News on the Loan Modification Front

One of the serious impediments to doing meaningful loan modifications is the high number of homeowners who are "under water" -- they owe more than their homes are worth. Currently that shuts them out of the conventional mortgage market. Estimates I have seen indicate that one out of every five households is underwater. Ouch!

As part of the initial stimulus package, the Federal Housing Finance Agency that is running Fannie Mae and Freddie Mac these days instituted their Home Affordable Refinance Plan. Under this plan, homeowners who were slightly under water could still refinance as long as the loan was not more than 5 percent larger than the appraised value of the home. There were two other nice features of this program:

1. If the initial loan was less than 80 percent loan-to-value (LTV) even if the new loan was at 105 percent LTV, no Private Mortgage Insurance (PMI) was required on the new loan.
2. If the initial loan had PMI on it, they would just continue with that policy.

On the bad side, paying off secondary financing with the refinance was not allowed. Borrowers who had financed homes with piggy-back financing could not refinance even if it made economic sense. They couldn't pay off the second loan and the holder of the second wouldn't allow subordination to the new first even though it had better terms. That´s a Catch 22.

It has been clear to many of us that even though this program looked attractive, its applicability was, in fact, quite limited.

Some better news is that under a change in policy just last week, there is additional help for some of these homeowners. Now a homeowner may be as much as 25 percent underwater and if his loan is owned by Fannie Mae or Freddie Mac he is still eligible for a refinance.

If you owe $250,000, for example, even if your home appraises for only $200, 000, you are eligible. For more information go to MakingHomeAffordable.gov.

As an editorial comment, I am glad if anyone gets helped by this, but all this seems more like political grand-standing. If we have 15-20 million homeowners in trouble because of lack of equity and the unaffordability of a toxic mortgage, this program is just a drop in the bucket. We are not going to solve the foreclosure problem until lenders start reducing the principal owed on loans down to something like current market value. 

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Comments

[Jackie Smith]

I had remodified my first and second mortgage a year ago, but on my credit report it show's four open mortages. It appears that my loan company did not close out the original loans. What effect has this on my credit?

[Gerri]

Jackie,

I would recommend you dispute that information. Otherwise it does affect your credit report, both by adding to the total debt you appear to owe as well as the number of accounts with balances. File a dispute with each of the credit reporting agencies.