Alabama Mortgage loan modification and refinancing used to be as eventful as changing one’s shirt on a hot day. Nothing difficult, sexy, or exciting. With home prices plummeting, you may need professional or government help to pull it off.
President Obama’s aggressive rescue plan calls for:
* restructuring distressed mortgages
* keeping struggling borrowers in their homes
* reworking troubled loans
* installing a floor beneath falling property values
* helping up to 4 million homeowners
The Obama administration has set aside $75 billion to prevent defaults and foreclosures even though 52% of loans modified in early 2008 went bad again within 6 months.
Mechanics of the loan modification plan:
* the loan servicing company reduces monthly mortgage payments to no more than 38% of the borrower’s gross monthly income
* government acts to reduce these payments down to 31%
* to get to 31%, the loan servicer will first reduce the interest rate to as low as 2%
* if not enough to reach the 31% threshold, the loan terms are extended up to 40 years
* if still not enough, the servicer will forebear (not reduce) loan principal at no interest
Writing down the principal to make the mortgage loan balance less than the home’s value is critical. Anyone left “underwater” – mortgage greater than home value – would have an incentive to default.
You would think the banks would have every reason to embrace the Obama plan, given the REOs already on the books. I guess their lobbyists in Washington wanted an even sweeter deal – at taxpayer expense.
Incentives:
* loan servicers will receive $1,000 (your tax dollars) for each Alabama mortgage loan modification completed
* servicers will receive an additional $1,000 per year for up to 3 years if the borrower is making payments on time
* borrowers will receive $1,000 knocked off the principal each year for 5 years if they make payments on time
No cash incentives are awarded until modified loan payments have been made for at least 3 months.
As with all government programs, strings are attached. The government states that it is out to assist responsible homeowners who were caught up in a historic housing slump.
Caveats:
* house must be owner occupied
* owner occupancy will be verified through credit reports
* the mortgage must have been written before January 1, 2009
* the outstanding principal balance must be $729,750 or less (don’t know how they came up with this figure)
* borrower is required to sign an affidavit of financial hardship and to verify income
* modified loan payments will remain in place for 5 years
Verification is likely to be more stringent than for the original mortgage loan. No more “wink and a nod” loans through shady mortgage brokers.
Loan servicing companies will determine whether or not to modify a loan by using a “net present value” test. The test compares expected cash flow if the loan is modified against performance projections if it is not.
The test is a clever way to placate bankers and investors. When the federal subsidies are included in the formula, modified loans are a better risk for investors.
What remains unclear under the plan is how to deal with second mortgages and equity lines of credit.
Will it work? I’m not sure, but I do believe it’s a lot like chicken soup for the homeowner – it can’t hurt.
If you are a homeowner on the ropes, I would not attempt this on my own. The paperwork alone should be staggering. Work with professionals who know the system and any alternatives available to you.
Visit http://refinancingyourmortgageresources.com
