FreeDIYkits Loan Modification Blog

The Obama administration is facing increasing pressure from lawmakers and housing advocates to retool its troubled mortgage relief program a year after its debut as the housing crisis continues to deepen and spreads to more creditworthy borrowers.

The $75 billion program pays lenders to modify the mortgages of troubled borrowers, typically lowering their payments by about $500 a month.

But so far, fewer than 200,000 borrowers have received a permanent change to their loans, according to Treasury Department data released Wednesday, a small fraction of the 3 to 4 million borrowers who government regulators initially said the program could help before it expires in 2012. That may not bode well for efforts to stabilize the housing market. Credit Suisse has estimated that 3.2 million foreclosures would have to be prevented this year for home prices to rise modestly.

“Clearly the numbers that were discussed by the administration set up an expectation that just don’t deal with the reality we’re in,” said John Courson, president of the Mortgage Bankers Association.

Administration officials have acknowledged that the program, known as Making Home Affordable, got off to a slow start and has yet to reach its full potential. Many lenders didn’t begin enrolling borrowers until last summer, months after the program was launched. By then, the primary cause of foreclosures had shifted from the risky mortgages that helped spur the financial crisis to rising unemployment. The latter is tougher to address because jobless borrowers often have little money with which to pay any type of home loan.

Through January, nearly a million borrowers had gotten at least some reduction in their mortgage payments as part of the program, but more than three-quarters have yet to win a permanent modification and must still prove they qualify, according to Treasury data. The program “is doing the job it was designed to do, Phyllis Caldwell, chief of Treasury’s Homeownership Preservation Office, said in a statement. “Struggling families are receiving payment relief and the housing market is showing signs of stabilization.”

The Mortgage Bankers Association proposed a forbearance program Wednesday aimed at helping the unemployed pay their mortgages for up to nine months.

Under the proposal, loan servicers would reduce eligible borrowers’ monthly payments to no more than 31% of their household income for up to nine months. Unlike a modification, however, the arrears would be tacked onto the end of the mortgage.

As part of the proposal, the association has asked the Treasury Department to provide loans to some servicers to cover payments to the mortgages’ investors. Treasury officials, who met with the group last week, have not made yet a determination, a spokeswoman said.

The trade group’s goal is to address the growing number of people who are falling behind on their mortgages because they’ve lost their jobs.

“Borrowers with such a precipitous drop in income can’t qualify for most loan modification programs, so we are looking for ways to allow those borrowers to keep their homes while they look for another job,” said John Courson, the association’s chief executive.

Once borrowers find new employment, they will be considered for a long-term modification under the Obama administration’s foreclosure prevention program.

Most consumer advocates, however, do not think forbearance plans are an answer to the foreclosure crisis. Most delinquent borrowers need more help than just a temporary reduction of their payments.

Also, it’s unlikely that borrowers will find new jobs in nine months in this tough economy, said Kathleen Engel, a law professor at Suffolk University in Boston who specializes in foreclosures. She said the program would need to last at least two to three years to be effective.

The Obama Loan Modification or Homeowner Affordability and Stability Plan offers protection and hope to billions of homeowners. Before you apply for a mortgage modification make sure you understand what protection is offered.

Full Disclosure:
When either just describing or encouraging loan modification, the servicer shall give the debtor information that will aid them in understanding the terms of the modification and the process of modification, and debtors should also be given written information about the costs, terms, and risks of modification that is clear and concise. This should be given in a timely manner as to allow debtors to make an informed decision.

Fair Lending:
Modifications under the plan must abide by the Equal Credit Opportunity Act and the Fair Housing Act, both of which do not allow discrimination on a prohibited basis connecting to mortgage transactions. Loan modification plans are subject to fair lending laws, and both servicers and lenders should make sure debtors are being treated equally when it comes to mortgage modification.

Consumer Complaints and Questions:
Servicers should have a system to answer complaints and questions regarding loan modification timely and appropriately, and that every question and complaint is taken seriously and answered appropriately.
This protection will ensure that you and your family are not treated unfairly and can receive the full benefits a mortgage modification.

Many homeowners are finding themselves with an underwater mortgage and are having trouble meeting their mortgage payments on a home with a value less than what the homeowner owes. This obviously causes frustration for homeowners seeing as how no one wants to owe more on a home than it’s worth.

