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Let?s discuss what loan mods are, ? and what loan mods aren?t. There are non-government sponsored loan modifications which can look like anything. The lender and borrower change any of the terms of the loan that both agree to. The interest rate may be reduced or increased, the term may be extended or withdrawn, principal may be forborne, principal may be reduced, or they may just tear up the contract, (well not really, but you see where I am going). It is a contract between two parties and those two parties can change the terms of the contract, as long as they agree. There are a few private loan modifications occurring, but very few.
The loan modifications in the news and brought forth as the second coming are government sponsored loan mods. The government wrote the qualifications and the government wrote the terms and the government is paying both the lenders and the borrowers to modify their loan according the terms the government has decided is best. HARP is government sponsored loan mods for Fannie and Freddie guaranteed loans. HAMP is for non Fannie/Freddie loans. But there are qualifications. The loan must have originated before January 1, 2009. The borrower must be able to prove they are having difficulty making their payments. The amount owed on the first mortgage must be equal to or less than $729,750. The loan must be for your primary residence. DTI must be more than 31%.
There are three terms that HARP or HAMP may modify and those three terms are approached in a specific order. The second term will only be modified if the first modified term does not bring the DTI equal to or below 31%. And the third term will only be modified if the second term mod does not bring DTI below 31%. The first term is the interest rate which will be lowered to bring DTI to 31% with a minimum rate of 2%. Not bad, eh? Wouldn?t you like you have your interest rate lowered to 2%. If the modified interest rate is below the market rate, the modified rate will be fixed for a minimum of five years as specified in the modification agreement. Beginning in year six, the rate may increase no more than one percentage point per year until it reaches the rate cap indicated in the modification agreement. The cap is equal to the prevailing market interest rate on the date the modification is finalized as published by Freddie Mac based on a survey of its customers. This cap means that your rate can never be higher than the market rate on the day your loan was modified. If the modified rate is at or above the prevailing market rate, the modified rate will be fixed for the life of the loan. Simply, after five years, the interest rate will increase 1% per year until it gets to about 5.2%.
Will lowering interest rates for five years on some mortgages encourage folks to keep making the payments on mortgage amounts that are more than the value of their home? I think it will. And the number of folks who continue to make their payments will depend upon just how underwater their mortgages are, future appreciation or depreciation, unemployment rates, rent vs. own comparisons, etc. What percentage will continue to make their payments based on a reduction in their interest rate? I do not have a clue. There are too many variables.
The 2nd term that can modified is the length of the loan, and it can be extended up to 40 years to bring the borrowers DTI under 31%. Will extending the number of years to pay a mortgage encourage folks to keep paying on their mortgage? I doubt it. Maybe a few, but not many. Would you continue to pay on a mortage for which you were severly underwater if the change in the loan amounted to less equity you were paying and more interest every month? And you were basically never going to own your house? What percentage will continue to make their payments based on an extension in the loan term? I would guess about 5%.
The 3rd term that can modifed is the principal, although under the conditions of HARP and HAMP, the principal may be foreborne, that is, the principal can be reduced for the period of the loan, but must be paid back when the house is sold, or foreclosed on, or borrowed on. Will folks continue to make payments based on principal forebearance? I think so, but I don?t think they will understand the terms under which they will agree. My understanding is that the amount of principal forebearance will be owed by the borrowers no matter how much they sell the house for in realtion to the amount owed. I would not agree to this. It changes a non-recourse portion of the loan into recourse.
Borrowers are enrolled in a three month trial period paying an amount equal to or less than the amount agreed upon in their loan modification agreement. If the borrowers do not make their new payments on time during the trial period, their trial period is extended. If the borrowers do not turn in the appropriate documentation necessary to qualify for the loan mod, the trial period is extended. If the borrower fails to meet the requirements of the trial period is any way, the trial period is extended. Currently, no borrower who is enrolled in the loan modification program may fail. On January 31, some of the trial loan modification extensions will end, unless they are extended again. If the maximum time period for a foreclosure proceeding is reached while a trial loan mod is in effect, the foreclosure is canceled.
IMO, the overall effect of the government sponsored loan mods will be more pretend and extend. Foreclosures will be delayed or canceled, but only temporarily. Eventually most borrowers who obtain loan mods will default as they realize they could rent for much less than they can ?own?, and the likelihood of their building equity through appreciation will dissappear with the months they pay on an underwater mortgage.
Insolvency can not be solved with more borrowing.
It's a good article, but I can't agree with the conclusion. Why foreclose when uncle sam is subsidizing your mortgage? Worse case, just cry for more government help.
The monthly payment on $730k loan at 6% rate is roughly $4,735, versus the same loan at 2% rate is roughly $2,700. Gee um... Let's reward everyone who's financially irresponsible!
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