New Hope and Help for Struggling Homeowners

When the housing bubble burst in 2006-2007, observers attributed the jump in foreclosures to subprime and exotic mortgages. Those loans, which typically required small initial monthly payments that climbed out of reach, enabled millions of buyers to purchase homes they couldn't have afforded with a traditional mortgage. A year or two later, when the loan payments adjusted upward�on properties that had lost value instead of gaining it�borrowers had no way to avoid foreclosure.

Despite lenders having largely abandoned subprime and exotic loan products, the housing landscape doesn't look much improved today. According to RealtyTrac, Irvine, Calif., a real estate Web site and online marketplace for foreclosure properties, foreclosure filings in the first quarter of 2009 were up 9% from the previous quarter, and nearly 24% from the same period in 2008.

What has changed is the reason behind the foreclosures: unemployment. Statistics reflect a sharp increase in defaults on traditional, fixed-rate loans, a sign that the foreclosure problem now is more the result of a bad economy than bad loans.

In response, the Obama Administration, in March 2009, launched a $75 billion plan that would keep an estimated seven to nine million homeowners out of foreclosure over the next few years. The program focuses on making monthly mortgage payments more affordable. So, whether you're still holding on to a subprime or exotic mortgage or you're one of the millions of workers who has lost work, there's new hope for saving your home.

Keep in mind, too, that another potential option is to refinance a loan from another source at your credit union, if you qualify. That avoids many of the issues that resulted in mortgage problems in the first place.

Multipronged effort addresses mortgage affordability

The Administration's Making Home Affordable (MHA) program consists of two remedies for homeowners in trouble:

Home Affordable Refinance�This part of the plan offers new access to lower-rate refinance loans for homeowners who haven't missed a payment but may have little or no equity in their property. Only conforming Fannie Mae and Freddie Mac loans are eligible to refinance under this program, which ends in June 2010.

Home Affordable Modification�This part of the plan reduces payments for borrowers who are already behind or are at risk of default. Under the plan, the monthly payment on an existing first mortgage is reduced to 31% of monthly gross income. To achieve the 31% target, the lender first reduces the interest rate (to as low as 2%, if necessary). If that isn't enough, the lender can extend the loan term up to 40 years, forgive part of the loan balance, or postpone payment of part of the principal. The new interest rate would stay in place for five years, and then increase by one percentage point per year until it reached either the original rate or the prevailing mortgage rate at the time of the modification, whichever is lower.

Most conventional loans are eligible for a modification, as long as the lender participates in the program. Currently FHA, VA, and USDA loans are not eligible, but they may be modified under other programs. The modification program will be in effect until the end of 2012, but a loan only can be modified once.

Even if you got your home loan elsewhere, review your options with a mortgage specialist at your credit union.

The Second Lien program reduces payments on a second mortgage when the first is modified under the Home Affordable Modification program. Or, in some cases, the second loan will be eliminated through a lump-sum buyout by the government. This addresses the issue of unaffordable "seconds," which often complicate or prevent modification of the "first."

To be eligible for a Home Affordable Refinance: Your first mortgage cannot exceed 125% of the current market value of the property; You must be current on your mortgage payments; You must occupy the property; You must have sufficient income to afford the new mortgage payment; and You must have a conforming Fannie Mae or Freddie Mac loan. Contact Fannie Mae , 800-7FANNIE; and Freddie Mac or 800-FREDDIE to determine if either agency owns or securitized your loan.

To be eligible for a Home Affordable Modification: You must occupy the property; You must have a loan that was originated before Jan. 1, 2009; Your first mortgage cannot exceed $729,750 for a single-family home (higher limits apply for two- to four-unit properties); Your mortgage payment (including taxes, insurance, and homeowners association dues) must be more than 31% of your gross monthly income; You must have experienced, or will soon experience, a change in income or expenses that makes your current mortgage payment unaffordable; and Your servicer must participate in the program. Participation is only mandatory if the lender takes Troubled Asset Relief Program (TARP) bailout funds from the government. However, as of early May 2009, lenders responsible for more than 75% of all mortgages in the U.S. were participating in the MHA program.