However, despite homeowners who are walking away from their underwater mortgage, many are just looking for help in their monthly mortgage payment. Homeowners feel that the value of their home is bound to rise again, so if they could just make their home mortgage payment more affordable at the present time the underwater status of their home wouldn’t be so bad.

The trouble with having an underwater mortgage is there are few refinancing options as banks are unwilling to refinance a home whose value is less than what is owed in the original mortgage. Refinancing may be an option for a select few homeowners with an underwater mortgage in certain circumstances, but most homeowners will need to look into a home loan modification.

Reeling from the recession’s one-two-three-punch of job woes, climbing mortgage payments, and evaporating equity, desperate Silicon Valley homeowners are dipping into a nearby income stream to avoid foreclosure:
That bedroom just down the hall.

While renting out a room has been around for years, especially in the South Bay’s Latino neighborhoods, sharing a home in order to save it has become an increasingly popular way to hang on to the front-door keys to the American dream.
“I’m up against a wall and I had no other place to turn for income,” said Rafael Porras, a 50-year-old waiter who began renting out a room in his downtown San Jose condo this month after he was squeezed by pay cuts at work and a mortgage payment about to rise. “But I had to do it because I don’t want to walk away from this place. ”

Whether they’ve rented out rooms in the past to make ends meet, or a job loss has prompted them to tap into their inner landlord for the first time, many people say their rental income is the only thing keeping them from losing their homes. And for many homeowners — even those whose property is worth less than their loan amount — losing their home is not an acceptable option.

“I can’t imagine life anywhere else,” said 71-year-old Margaret Licon, who bought her San Jose house 40 years ago and raised six kids in it before losing her husband 25 years ago. With no job, dwindling savings, and rising loan payments, Liconnow relies on a houseful of renters to stay afloat — a couple with three kids, an ex-Marine with health problems, and two grandsons shoe-horned into the garage.
“Without my tenants, I couldn’t make it,” said Licon, who’s hoping her lender will modify her $400,000 loan. “But I’ve been here so long, this house is a part of me. I’d even move into my garage and rent out my own bedroom if it meant keeping my home.”

While it’s hard to know precisely how many struggling homeowners have turned to renting out rooms, housing advocates have seen a surge in the past year in the number of people desperate enough to give it a try. Especially among the recently unemployed, rental income — along with family loans — has become a godsend.
“Renting out bedrooms is a growing trend,” says Sunnyvale housing counselor Maritza Wong, who works for the nonprofit Project Sentinel. “And it’s not just lower-income people doing it, but even people who were making good money before losing their jobs.”

At Project Sentinel, where staffers report as many as 20 percent of their clients becoming landlords under their own roof, counselors are recommending the practice as a way for homeowners to tweak their debt-to-income ratio in order to qualify for a modification.

Under new law banks compelled to work with homeowners in trouble and create California loan nodification Agreements. The California Foreclosure Prevention Act states that banks have to try and modifiy loan before foreclosure.

“Finally there is good news for California homeowners and help them avoid foreclosure. The new
The California Foreclosure Prevention Act, signed by Gov. Schwarzenegger in February, adds 90-days between the time a homeowner defaults on a loan and when banks can initiate foreclosure proceedings,” states Art Franklin, V.P. AboutCaliforniaLoanModification.com.

AboutCaliforniaLoanModification.com attorneys help homeowner obtain loan modification agreements. These agreements make monthly mortgage payments more affordable.

Assemblyman Ted Lieu, D-Torrance, who wrote the bill states “The goal is to compel banks to do systematic California loan modifications that will reduce the foreclosure rate. California has the highest foreclosure rate in the nation. Until we slow that down, the state’s economy cannot recover.”

Nearly a year ago, the Obama administration trumpeted a loan-modification program that was supposed to save millions of mortgage borrowers from foreclosure. That plan–involving monetary incentives for banks and an occasional poke in the eye when they don’t seem sufficiently motivated—isn’t proving a miracle cure. So look for lots of proposals in the months ahead on how to take loan mods to the next level, and the next one after that.

