7 Must Know Facts About Obama Loan Modifications
1. Its ALL About The Payment: The plan centers on the belief that struggling borrowers will stay in their homes—even as values decline sharply—as long as they can make their monthly payments. The idea is that the homeowner will keep the house if they can afford the payment. The question remains…what will homeowners do when they can RENT the same house (or very close) for less cost per month vs. the modified payment. Translation: Do you think people will stay in their homes even if they are (more or less)…renters?
2. The Number You Need To Know…31%: To that end, the administration’s plan requires participating loan servicers to reduce monthly payments to no more than 38 percent of the borrower’s gross monthly income. The government would then chip in to bring payments down further, to no more than 31 percent of the borrower’s monthly income. In lowering the payment, the servicer would
* first reduce the interest rate to as low as 2 percent. If that’s not enough to hit the 31 percent threshold,
* they would then extend the terms of the loan to up to 40 years.
* If that’s still not enough, the servicer would forebear loan principal at no interest. The plan does not, however, require servicers to reduce mortgage principal. In other words, the negative equity would be (more or less) tacked onto the
loan and would have to be paid off when the home was sold. Translation: Principle reductions remain elusive at best. Lenders would rather not reduce the balance now and gamble that the house will be worth more in the future. Enough so that the proceeds from the sale will pay the lender back. Based on various studies (Credit Suisse) it may take in excess of 10 years before properties are worth what people paid for them at the peak of the bubble.
3. ‘Ethical’ Bribe: To encourage participation, servicers will be paid $1,000 for each modification and will get an additional $1,000 payout each year for as many as three years, as long as the borrower continues making payments. Borrowers, meanwhile, can get up to $1,000 knocked off the principal of their loan each year for as many as five years if they make their payments on time. Neither party can receive the cash incentives until the modified loan payments have been made for at least three months. Translation: the government is rewarding both borrowers and servicers to modify loans so that they homeowner doesn’t default.
4. Financial hardship: The Obama administration is pitching its plan as an effort to help responsible homeowners ensnared in the historic housing slump and painful recession—not speculators. As such, only owner-occupied, primary residences with outstanding principal balances of up to $729,750 are eligible. Occupancy status will be verified through documents, such as the borrower’s credit report. In addition, the program is designed to target homeowners who are undergoing “serious hardships”—such as a loss of income—which have put them at risk of default. To participate, borrowers will have to sign an affidavit of financial hardship and verify their income with documents. “If we would have had such stringent verification over the last four or five years, we probably wouldn’t be in as bad a position as we are in,” says Richard Moody, the chief economist at Mission Residential. But while Moody has no objection to such verification, obtaining documents from so many homeowners could be an onerous effort. “It’s going to be a very time-consuming process,” he says. Only loans originated on or before Jan. 1, 2009, are eligible, and modified payments will remain in place for five years. Now that the administration’s plan is out, lenders are free to begin modifying loans. Translation: How many people who would ‘qualify’ for this program have financial documents that they can produce. Remember, most of these loans were the so-called ‘Liar Loans’ where no documentation was required. How many borrowers will be able (or willing) to produce the required documentation to benefit from this program? As far as not ‘bailing out’ investors. If the house going into foreclosure next door to your home (thus, reducing your property value by 9%..according the the Obama administration) does it matter if it was owned by an ‘investor’ or a homeowner. If the idea is to slow/ stop foreclosures does it really make sense that we only stop ‘certain’ foreclosures?
5. Net Present Value: To determine if a particular mortgage will be modified, the servicer will perform a so-called net present value test. The test compares the expected cash flow that the loan would generate if it is modified with the expected cash flow it would generate if it isn’t. If the modified loan is expected to produce more cash flow for the mortgage holder, the servicer is to restructure the loan. Howard Glaser, a mortgage industry consultant and a U.S. Department of Housing and Urban Development official during the Clinton administration, called this component of the plan “clever,” arguing that it would work to ensure broad participation. “When you apply the formula, the loans that are modified are the ones that are in the best economic interest of the investors to modify,” Glaser says. “The federal subsidy for the payment on the modification…tips the scale toward modification as a better deal for the investor.” Translation: Expect a massive wave of BPO orders to hit the shores soon (like next week). Some lenders may go online to sites like Zillow to create the value.
6. Second Liens: The Obama plan also addresses the issue of second liens—such as home equity loans or home equity lines of credit—by offering incentives to extinguish them. But key details on this component of the plan remained unclear. “Distinguishing the second lien is really important,” Green says. “[But] exactly how they are going to convince the second lien holder to do this is not clear to me at all.” Translation: WTF?
7. Will It Work? Moody argues that while the plan may reduce foreclosures for primary residences, it could lead to a spike in defaults for another group of homeowners. Although he supports the administration’s efforts to focus the initiative on primary residences, Moody notes that “it could be the case that a lot of [real estate speculators] have been just hanging on waiting to see exactly what the details are of this [plan],” Moody says. Now that it’s clear the Obama plan leaves speculators out, “we could actually see a spike in foreclosures or at least mortgage defaults among this group.”
Translation: Not only speculators…how many normal Joe homeowners have been waiting to see what the Obama plan would mean to them. Now that the details have been released expect
to see a HUGE increase in Short Sale demand….and REOs.
Bottom Line: Lenders will be overwhelmed by inquiries from homeowners looking to participate. Do the financial servicer has the capacity to handle these inquiries.” (No way)
Translation: Lenders are moving all available staff and resources to their new Loan Modification Departments.
Besim Kuduzovic "Yours Real Estate Samurai" - loyalty, devotion, integrity & honor to death
Harris Real Estate University Certified Short Sale Expert
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