Sara J. Lipowitz is a Santa Cruz attorney in solo practice who specializes in bankruptcy. An attorney for eight years and a former journalist, her article below provides an excellent overview of the limited resources that are now available for coping with distressed loans.

Every day, announcements are made about new programs for distressed homeowners or changes to existing ones. Even if you’re not in default, if you’re spending too much of your income on housing or are experiencing a financial crunch, help may be available. One thing these programs have in common: They require either a new loan or a change to the terms of an existing loan. In many cases, this will be the first time real underwriting takes place based on the borrower’s income and circumstances. Lending became so lax for a period of time that responsible underwriting basically disappeared from large segments of the industry.Some of these programs and offers apply only when the lender is the note holder. Since 80 percent of mortgages have been securitized, the entity to which you make your payments may not have authority to change your loan terms.

Hope Now Alliance

Hope Now was unrolled in July 2007 to great fanfare in Washington. The program’s aim was to modify home mortgages through a voluntary alliance of nonprofit housing counselors and mortgage lenders. This proved to be akin to stuffing coconuts through a garden hose. At the time, public officials were underestimating the scope and nature of the crisis.As of September, the program has resulted in about 1.6 million repayment plans and 860,000 modifications. Repayment plans allow the borrower to catch up on missed payments, but the loan terms remain the same. Modifications allow for a change to the loan terms, which can include a reduction in the interest rate, forgiveness of a portion of principal or extension of the maturity date. However, according to the Center for Responsible Lending, about half of Hope Now loan modifications between July 2007 and August 2008 resulted in the same or even a higher mortgage payment for the borrower. Hope Now’s aim is to modify resetting first-lien subprime residential adjustable-rate mortgages ARMs.

For homeowners to get “fast track” help, their loans must:

• Have been generated between Jan. 1, 2005 and July 31, 2007 and must reset between Jan. 1, 2008 and July 31, 2010.

• Be securitized.• Be current. Current means not more than 30 days delinquent and not more than one incident of 60 days delinquent in the last 12 months.

• Not be a negative amortization product.In addition, the homeowner must have less than 3 percent equity in the home and a FICO score under 660. The loan servicer must determine the owner cannot afford higher payments. Obviously, this is not a program for people already in trouble, or who will never be able to make even a modified monthly payment. Advocates question whether the modifications, which are basically five-year rate freezes, will preserve people’s housing in the long run or whether this is kicking the can down the road.

Hope for Homeowners

H4H, unveiled in October, aims at a more distressed group of homeowners. Any type of loan is eligible, as long as it was generated prior to Jan. 1, 2008. Again, it applies only to residential, owner-occupied homes — no speculators. The total monthly mortgage payment must exceed 31 percent of the borrower’s gross monthly income, which is what the U.S. Department of Housing and Urban Development considers unaffordable. The borrower may be current or delinquent, but must have made at least six payments.Like Hope Now, H4H is voluntary. Participating lenders must agree to waive prepayment penalties and late fees, extinguish their liens against the property, and accept the H4H payout as payment in full. The government takes a future interest in the property’s appreciation, which it may choose to share with lenders as incentives for participating.The maximum loan amount is $550,440.H4H allows for principal reduction, historically difficult to get from lenders. It remains to be seen how often principal reductions happen.

Individual lenders

Some lenders, whether from government takeover, threat of government action, or fear of future regulation, are modifying mortgages. These include:

• IndyMac, which was taken over by the FDIC in July.• Countrywide, which announced a settlement with the California Attorney General’s Office and others in October to avoid being ground into dust by predatory lending lawsuits

• JP Morgan, the owner of Chase, Washington Mutual and EMC Mortgage. It announced new plans Nov. 1 to modify home mortgages.

• Fannie Mae, the quasi-governmental agency taken over in September, and its sister organization, Freddie Mac.

• Citigroup, which announced plans Nov. 11 to expand its already existing modification program.Some lenders have sent letters with instructions on how to initiate a modification. Do not assume, however, that if you do not receive a letter you are not eligible — call to find out. Other lenders may follow suit.

What you can do

Most foreclosures happen without any communication between the lender and the homeowner. A mortgage broker I know says she tells her clients to call lenders and stay on the phone until they get passed along to a person who has authority to make decisions on loan terms. Do not start with customer service numbers, but research on the Web and elsewhere for the number of the loss mitigation department. Be persistent, polite and firm. Before accepting an offer, consider whether the deal is a good one and how it will fit into your larger financial picture. Be prepared to offer documentation of your income and expenses.Bankruptcy may be an option, particularly for people whose home values have fallen so far that their second mortgage is completely unsecured. Before you decide, consult a bankruptcy attorney.There is a rumor the federal bailout bill contained provisions to help homeowners. While the bill gave the U.S. Treasury the option of using bailout money to stabilize the housing market, the proposals to give bankruptcy judges the power to modify home mortgages and reduce principal in bankruptcy did not pass. When the new administration takes office in January, there may be further plans to address the crisis. Stay tuned.

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