Beware of Loan Modification Scams

It is no secret that loan modifications is becoming a very large business. With over 5 million homeowners currently behind on their mortgage payments, and the new stimulus plan to help fund loan modifications, more and more loan modification companies are popping up. While many of these companies are legit and do help people, there are plenty more that simply scam weary homeowners out of money.

Some people will say that any loan modification company is out to scam homeowners because people can do loan modifications by themselves. While this is true, any homeowner can do a loan modification by them self, they may not get the best deal and that it will take way longer than it should. What a loan modification company does for a homeowner is researches every piece of information, to use as ammo when presenting it to the lender, and usually these companies can bypass the run around that lenders give to a lot of homeowners.  A good loan modification company will constantly be in contact with the homeowners lender and get all the information needed to negotiate a new loan for their client.

Now the scam companies will promises a lot and deliver very little or nothing at all. Any loan modification that will tell you they can get a loan modification approved for you and tell you what terms they can get is telling you a flat out lie. The lender is the only entity that can approve a loan modification and tell you what terms they can give you. The most common scam is when the loan modification tells the client they can do these things, and then asks for money up front. As a homeowner you should never pay for a loan modification until it is approved by your lender. Many scam companies are charging up front fees, usually anywhere from 1,000 to 5,000, and then doing nothing for the client.

So if you are looking for a loan modification to handle the negotiations for you, be sure not to pay them up front, and if they promise you they can get you approved, you may want to look somewhere else.

Is Obama’s Loan Modification Enough?

Experts say that only about half of the 9 million American homeowners that President Barack Obama’s mortgage modification plan is targeting will actually receive relief.The plan is broken up into 2 parts that will spend $275 billion to help rework or modify mortgages. The first part is aimed to help borrowers who bought more house than they really could afford, and the second part targets borrowers with good credit who have had their property values plummet.

The first part of the plan allocates $75 billion to encourage servicers, investors, and borrowers to get loan modifications on Alt-A and Subprime mortgage loans that are at risk of foreclosure. These types of mortgages represent 60 percent of all loans that are currently delinquent.

The second part is to get Fannie Mae and Freddie Mac to refinance approximately 5 million loans that are current but do not qualify because the property values have lowered. The problem here is that there aren’t 5 million Fannie Mae and Freddie Mac loans that would be qualify under the program’s criteria for refinancing. To be eligible for refinance the mortgage must fall between a loan-to-value ratio of 80% to 105% and most of the properties now exceed this number.

While Obama’s mortgage modification plan does offer hope for many Americans it will not be enough to help everyone. Experts estimate that we could see more than 8.1 million foreclosures within the next four years.

The Loan Modification Plan Gets Better

The U.S. Treasury  provided more details last week about its $75 billion effort to help up to 4 million distressed mortgages. While much of the plan resembles the version introduced 3 weeks ago, a few surprises will increase the program’s scope.

One of the new things will be to help struggling borrowers with mortgages up to $729,750, a higher amount than what many experts had expected. This will help include more expensive homes common in high-cost areas.

Another part of the plan to help the situation, the program will use cash incentives to get servicers, lenders, investors and borrowers to modify mortgage loans into ones with lower, more manageable payments equal to 38% of a borrower’s income. The Treasury will also match interest rate reductions to get the payment down to 31%. But if they participate in the program, lenders no longer can choose which loans they modify, they must use the government’s new guidelines.

The lack of incentives is what kept lenders away from the Federal Housing Administration’s Hope for Homeowners program, another large scale loan modification program introduced last year. Also, the new plan also offers cash incentives to servicers who engage in foreclosure alternatives such as short sales.

Homeowner Stability Plan Open for Business

The Obama’s administration’s Homeowner Stability Plan was launched today. The plan to  help as many as 4 million struggling borrowers by modifying loans so housing payments are no more than 31% of monthly gross income. Also, homeowners who haven’t missed a payment can refinance into lower cost loans. This is expected to help up to 5 million homeowners. The $75 billion loan modification plan will provide incentives to borrowers, servicers and mortgage investors with the goal of stopping foreclosures.

Administration officials stressed that they are not using taxpayer money to bail out irresponsible homeowners, there will be qualifications that need to be met in order to receive a loan modification. New qualifications for loan modifications are as follows:

• have obtained their mortgage before Jan. 1, 2009;
• have a primary mortgage of less than $729,500;
• live in the property;
• fully document their income by providing tax returns and pay stubs;
• sign a statement of financial hardship; and
• go for counseling if their total household debt – including auto loans, credit cards and alimony – totals more than 55% of their income.

However, for servicers who just received the new guidelines,  it will take some time to upgrade their systems and train their staffs to handle borrower calls. While borrowers can now start contacting servicers, it may take several weeks for companies to implement the guidelines.

The Homeowner Stability Plan Starts

The Treasury Department is expected to begin implementing the Obama Administration’s $75 billion, Homeowner Affordability and Stability Plan tomorrow. For distressed homeowners, help is on the way. The Obama plan, originally announced on Feb 18, aims to keep homeowners from defaulting on their homes causing foreclosure. Mortgage servicers, the companies that process payments on behalf of the owners of the loan, will now have a financial incentive to change the terms, making loan modifications more accessible by homeowners. Government funding could knock as much as three percentage points off of the rates borrowers pay.

The plan changes the formula for calculating monthly payments. In the past, banks tried to help borrowers who had fallen behind by tacking missed payments onto the principal of the loan, which did not reduce the monthly payments. Over 50% of borrowers who get put in such payment plans end up defaulting again. Under the new program, mortgages will be restructured so that home payments account for no more than 31% of the borrower’s monthly income. All debt payments, including and credit cards and car loans, will be no more than 55% of pre-tax income.

