In my post on April 1, I talked about the changes to the Making Home Affordable Program the Obama Administration announced on March 26.
Principal Write-Downs on Mortgages
The change that caught the news media’s attention was the one that talked about principal write downs on mortgages. The revision simply said mortgage companies would write down the balance of a mortgage for people facing foreclosure in those instances where the balance of the mortgage was far greater than the value of the home.
Since the start of this foreclosure crisis in our country, the value of homes has dropped. This drop has been substantial. I believe that the value nationwide has dropped about 20%. In California, Florida and some other areas values may have dropped 50% or more.
Many people owe far more on their mortgages than their homes are worth. In these situations some people facing foreclosure are not motivated to try to save their homes. They feel that they will never be able to recover what they pay for their home. So they walk away and let their mortgage company foreclose.
Members of congress and various consumer advocacy groups in the past saw the problem here. They lobbied to have judges in bankruptcy cases be allowed to lower the balance of the mortgage to what the home was worth. The lobbyists for the mortgage industry are very powerful. Each time this proposal had been made, the lobbyists were successful in getting it defeated.
In the revisions to the Making Home Affordable Program announced March 26 the Obama Administration dealt with this. They announced that mortgage companies would have to consider writing down the principal balance for certain people who have applied for loan modifications. This is supposed to be done if the balance owed on a mortgage is greater than 115% of the current value of the home.
Say the value of a home is $100,000. The amount currently owed is $130,000. The mortgage company is being urged to reduce the balance on the loan to $115,000.
The mortgage company would run a New Present Value Test. As long as that indicated it was worthwhile to reduce the balance of the loan, the company is supposed to do so.
The mortgage company would initially put the amount to be reduced into a separate forbearance account. As long as the person remains current on their loan payments, the mortgage company will forgive the amount reduced in 3 equal payments over 3 years.
Let’s look at our example above. The mortgage company would reduce the amount owed by $15,000 from $130,000 to $115,000. As long as the payments were made on time, the mortgage company would forgive $5,000 a year. The entire $15,000 would be forgiven at the end of the third year.
As you can see, this form of principal reduction is greater than the one that members of congress and consumer advocacy groups had proposed in the past. This covers all people facing foreclosure who applied for loan modifications not only those who filed for bankruptcy.
An Incentive for Mortgage Companies to Write Down Loan Balances
The Obama Administration is giving mortgage companies an incentive to do this. They will pay them $.15 on the dollar for the amount that a mortgage company reduces a mortgage by if the balance is from 115% to 140% of the value of the home. If the balance of the mortgage is greater than 140% of the value of the home, they will pay the mortgage company $.10 on the dollar for the amount reduced.
If the balance of the loan is less than 115% of the value of the home, The Obama Administration is giving the mortgage company an added incentive. They will pay them $.21 on the dollar for the amount reduced.
Going back to our example, the loan balance of $130,000 is 130% of the value of the home ($100,000). The amount that the balance is reduced is $15,000. So the mortgage company would be paid $2,250 (15,000 X $.15).
Sounds great, doesn’t it. If you are facing foreclosure and are in this position,
Don’t Get Your Hopes Up
Certain problems are going to arise. These have not been addressed by the Obama Administration.
The first is that this is voluntary for the mortgage companies. What happens if some elect not to do this?
The second is that there is no time limit for the mortgage companies to put this in place. Are the mortgage companies going to delay implementing this? Will we see the same type of delays that have plagued the Making Home Affordable Program from the start?
The third is that the mortgage company or investor will contact those people who are eligible for this. Do you know who the investor on your mortgage is? Not many people do. By the way, the mortgage company to whom you are sending your monthly payments is normally not the investor.
How will your mortgage company or investor determine who actually qualifies for this? Will anyone monitor them to make sure this is done fairly? What if some mortgage companies do this quickly and others drag their feet?
Fourth – What happens in those instances where there are two loans? It looks like the administration assumed that most people who have a first and second loan got these through the same mortgage company. So the balance on the second loan will be reduced first. If the remaining balance is still over 115%, the balance on the first loan is reduced.
The guidelines indicate that a mortgage company that has to reduce the balance on a second lien to bring the total down to 115% will be paid $.06 on the dollar for the amount reduced. This payment will only be made if the person had not made a payment on that second loan in more than 6 months.
Let’s look at the example we have been using. The balance on both loans totals $130,000. The balance on the first mortgage is $109,000. The balance on the second is $21,000. The value of the home again is $100,000.
115% of $100,000 is $115,000. The balance on the second loan would be reduced to $6,000. The balance of $109,000 on the first loan would remain unchanged.
If there was a different mortgage company for the second loan, they are being asked to forgive $15,000 of their loan. For that the government may pay them $900 ($15,000X$.06). They will get that only if the person facing foreclosure has not made a payment on that loan in the last 6 months.
So the mortgage company here can possibly get $900 at most while in those instances there is only one loan, the mortgage company there would get $2,250 regardless of when the last payment on that loan was made.
Is There Anything Wrong With This Picture?
It sure looks like the mortgage company handling the second loan is getting the shaft. Do you think that most mortgage companies on these second loans are going to willingly participate in this program?
Current estimates are that in about 50% of the cases where people are facing foreclosure first and second loans exist. It is not clear on how many of these two different mortgage companies are involved. Chances are the percentage is high.
One Other Big Challenge Exists . . .
. . . for mortgage companies when it comes to reducing the principal balances on loans. If they start doing this for people facing foreclosure, won’t the people who have made their loan payments on time and are not facing foreclosure complain? Won’t they demand that the balance on their loans be reduced if the value on of their homes has dropped?
Many people facing foreclosure who are expecting the principal balances on their mortgages to be reduced are in for a rude awakening if it does not occur.
What steps can you take if you are in this position?
I suggest that you get in touch with your mortgage company. Tell them that you heard about the revisions that were made at the end of March to the Making Home Affordable Program. Let them know that you believe the balance on your mortgage is greater than 115% of what your home is worth. Ask them what you have to do to be considered for a reduction in the balance of your mortgage.
If you have a first and second mortgage and these are handled by 2 different mortgage companies, call both companies. Explain the situation to them. Ask them for consideration.
Expect the people you talk to tell you that they are not going to reduce the principal balances on any mortgages. Get the name and phone number of the person to who you talk. Make a note of what they tell you. Then call or write your congressman and let them know your situation and what you were told. Ask for their help.
If you are being represented by a lawyer or a housing counselor, discuss this with them. See what they will do.
By the way here is another reason I recommend that anyone facing foreclosure get a lawyer or counselor to represent them. Anyone who represents themselves most likely not won’t follow through on things like this. In the long run they will lose out because they did not.
Always remember that your mortgage company does not have your best interests at heart. Make sure that you know as much about the foreclosure process and the steps you can take to save your home as you can. My EBook has quite a bit of information which I believe that you would find very helpful. Please check it out. You can get more information on it by clicking Stop Foreclosure.