Homeowners who get loan modification may be too quick to get back on the spending track, putting them at risk for second defaults. Residential Capital, LLC, one of the country’s leading mortgage servicers, reports that almost half of the loan modifications they granted last year went back into default after less than six months. This has raised the question of whether loan modifications can really prevent foreclosure, or just hold them off temporarily.

Excessive credit

At last week’s meeting with the American Securitization Forum, ResCap CEO Thomas Marano reported that excessive credit was the main reason for most second defaults. According to Marano, once people get their mortgage modifications, many immediately use their savings to load up on other debt (such as credit cards). He adds that the rise in unemployment, resulting from large-scale cost-cutting by major companies, is also working against loan modification programs.

Debt counseling

Marano says that borrowers need to see loan modification as a long-term commitment rather than a one-off solution to mortgage problems. To do this, he recommends putting borrowers through debt counseling as part of the loan modification program. This will help them make smarter decisions on future credit, particularly on credit card spending.

The move will also benefit credit card companies, who are already starting to feel the crunch from missed and late payments. Last week, Fitch Ratings reported that delinquencies in consumer credit hit a record high in the past month—a figure that’s expected to rise if the current loan modification programs aren’t adjusted.

Qualification adjustments

The general requirement for a loan modification is a debt-to-income ratio of about 35%; that is, the mortgage payments must take up no more than 35% of a borrower’s income. According to Marano, however, this figure often exceeds 60% when other debts are taken into account. Working together, these debts virtually ensure a second default, even when the mortgage is significantly modified.

Government support

The government has long supported loan modification as a promising solution to the real estate slowdown, which has been further fueled by recession. However, implementing the program has proven difficult as servicers find it hard to reach out to borrowers. Also working against servicers is their contractual obligation to match their investors’ financial interests with those of their borrowers.

This is why many mortgage servicers, including ResCap, have teamed up with the Federal Housing Finance Agency (FHFA) to boost foreclosure prevention. FHFA director James Lockhart added that the agency plans to help servicers whose profits have drastically declined due to delinquent mortgages.

Principal reduction

Among the measures being taken to expand modification programs is principal forbearance—a permanent reduction of the principal balance on homes that have lost their value. However, Marano says, this may result in moral hazards since many homeowners consider their homes an investment. ResCap is currently working out a “shared appreciation” system wherein the servicer (or its investors) can mutually recover losses from such modifications.

Homeowners’ options

Loan modification continue to be one of the most viable solutions to mortgage problems. The key for struggling homeowners is to make the right choices both before and after the change, and to work with the right professionals. Attorney-backed loan modification companies can offer sound advice on choosing a loan modification plan and staying on track afterward.

The Loan Modification Department is composed of a team of attorneys, mortgage and real estate professionals, and hardship analysts. Lead by Expert Loan Modification Attorney, Marc R. Tow, Loan Modification Department has helped thousands of American Home Owners save their Homes and decrease their loan payments. For more information just Call 800-738-1170 or Visit our website http://www.cdloanmod.com/

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Today more and more lenders are implying that they are doing everything within their power to help home owners that have fallen behind on their payments, but I am sure if you speak to anyone that has attempted to get a loan modification, will beg to differ as they tackle road block after road block from their lender.

Not only are home owners finding that it’s a mission to reach a work out officer within the loss mitigation department of their lender, but to make matters worst, if they do receive an approval for a loan modification from their lender, they are finding that new payments are as unaffordable as the original mortgage.

As more and more borrowers default on their loans for such reasons as job loss or an adjustable rate mortgages, lenders are finding that their loss mitigation departments are flooded with request from home owners who can no longer afford their payments.  One of the main causes of this is lenders were not set up for the work load and mortgage restructuring that the rise in foreclosures have caused.  The main purpose of servicing companies were to collect monthly payments from the borrowers as there were limited request to help home owners modify their existing mortgages within past years.

Most loan modifications that are offered by lenders result in either a temporary and minimal rate reduction and an increase in the principal amount owed, as the lenders tact on the arrearages with late fees and many other garbage fees that purposively arise from the mortgage going into default.  Home owners will find that the amount they owe increases because of the missed payments and these junks fees and as a result the new payment that is being offered by the loan modification is even higher than the original mortgage payment.

In saying that, some home owners need to realize that a loan modification isn’t for everyone and that renting and starting over can be a better options for many, especially if you live in a state like Florida where many Floridians have loss in excess of a hundred thousand in equity over the last 2 years and the Florida market is still declining.

