Loan Modification

Loan modification is one of the new weapons the government has chosen to help slow down the foreclosures and losses to many of the nation's lenders.  President Obama recently signed into law the "Making Home Affordable (MHA) plan". This new plan provides loan holders with a standard procedure for modifying home loans when borrowers are having trouble making payments. Borrowers can modify their loan terms via the MHA’s Homeowner Homeowner Stability Initiative up to end of 2012.

The goal of the MHA plan is to help the 4 to 5 million homeowners who need help with adjusting their loan payments. Up to 75 billion dollars has been set aside to 
provide incentives to loan holders to help cover any losses of revenue. Many lenders don't make any money on foreclosures and stand to loose as much as $50,000 
on some high dollar homes.

Loan modification is somewhat of a misnomer. Yes, you are requesting some type of change or mortgage loan modification of your home loan, but for all practical purposes this type of change requires the same type of information as if you were applying for a new loan. Although the government has stepped in and made some hard and fast rules that certainly benefit the loan holder, lenders can still request basic information about your current financial status in order to do the deal.

This new policy was established to help borrowers who are at risk for defaulting on any mortgage loan. The intent was to try and reach an acceptable mortgage loan modification of your loan to both you, the borrower, and the loan owner or lender. Rather than have both the loan holder and the lender go down in flames on a foreclosure, these new guidelines can help borrowers and lenders agree to new terms that both can fulfill.

The name of the program is the Standard Waterfall. If a borrower is identified at risk of foreclosure, the lender now has some course of action that can prevent the crisis. This applies to borrowers that can afford a payment that is equal to or less than 31% of a borrower's monthly income. Some basic rules of the Standard Waterfall are:

• Loan holders can ask for verification of income from current borrowers, that include pay receipts, income tax records, and information from employers.
• A credit check has to prove that you actually are the primary resident of the house before you can get any loan modification on the property.
• Loan holders figure out what a borrower’s monthly payment would be that includes everything but late fees or accrued penalties.
• The key is to get debt-to-income ratio (DTI) down to or below the 31% of gross income.
• Loan holders can begin to reach the DTI by making small interest rate reductions at 0.125% until the 2% floor interest rate is reached.
• If the DTI of 31% can not be reached, the lender can also extend the loan term for up to 40 years from the time of modification.
• If the DTI of 31% is still not achieved, the loan holder can choose to forbear some of the principal, which is then due in a balloon payment at time of pay off.

The government has put an incentive of $1,000 for any loan modifications to help offset the loss of revenue. Of course it depends on the final numbers, which would make more financial sense, foreclosure or mortgage loan modification. If the borrower makes payments for three months, the agreement will stay the same for the next five years.

So this is still a temporary situation meant to stop the financial impact of foreclosures and help both the borrowers and lenders to weather this financial storm. Whether this proves to be a long term solution will be dependent on when (or if) the economy picks back up.

One thing to always keep in mind, no third party is going to do anything the borrower can't do in regard to getting these types of loan modifications. Don't be taken in by any company that wants an upfront fee or promises some unrealistic outcome. The guidelines are clear and available to anyone. Don't fall for any scam or false guarantees that sound too good to be true, because they almost always are not!

For every loan modification they do, lenders get an incentive check for $1,000 from the government. They are supposed to follow the Standard Waterfall steps above, perform a cost analysis, and decide if the incentive payments will give them a better outcome than foreclosure would. If they decide in the affirmative, then they will proceed with the modification. After making payments on the modified loan for a three-month period, the new interest rate will stay fixed for the next five years.