Here’s an idea being pushed by John Taylor, chief executive of the National Community Reinvestment Coalition, which represents local organizations that promote affordable housing and community development. Mr. Taylor wants the U.S. Treasury to buy large numbers of troubled mortgages at a discount to face value and then ease the terms to make them affordable for the borrowers, including in many cases by reducing the principal to something nearer the current value of the home. After it reworks the mortgages into “sustainable” form, the Treasury could then package and sell them to investors, Mr. Taylor says.

He figures the Treasury could start such a program with only a few hundred million dollars and that it should be profitable. Some private firms, such as PennyMac Mortgage Investment Trust, already have similar mortgage-purchase and modification programs, of course. Mr. Taylor says that’s fine but Uncle Sam should get a cut of this action, especially since the government is propping up the entire housing and mortgage market, making it possible for firms like PennyMac to operate.

They gathered to say goodbye at the bucolic Redwood City retreat Mrs. Bagnarol had created — a compound of three homes cascading down a steep hillside where she raised chickens. Some of her children and grandchildren live on the grounds.

But that night an unwanted visitor arrived: a process server delivered papers that ordered Mrs. Bagnarol and her family to get out. The bank had foreclosed on their property, and they were all being evicted.

Emotions exploded. Not now, the family cursed. A sheriff’s deputy was called to keep the peace. Mrs. Bagnarol died a day later.

But the unfortunate timing of the official visit was not the only source of the anger. More troubling were the financial deals that led to the visit — and the decision by lenders to sign Mrs. Bagnarol up for one exotic mortgage after another.

“It’s definitely elder abuse,” said Carolina Bagnarol, her daughter. “There’s predatory lending here.”

Ms. Bagnarol has filed a lawsuit against a lengthy list of lenders she said took advantage of her mother. The loans plunged her mother deeper into debt with each mortgage payment, to the point of financial ruin. The lawsuit contends that Mrs. Bagnarol was pursued and persuaded — twice over — to take out ultimately disastrous loans on the family’s property.

In recent years, 70 percent of the elderly have been solicited to take out new mortgages, according to a survey by AARP.

“Older people seem to be targeted in part because they own their houses and have owned them for a long time and have equity in their houses,” said Jean Constantine-Davis, senior lawyer for the AARP Foundation.

Mrs. Bagnarol was in her late 70s and suffered from the onset of dementia when she signed the loans, family members said.

“This is one of the most egregious cases I’ve ever seen,” said Michael Rooney, the San Francisco lawyer representing the family in the lawsuit. “The terms were so horrible — negative amortization and adjustable rate — no one would believe this loan was good for her.”

Do borrowers taking part in the Obama administration’s mortgage modification program deserve a black mark on their credit records?

Lenders use special codes to let credit bureaus know what customers are borrowing and whether they’re paying on time. When the loan modification program, which lowers mortgage payments for homeowners who are behind in their payments or in danger of imminent default, was announced in February, lenders used an existing code, called AC, to signal that borrowers were participating in the program.

The problem for those borrowers, however, was the fact that the AC code signals that a consumer has made only a partial payment. That often had a significant impact on the scores of borrowers with good credit who had made all of their payments on time. A Treasury Department spokeswoman estimated that their scores could fall from 30 to 100 points, depending on other information in their credit file .

Why use an old code? The AC code was the closest fit, so the Consumer Data Industry Association recommended using it until it could develop a new one.

One Bank of America executive, for instance, confirmed in this recent New York Times article, that it reported borrowers who made timely payments before and after agreeing to loan modifications as making only partial payments. Presumably, the bank used the AC code, which damaged the credit of many borrowers.

First Phase of Project In the Phoenix Suburbs Hits New Financing Snag
CityNorth, the ballyhooed retail project planned in northern Phoenix’s affluent suburbs by Related Cos. and Thomas J. Klutznick Co., is the target of a foreclosure filing by lender Capmark Financial Group Inc.

Capmark filed last week in Maricopa County Court to foreclose on the first phase of the CityNorth project due to default on a $290.5 million loan. Other lenders that provided the loan include Deutsche Hypothekenbank and CSE Mortgage LLC.

Related, Klutznick and a third partner, J.E. Robert Cos., couldn’t refinance the loan when it came due, according to the companies. Those companies will continue to manage the project.

“The foreclosure will result in a restructuring of equity interests … to enable fresh capital to be injected,” Klutznick principal John Klutznick said in a statement. “Day-to-day operations will continue as usual.”