With a combination of the current U.S. economy and sub prime loans, foreclosures are far out pacing the number of loan modifications that are being done.

Many modifications done today tend to be unaffordable, because of no reduction to the principal balance of the mortgage and or a significant rate reduction and as a result we are now finding that over 50% of loan modification done within the last year have gone back into default.

One of the main duties of a servicer is to collect every dollar owed by the home owner for the lenders or investors that actually owns the loan, and this is one of the main reason that home owners are finding that their lenders are sometimes reluctant to modify their loan, as this could result in less income for them and the potential of huge losses for the investors or lenders that hired them.

Marlon Baugh is a nationally-known mortgage expert. Since 2003, he has specialized in Florida FHA Mortgage Loans for people with Bankruptcies, Foreclosure or with other credit issues, as well as Florida Loss Mitigation. If you would like a Free Copy or to get instant access to the remainder of this Insider Mortgage Report, please visit http://specializedfinancialsolutions.com/lendersexposed.htm or Call 954-678-5796

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The following are examples of ways the Home Affordable Modification Plan can help make your mortgage affordable. These are examples and are not intended to indicate the exact results you can expect if you qualify for this plan.

Legend

GMI = Gross Monthly Income

PITIA = Principal, Interest, Taxes, Insurance and Association Fees

DTI = Debt to Income Ratio

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Example 1: Rate reduction to achieve 31% DTI

GMI                                                                                    $ 4000.00

31% GMI (Target Monthly Payment)                                      $ 1240.00

Loan $200,000 @ 7.5% 30 years                                          $ 1398.43/month

Taxes and Insurance                                                            $ 250.00/month

PITIA                                                                                  $ 1698.43/month

Modify rate to 4% to achieve a DTI of approximately 31%

Modified Rate to 4%:                                                           $ 954.83/month

Taxes and Insurance:                                                          $ 250.00/month

New Payment                                                                  $ 1204.83/month

Savings                                                                             $ 493.60/month

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Example 2: Rate reduction and extending term of loan to 35 years to achieve 31% DTI

GMI                                                                                     $ 3000.00

31% GMI (Target Monthly Payment)                                       $ 930.00

Loan $200,000 @ 7.5% 30 years                                            $ 1398.43/month

Taxes and Insurance                                                             $ 250.00/month

PITIA                                                                                   $ 1698.43/month

Modify rate to 2%. Modify term to 35 years to achieve a DTI of approx 31%

Modified Rate to 4%:                                                            $ 662.53/month

Taxes and Insurance:                                                           $ 250.00/month

New Payment                                                                    $ 912.53/month

Savings                                                                              $ 785.90/month

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Example 3: Rate reduction, term extension & principal forbearance to achieve 31% DTI

GMI                                                                                   $ 4500.00

31% GMI (Target Monthly Payment)                                    $ 1395.00

Loan $450,000 @ 9.0% 30 years                                          $ 3620.80/month

Taxes and Insurance                                                            $ 250.00/month

PITIA                                                                                  $ 3870.80/month

Modify rate to 2%. Modify term to 40 years

Modified Rate to 2% for 40 years:                                          $ 1362.72/month

Taxes and Insurance:                                                           $ 250.00/month

New Payment                                                                    $1612.72/month

Because lowering the rate to the maximum floor of 2% and extending the terms of the loan to 40 years still does not achieve the desired DTI of 31%, the lender, at its discretion can elect to forgive or forebear a portion of the principal to achieve the 31% DTI. In this example the lender elects to forbear $75,000 of the principal which would be due as a balloon payment at the end of the term of the loan or if the home were to be sold. This is not expected to be a common practice and would most likely be used in an instance where the borrowers suffered a loss of income and the home suffered a sharp decrease in value.

Modified Rate to 2% for 40 years calculated on $370,000          $ 1135.60/month

Taxes and Insurance:                                                              $ 250.00/month

New Payment                                                                      $ 1385.60/month

Savings                                                                                  $ 2485.10/month

Peter is the nation’s leading authority on loan modification and loss mitigation strategies. His firm The Loan Modification Network connects homeowners with a team of specialsts in all fifty states to assist homeowners in foreclosure prevention solutions and loan modifications. Call 866-395-2803 or go to http://www.us-loan-modification.com to learn more.

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