mortgage insurance works in a similar way; the advance is called a partial claim.

If you're an older homeowner with bad credit and a lot of home equity, you are probably being bombarded with junk mail, phone calls, and email solicitations from salespeople trying to get you to refinance your mortgage. Be very careful dealing with these people--they may be practicing a predatory lending technique called equity stripping. They'll be doing the stripping, but it's you who ends up naked.

Look Out for Strippers

Equity stripping involves refinancing with ridiculous fees and costs that the homeowner may not be aware of. Here's how it works. Say, you have a bad credit mortgage and are paying an interest rate of 12%. It was a $200,000 loan, but you only owe $100,000 on it and your home has appreciated and is now worth $400,000. Some guy you don't know comes banging on your door and claims that he can get you an 8% interest rate. Your payment drops by about $2,200 a month! Sounds pretty good, doesn't it? You can't wait to sign on the dotted line.

What a Lower Rate Costs if You Have Bad Credit

But there's a catch. You only owed $100,000 on your mortgage. The new loan is for $125,000, and a lot of that payment reduction comes from starting your loan over for another 30 years. And $25,000 in loan fees on a $100,000 loan is criminally high. All you notice is the lower payment--you don't see how much it's costing you to get it. There have been documented cases of seniors refinancing several times in just a few years, over and over until they have no home equity left, can't afford the payments, and end up in foreclosure.

The Solution? Take Mortgage Financing into Your Own Hands

According to a study by AARP, seniors who respond to solicitations rather than contacting lenders themselves are more likely to end up with bad deals. Those who rely on a mortgage broker to find the "best loan" for them are also less likely to end up with a satisfactory mortgage experience. You should therefore shred and toss that junk mail, delete the emails (c'mon, they're probably coming from the same folks who claim they can help you lose 10 pounds in 2 days), and screen your phone calls. Look for lenders on your own terms--it's easy to do online, even if you have bad credit.

Try a Reverse Mortgage: Bad Credit Okay

If you have enough home equity to attract the equity strippers, you should really consider a reverse mortgage. Find a lender approved by HUD to fund Home Equity Conversion Mortgages (HECMs). The fees on these loans are limited by HUD. You will see a reverse mortgage counselor to determine if a reverse home loan is a good solution for you. Best of all, people with bad credit don't pay any more than people with good credit. Because you don't repay the mortgage until you die, sell the property, or move out, your income and credit history are irrelevant.

FHA Loss Mitigation Can Help if You Have an FHA Mortgage

The US Department of Housing and Urban Development mandates that lenders take all possible steps to prevent foreclosures on FHA home loans. If you are g=having trouble with your FHA mortgage, there is a lot of help available and it takes many forms. Check out:

1. Assumption
2. Partial Claim
3. Special Forbearance
4. Extension of Time
5. Deed in Lieu of Foreclosure
6. FHA HAMP

The kind of assistance you might be eligible for depends on the following:

1. Income (enough to make a modified payment?)
2. Desire (want to keep your home?)
3. Equity (underwater on the home?)
4. Hardship (beyond your control?)

Assumption

Assumption means that someone else will take over your mortgage payment and also get your home. Even if your mortgage has been modified, the new owner may be allowed to take it over. This person must qualify to assume the loan. This is a workable option if you aren't underwater (or no one would want your loan) and you can't or don't want to retain the property.

Partial Claim

If your mortgage is four or more months past due, you may qualify for a partial claim. This involves some of your mortgage insurance policy being advanced to cover your late payments. To qualify, you must have solved the problem that caused the default (for example, if you lost your job, you must have found a new one), and you must keep living in your home.

Special Forbearance

Its purpose is to bring mortgages that are in default back to being current and stop foreclosure. If you are at least 3 months behind on your home loan, you may be eligible. Forbearance means that you skip or make partial payments; your loan is brought current and the missing money is added to your mortgage balance. The maximum arrearage allowed is twelve months of payments.

Extension of Time

This is 90-days of extra time for borrowers in foreclosure proceedings. Those who want to keep their homes are granted additional time to arrange mortgage modifications or catch up on their payments.

