Loan Modification Strategy
At its core, the
loan modification strategy formulated by the Obama administration is driven by the belief that modifying strained mortgages will help struggling homeowners hold on to their homes, while simultaneously preventing real estate values from falling into a bottomless abyss. This is an ambitious attitude indeed, especially given the fact that the top banking regulator declared at the end of last year that over 50% of the loans that had been modified in the opening quarter of 2008 turned toxic again within a period of six months.
The Obama administration insists that this statistic is due to the fact that the early modifications were not properly structured, and that significant strides have been made in improving the process so that sustainable arrangements can be created. This modification program has been structured with several identifying characteristics.
Payments as opposed to prices- A central premise of the plan is the belief that homeowners will maintain their ownership of their homes if they are able to cope with the payments, in spite of a sharp decline in the value of their home. While this belief is not unanimously shared, it remains a core conviction that underpins the structure of the program.
31 Percent- With the previous point in mind, the modification plan requires that participating lenders decrease mortgage payments to no higher than 38% of the homeowner's gross monthly income. The government would then provide additional financial assistance so that the monthly mortgage payment is no higher than 31% of the homeowner's gross monthly income. However, it's important to note that in reducing mortgage payments, lenders are not required to reduce the principal amount, a move which has attracted criticism from some.
Financial hardship- The program is aimed at providing relief to those who have suffered severe and legitimate financial hardship, such as the loss of an income or paralyzing medical expenses. The focus is on those who find themselves in a situation where circumstances beyond their control have made it impossible to cope with current mortgage payments. Homeowners are required to sign an affidavit of financial hardship and to clearly demonstrate their income with supporting documentation.
Cash rewards- In an attempt to attract involvement in the program, lenders will be paid $1000 for each processed modification, as well as an extra $1000 every year for as long as 3 years, provided that the homeowner continues to honor the modified loan agreement. Homeowners stand to benefit from an annual reduction of $1000 to the principal amount of their loan for as many as 5 years if they demonstrate consistency in making their new mortgage payments. These rewards become operational after the modification has been successfully operating for at least 3 months.
2nd Liens- 2nd Liens such as home equity lines of credit and home equity loans are taken into consideration as part of the modification program. Rewards are being offered to have them done away with. It remains unclear at this stage however exactly how this aspect of the plan will be implemented and achieved.
Net present value- When assessing whether or not a specific mortgage qualifies for modification, the lender is to conduct what is called a net present value test. The purpose of the test is to compare the projected cash flow that the modification would facilitate with the cash flow that is in operation in the absence of the modification. If it is determined that the modification would result in a greater cash flow, the loan is to be modified by the lender.
Before approaching your lender to initiate a loan modification application, you would do yourself a great service by first determining what chance your application has of success. Please visit
http://www.mycaal.com for information about this.
