Real Estate Q&A March 2009 - Mortgage Modification Update

Q: Hi. Are there set rules for mortgage modifications. I get different answers depending on who I talk to.

A: Great question. There are some questions in real estate where a good real estate should say, “I don’t know.” Until now this was one of those questions. I say ‘until now’ because the current administration’s housing plan addresses the issue of homeowners who can’t afford their monthly payments because of a number hardships. This plan encourages lenders to modify homeowner’s mortgages who fall under the definition of hardship.

And therein lies the rub. The definition is loose at best and includes such things as ARM payment increase, lost income and increased expenses.

The bottom line: an approved mortgage modification would reduce the current payment to 31 percent of before-tax income of the mortgagee. These adjustments would hold for five years in most cases, and after that the lender is allowed to raise the rate by 1 percentage point per year until the rate is close to the prevailing rate during the week that the loan modification was approved.

The goal here according to the Treasury Department is to prevent the destructive impact of foreclosures on families and communities. Gee, I don’t remember the Treasury warning us or Freddie and Fannie about the problem with giving anyone with a heartbeat a mortgage a few years back…but I digress. I know many people in Northern Virginia who have been foreclosed on that will not benefit by this plan now…oops…I digressed again.

So, the qualifications for a loan modification.:
1) It must be the primary residence, occupied and inhabitable’
2) The first mortgage balance must be $729,750 or less’
3) It’s alright if foreclosure proceedings have already begun or if the borrower is suing the lender,

The lender then figures out what it will take to decrease the monthly payments 31 percent of the borrower’s income.

The house payment would include principle, interest, taxes, home owner’s insurance, and hoa/condo dues. Mortgage insurance premiums are excluded.
It’s also important to note that past-due interest taxes and insurance are added to the balance while late fees must be waived.

The bottom line is that in the world of Real Estate mortgage servicers apply extremely different rules to the world of loan modifications, and the hope is that these guidelines will serve to provide more consistency to the public.

We shall see. What is certain is that anyone facing a house payment they can’t afford needs to educate themselves on the mortgage modification process.

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