Also included in this plan, borrowers will not have to be late on their payments to qualify for a loan modification. Borrowers who owe more than their house is worth, will also be allowed to refinance so long as their first mortgage does not exceed 105% of their home’s value. Previously only borrowers with at least 20% equity in their homes could refinance.

Why Would a Lender Modify Your Loan?

Typically, a lender and a borrower agree to terms of a loan indicating the principal balance, interest rate, and repayment period. Most home loans are secured by the underlying property, which means that if the borrower defaults on the loan, the lender can seize the property through foreclosure.

The primary reason a lender would offer a loan modification is because they believe it to be in their best interests. Foreclosure is a very costly and lengthy legal process. After the foreclosure, the bank must then sell the home, making the losses even greater, and in with the real estate market where it is at now, it is hard to sell any homes, even at low prices. If lenders can keep borrowers in their homes by modifying terms of the original loans, the costs can be significantly less than a foreclosure. Since most loan modifications do not reduce the principal balance of the loan,
the lender will still recover the amount of the loan, just over a longer term.

When a home goes into foreclosure, everyone loses, this is a fact. Lenders are doing everything possible, with the help of the government now, to offer borrowers a chance to keep their home and avoid foreclosure.

Fannie Mae & Freddie Mac easing up on Loan Mod requirements

Due to the staggering foreclosure rate Fannie Mae and Freddie Mac are going on the offensive in hopes to put a stall to the increasing #’s. They have recently sent out 90,000 letters to borrowers that have missed at least three payments on their mortgage. The letters offer the struggling borrowers to participate in a streamlined loan modification plan that was announced in November. The program is different than the proposed plan by the Obama administration in that it will have more flexibility than just refinancing or modifying mortgages. The main difference will be that mortgage payments can be reduced to 38% of the borrowers salary. This can be done by reducing the interest rate, extending repayment terms and even reducing the principal balance.

Even with this new aggressive program coming out the statistics to date are not as favorable as one would expect. Last year 57% of all loan modifications that Fannie Mae and Freddie Mac did in the first quarter still ended up defaulting again within 6 months.

Many other experts put additional blame on the servicers of the loans stating that when borrowers get in trouble the servicing companies are either not helpful or extremely difficult to communicate with. To take this on further I attempted to contact my lender to see what the process was like. The owner of my note is US Bank but it is serviced by Chase. When attempting to communicate with Chase I was surprised to find out that getting to the proper person was not as easy as they would have led you to believe. It took several phone calls and transfers to get to the right department and once I reached the right place they were only available during a limited number of business hours.

So although Chase claims to have helped 100,000’s of borrowers to me it is evident that the process is not a simple and easy one. Hopefully more programs such as this new one by Fannie Mae and Freddie Mac can continue to become available but if borrowers are unable to communicate with their lenders it won’t matter how good the program is.

Fannie Mae & Freddie Mac are Expected to Make Loan Modifications More Acceptable

The two largest government sponsored enterprises (GSE’s), Fannie Mae and Freddie Mac, have sent over 90,000 letters to borrowers who have missed at least 3 payments, offering them to participate in a loan modification plan that was announced in November of 2008. . The loan modification program was designed to reduce borrower’s monthly payments on their mortgages to 38% of their salary. The loan modification reduces interest rates, extending repayment terms, and sometimes even reducing the outstanding principal on the loan. This is a different program from the one that has been proposed by President Obama last week that gets Fannie Mae and Freddie Mac to refinance or modify even more mortgages.

Unfortunately, with this existiing loan modification plan, approximately 57% of all Fannie Mae and Freddie Mac’s loan modifications that were made during the first quarter of last year defaulted again within six months of the modification.

Fannie Mae and Freddie Mac own or guarantee about $5.3 trillion of the $12 trillion in U.S. residential mortgage debt. The government seized control of the companies in September of 2008 after their losses threatened to further hurt  the housing market, and regulators began pushing them to step up efforts to stop foreclosures.

Some Facts About Loan Modification

Here are some useful facts that many homeowners have questions about when getting a loan modification:

1. All legal fees for work actually completed and applicable to the current loan modification can be added into the modified principal balance. The homeowner does not have to pay the fees up front if they choose not to.

2. The Lender has the right to perform an inspection of the home before approving the loan modification. They can deny a loan modification if the house has not been taken care of.

3. Any late charges applied to loans for late or missed payments should be waived by the lender upon approval of the loan modification.

4. Lenders are to perform an escrow analysis at the time of the loan modification to ensure that the delinquent payments reflect the actual escrow requirements required for those months capitalized.

5. The homeowner must provide proof of income to qualify for a loan modification. The homeowner must be able to continue making the lower payments. To become a good candidate for a loan modification, the homeowner must show a desire to keep the house.

6. The homeowner must have experienced a financial hardship, whether it be loss of job or interest rate increase in an ARM loan.

A loan modification is a new agreement between the lender and the borrower on the loan already in place, reducing the payments to prevent foreclosure. If a home goes into foreclosure, both parties lose, so it is in the best interest of both parties to make a deal and prevent the foreclosure from happening.

Obama Administration to apply $50-100 billion toward home loan modifications

The Obama administration’s housing plan will use government money to help reduce interest rates for struggling borrowers, while asking lawmakers to approve more ways to modify mortgages. The much anticipated plan will be most likely made public within one week according to US Secretary Treasurer Timothy Geithner. Within the last year foreclosers have soared to an all time record high of over 2 million. With the combination of falling home values and tigher mortgage standards which increased the difficulty of homeowners to sell or refinance their properties. Of the $700 billion proposed in the stimulus package an estimated $50 – 100 billion will be used to boost the housing market nation wide. “Our focus will begin on using the full resources of the government to help bring down mortgage payments and help reduce mortgage interest rates,” Geithner told the Senate Banking Committee yesterday.