Modification is the buzzword for Vail Valley borrowers
The latest effort to stem the economic turmoil and stabilize home ownership is a massive effort by the government to work with lenders to modify millions of home loans, both in terms of interest rates and in some cases, loan balances.
As home values have plummeted and jobs vanished, many borrowers find they owe more than their property is worth or are forking over a larger percentage of their income to make a mortgage payment. As a result many homeowners see no options other than to walk away.
There have been a large number of mortgage loans voluntarily modified in the last year, but to put it mildly, you haven’t seen anything yet. For the most part, borrowers had to be delinquent ” and quite often the terms of the modification were of questionable benefit at best. Many times the modifications offered to roll a few payments into a new loan but did not result in a reduced payment. Modifications took as long as six months to process.
It now appears that lenders will have to make a legitimate effort to modify millions of loans to lower payments, interest rates and in some cases balances owed. The details are still sketchy about just how this will happen, but in general it appears that lenders will have to look at an applicant’s income and adjust his housing payment including taxes, insurance and homeowners fees to somewhere between 31 and 38 percent of gross income. The rate could be as low as 2 percent and the term as long as 40 years.
However, before you start planning how you will spend all that cash left over should your payment get reduced, keep a few things in mind. The program does not cover every loan out there. Notably it excludes loans over $729,750 and those on second homes and investment properties. It also does not cover loans that are not owned by Fannie Mae or Freddie Mac. These restrictions encompass millions of loans, and I am willing to bet a disproportionately high percentage in the Vail Valley. If your loan was a stated income, sub-prime or jumbo loan at the time (meaning over $417,000) chances are slim you’re included in this party. And if you do get invited to the party, plan to wait in a very long line before you see a reduced payment. I honestly think lenders may be backlogged up to a year on processing some of these.
However, you can check on your owner-occupied primary residence loan by calling your lender to see who owns your loan. If it’s not Fannie or Freddie and you can document that your income has dropped significantly since you bought your home, you should ask how to start the process for requesting a loan modification anyway and you might find a way.
If you are offered a modification, beware and read everything carefully. Recently an acquaintance came in to show me a modification offer he got from Countrywide and I advised him to refuse it. My acquaintance had a very bad adjustable rate mortgage that he should never have gotten into (he didn’t call me when he applied for it) and the rate was up to about 9 percent and likely to go higher.
I’m not quite sure what Countrywide thinks they are getting away with but they had offered my friend two options. The first was to fix his rate at 9 percent (what the…????). The second was to roll it back to 6.9 percent for a few months, then it would adjust to 9 percent and likely higher. Gee thanks, guys!
Curiously, there was no real disclosure included in the forms he had gotten from Countrywide noting that his rate would soon zoom back up. Rather, it looked enticing that he might get to skip a couple of payments and have a few months of lower payments than he had been struggling with. I suggested he call Countrywide back (which will likely entail hours spent on hold) and ask why he was not eligible under the Fannie Mae/Freddie Mac guidelines. I fear their answer may be that Fannie or Freddie would never have participated in putting out an adjustable rate mortgage that would go to 9 percent, and he may not be eligible under the current guidelines.
If this is the case he may be at the mercy of whatever Countrywide chooses to offer him, but if that’s the case shame on Countrywide and their parent, Bank of America, who have taken billions in bailout money and then offer people in trouble worse loans than they already have.
Chris Neuswanger is a loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related inquiries from readers.