Deed in Lieu of Foreclosure

This is for homeowners who can't make their payments and don't want to keep their houses. It is not for those who could make their payments but don;t want to. It lets people in default who don't qualify for any other HUD Loss Mitigation option (long-term unemployed, for example) to sign the house back over to the mortgage company. To qualify, you must line in the house, document a reduction in income or an increase in living expense, and agree to leave the property in good condition. You may be paid up to $2,000 to voluntarily leave.

FHA HAMP

FHA's version of the Home Affordable Modification Plan (HAMP) is better than the standard modification plan. It combines mortgage modification with a partial claim advance. Besides interest rate reductions and making your loan current again, the FHA HAMP may reduce your principal balance up to 30%. Here's the scoop:

• You complete a 3-month trial loan modification.
• You may be given a partial advance from mortgage insurance to bring your mortgage current.
• You could receive a loan reduction of up to 30% of the unpaid principal balance.
• You cannot be more than 12 months behind on your payments.
• Your interest rate gets reduced.
• Your modified loan must be a 30-year fixed-rate mortgage.

If you have an FHA mortgage and are in trouble, immediately contact your lender or loan servicer about FHA loss mitigation. Or call a HUD mortgage counselor. One way or another, you should be able to find the help you need.

Lenders are nosy. But they're entitled to be, to a certain extent. If you were loaning a huge sum of money to someone who wasn't your best friend, wouldn't you want to know as much about that person as you possibly could? So, yes, lenders are entitled to ask some really personal questions. But there are limits. Here are three invasive things they get to ask you, and two they don't.

Are You Involved in a Lawsuit?

Lenders ask this because they need to know if you have a potentially ugly judgment hanging over your head, which could impact your financial position or that of your business. What you need is a good explanation or even a statement from your lawyer explaining the merits of your case and why it is unlikely to damage you financially (you have sufficient insurance to pay a verdict, or you are the plaintiff, not the defendant).

What Are the Circumstances of Your Divorce?

Divorce is one of the leading causes of bankruptcy, so it's not extraordinary that your lender would want to know about yours. But not the juicy stuff, only the financial stuff. Who gets the house? Who gets the payments? Are they being made? The reason for this is that if you incurred joint debts, a judge's order can't make only one spouse responsible. So if your ex fails to make payment on a jointly-incurred debt, the creditor will probably come after you. In many cases, lenders won't approve a loan to divorced folks until it can be shown that each has been paying his or her share of the family debt. Per Fannie Mae's guidelines, "The lender is required to evaluate the payment history for the assigned debt after the effective date of the assignment. The lender cannot disregard the borrower's payment history for the debt before its assignment." If you are merely separated, you will need a legal separation agreement before you try to get a mortgage of any kind.

What Is Your Ethnic Background?

This is part of the declarations section at the end of a standard mortgage application. Lenders don't ask this so they can discriminate against you. In fact, they legally have to ask in order to prevent discrimination. You don't have to answer, but the lender then has to make a guess about your ethnicity and complete the form anyway. This is required by HMDA, the Home Mortgage Disclosure Act. HUD scrutinizes lenders in the US for patterns of discrimination, and if they see a lenders exhibiting a pattern of charging higher fee to people of certain ethnic backgrounds or declining their loan applications at a higher rate, they look closer and take action if they find discrimination.

And here are two questions that it's illegal for lenders to ask.

Do You Plan to Have Children?

Lenders used to ask women borrowers this all the time, trying to gauge whether the women were likely to experience a decrease in income or an increase in expenses. That is illegal under the Equal Credit Opportunity Act. In addition, lenders can't discount income because of your sex or marital status. For example, a creditor cannot count a man's salary at 100% and a woman's at 75%. And they can't assume that a woman will stop working to raise children.

How Is Your Health?

Lenders can't discriminate against people who are ill or are older, even if they are 80 years old and taking out a 30-year loan. It's none of their business. Finally, lenders may not discriminate against you because of your sex, age, marital status, race, color, national origin, receipt of public assistance or because you may have exercised your rights under consumer protection laws. They cannot include in their advertising or other documents anything that would discourage a responsible person from applying for a loan.

As of January 1, 2010, lenders are required to use a new Good Faith Estimate (GFE) form that puts the important features of your loan right in front, and lists the fees and interest rates. The most powerful change is the requirement that if fees are different at closing from what they are on the ...

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