November 2008 Archives

November 14, 2008

The Federal Mortgage Modification Morass

Yesterday a client asked me whether he should start defaulting on his mortgage payment. He got word from his lender that his payments might be substantially reduced in the future, but only if he was at least three months behind when he applied for the modification program. More than anything, the idea that you have to miss payments to get help with your mortgage defines the trouble we are in.

On November 11, Secretary of the Treasury Henry Paulson announced just such a plan for mortgages owned by federal housing agencies Freddie Mac and Fannie Mae. Unfortunately, these entities own only a small percentage of the outstanding sub-prime mortgages -- the type that give rise to most of the foreclosures. According to Sheila Bair, head of the Federal Deposit Insurance Corporation (the regulator of most of the nation's banks), this policy only addresses the tip of the foreclosure iceberg. The FDIC is pushing its own program that may prove to be the centerpiece of the Obama plan.

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According to the Treasury announcement, your Freddie or Fannie mortgage payments will be reduced to 38% of your pre-tax income by lowering your interest rate and extending the term of your mortgage. Oddly, this 38% figure is nearly 10% higher than the standard ratio previously used by lenders to determine affordability. In other words, your modified Fannie or Freddie mortgage will be technically unaffordable by a large margin. Huh!

In tandem with this new Fannie and Freddie mortgage program, the federal government continues to offer (under the HOPE for Homeowners Act) 30-year fixed rate FHA-insured mortgages for homeowners at risk of foreclosure. While you don't have to be behind on your payments to participate in this program, it does require your mortgage owner to voluntarily cash out the current loan at something short of your home's current appraised market value (just how short will likely range between 3% and 10%, due to amendments included in the bailout bill). So far, very few lenders have stepped up to the plate. And homeowners aren't all that thrilled either since they would have to share at least 50% of any future equity they develop with the federal government.

It's important to keep in mind that federal foreclosure mitigation policies are being fashioned by a few individuals who likely will not be around on January 20, 2009. Also, the Democrats' majorities in the House and Senate will be enhanced. As the economy continues to deteriorate and a new government takes hold, radical -- and unpredictable -- changes in the federal government's approach to the foreclosure epidemic are virtually guaranteed.

If you want to know about what modification opportunities are available for your mortgage right now, whether under the federal programs or under other programs operated by private mortgage owners, you'll need to find out who's calling the shots and what type of plan they offer. Consider using a free HUD-certified housing counselor to help you get this information. You can find a counselor in your area by calling 1-888-995-HOPE.

To learn more about modification programs and opportunities, see Nolo's article Mortgage Modification and Refinancing Under the Homeowner Affordability and Stability Plan.

November 6, 2008

New Developments on the Foreclosure Modification Front

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While the federal government mulls its approach to reducing foreclosures, California's governor is moving forward with new legislation designed to encourage lenders to aggressively modify mortgages, according to Carolyn Said, staff business reporter for the San Francisco Chronicle. The new law would apply to owner-occupied homes and would, in effect, mandate an additional 90-day delay to an already lengthy foreclosure process -- unless the lender seeking the foreclosure has an "aggressive modification policy" in place.

Among other things, such a policy apparently would require modifications downward so that the borrower would not have to pay more than 38% of his or her income, and would offer options such as extending the loan period to 40 years and deferring some of the principal balance until the home is sold or refinanced. The basic idea here is that increasing the foreclosure process by 90 days would be so financially detrimental to foreclosing lenders that they would choose the modification route.

Other states are taking similar actions. For example, both New York and Massachusetts have recently enacted laws requiring 90 days advance notice before foreclosure proceedings can be commenced. As with the proposed California legislation, these 90-day advance periods make foreclosure more expensive (because the lenders typically receive no payments during these periods) and may encourage them to also adopt "aggressive" modification polices.

There is no question that the modification landscape is shifting radically under new state laws, but the big changes are yet to come. Under the federal bailout bill, the Treasury Department and government housing agencies must have plans in place by December 2 designed to keep people in their homes. These agencies will undoubtedly be conferring with the Obama transition team on these plans, and the plans that emerge can be expected to have the Obama stamp of approval.