Obama's Loan Modification Program

You've probably heard about President Barack Obama's plan to rescue the housing market. He believes that restructuring distressed mortgages will help to keep struggling home owners in their homes. He also believes that this will help slow or stop the decline in housing prices. To this point $75 billion has been allocated toward modifying distressed loans and the Administration claims that it can help up to 4 million homeowners. Unfortunately, over half of those loans that have been modified have re-defaulted within six months.

Can Obama's plan help you? Well, let's look at it's main components:

First, the Obama administrations loan modification plan focuses on payments, not prices. They assume that home owners will want to stay in their homes as long as they can make the monthly payment regardless of the value of their home. This may or may not be the case. Evidence has shown that some homeowners will walk away from their homes even if they could make the payment only because the value of their home has fallen far below what it was once worth.

Second, Obama's loan modifcation program requires loan servicers to lower the borrower's monthly payments to no more than 38 percent of the borrower's gross monthly income. The federal government would then subsidize a portion of the payment so that the borrower would only be paying 31 percent of their gross monthly income. Obama's plan does not require loan servicers to reduce the pricipal amount of the loan. The servicer can reduce the interest rate to as low as 2 percent, extend the loan to a 40 year amortization, or forbear a part of the pricipal at no interest. So, if these terms would help you stay in your homne then you should take a serious look at the Obama Loan Modification Program.

Why would loan servicers want to participate in this program? Well, for one, they will get $1000 for every modification plus an additional $1000 each year for up to three years if the borrower continues to make the payments on the loan. The borrower too can get up to $1000 knocked off of their loan principal each year for up to five years if they make their payment s on time.

Of course, in the Obama Loan Modification Program only owner-occupied primary residences will be considered and only those with loan balances less than $729,750. Applicants will have to sign an affidavit of financial hardship and verify their income and only loans originated on or before January 1, 2009 will be eligible for the program.

So, does the Obama Loan Modification Program sound like it could help you? If so, then give your lender or loan servicer and call and see if you qualify.

Loan Modification Example and Why It Failed

We recently helped our client Alex with a loan modification. Here is the situation, numbers and why it was declined by Countrywide, the 1st lender.

Alex built a house a few years ago in West Sacramento and invested about $50,000 of his own money. The rest was financed with an Adjustable Rate Mortgage (ARM).

Adjustable Rate Mortgages were popular a few years ago but not so much today. They call these loans a "ticking time bomb" because the payments are low but only for the introductory period of 1 to 5 years. Then the rate adjusts to whatever the market rate is (up!).

It's not uncommon to see payments jump by several hundred dollars of more. That's what happen to Alex. His introductory fixed payments where around $1500 per month and then jumped to over $2500 per month.

Alex's business also took a hit and he is making less money than when he first built the home. Alex can't afford the payment anymore so we helped him call his bank for a loan modification. As part of the loan modification the bank asks for a list of current income and expenses.

Alex is married and has 4 kids. Here is his monthly financial picture:

Income:
+ $3,800 income from his business

Expenses:
- $425 business insurance
- $800 business expenses
- $200 auto gasoline
- $58 auto insurance
- $150 life insurance
- $120 electric bill
- $140 cell phones
- $46 home phone
- $72 sewer/water/trash
- $350 credit card payments
- $ food and other expenses??
Total: $2,361

Net left over to pay mortgage: $1,439

As you can see Alex can barely afford the original fixed mortgage payments, and the numbers above don't even including his food and miscellaneous expenses.

What the bank said:

After submitting the financial statement and proof of income the bank took several weeks to respond with an answer.

Waiting a long time is typical as many people are trying to adjust their loans or short sale their homes during this time of economic hardship. The loan modification / loss mitigation departments of most banks are quite busy. Patience is necessary along with frequent follow up.

Bank's answer:

Sorry but you don't have enough money left over at the end of the month for us to even consider a loan modification.

Well, based on the numbers above that makes sense. Not a big surprise. At least Alex feels good that he tried. If you do your own loan modification it doesn't cost anything to try.

Next step:

Short sale the house to avoid a foreclosure and preserve credit.