Visit MakingHomeAffordable.gov to determine your eligibility for either a refinance loan or a modification and to find out if your servicer is participating in the program.

Servicers given tools, motivation to help borrowers

Before the launch of the Making Home Affordable program, many past-due borrowers complained that servicers were not as committed to making loan modifications as they claimed to be.

Rick Harper, housing director and vice president of Consumer Credit Counseling Service of San Francisco, a HUD-certified housing counseling agency, says the reason previous foreclosure prevention efforts were not as effective as they needed to be is because they were largely voluntary, often complicated, and sometimes expensive. Servicers also lacked clear and consistent guidelines for making modifications.

Under the MHA program, servicers now have the tools and the rules they need to make loans affordable. They also are receiving financial incentives from the government for each borrower they keep out of foreclosure.

Borrowers, too, will be rewarded for success. Homeowners who keep up with their new, modified payments are eligible to receive an annual $1,000 reduction in principal on their first mortgage for up to five years. They can receive an additional $250 per year if they keep up payments on a modified second mortgage. That's up to $6,250 of principal forgiven on your first mortgage over five years!

Patience required

Some of the first borrowers to contact their servicers about the MHA program have complained of long waits and unresponsiveness. Program officials and housing counselors are asking homeowners to be patient as servicers roll out the new program.

"We're beginning to see a few [loan modifications] that have worked their way through the process," says Harper. But, he says, at this early stage it could take 90 days or longer from application to modification. Regardless of delays, Harper says you should contact your servicer now if you're struggling.

Harper also reassures borrowers that the foreclosure process will be suspended once you've contacted your servicer and it's been determined you meet the minimum eligibility criteria for the program, even if the modification can't be finalized for a while. However, he says, if you are not accepted after the full eligibility evaluation is completed, the foreclosure process will pick up where it left off.

Borrowers are encouraged to use the delay to check eligibility requirements, gather documentation, and come to the conversation prepared.

If you don't qualify for the Making Home Affordable program

"The Making Home Affordable program has specific requirements some borrowers won't be able to fulfill," says Harper. "But other options may exist with the lender."

These other options include: Reinstatement, which requires you to pay the lender the entire past-due amount plus all late fees and penalties by an agreed-upon date. Repayment plan, which allows you to add an additional amount of money to your regular monthly payment until you make up the past-due amount you owe. Forbearance, which is a formal agreement that temporarily reduces or delays payments. Loan modification, which, like an MHA modification, involves changing one or more of the terms of the mortgage to make payments more manageable.

While not every lender offers all these options, and some, such as the Federal Housing Administration (FHA) and Veterans Administration (VA), may offer different or additional ones, virtually all reputable lenders�especially at your credit union�have some tools to help borrowers in a bind. You and the representative you speak with will determine together which, if any, of the lender's programs will get you back on track. The key is contacting the lender sooner rather than later.

"You're doing yourself a service by calling [the lender] to let them know about your situation as soon as you foresee missing a payment," says Harper.

You can find contact information for your lender or the servicer, which collects mortgage payments on behalf of the lender, on your monthly billing statement or in your payment coupon book.

To ensure your conversation with the lender representative is as productive as possible, prepare for the call by answering these questions:

What is the situation? How have your finances changed? Do you have documentation to support your explanation for falling behind on the mortgage�a medical note or proof of unemployment benefits, for example? Have you determined you are not eligible for an MHA modification? What is the prognosis? Is the change in your situation temporary, long term, or permanent? What efforts have you made to get back on track? What changes do you expect in the future? What outcome are you looking for? Do you want to keep the house? What kind of payment plan would be realistic? Are there any particular solutions you have in mind? How committed are you to resolving the problem? Will you communicate with the lender openly and consistently? Will you complete all forms and tasks by the deadline given? Will you keep all promises you make and see the process through to the end?

Harper advises going into the call also knowing how much equity you have in the home and what your monthly income and expenses look like. The lender will need your financial information to devise a realistic solution.

If your situation isn't easily resolved during your initial call or soon after, ask the lender about the foreclosure timeline in your state�when would the foreclosure sale take place and what is the last day you could stop the sale?

During the process, keep a log of all communications. Follow up any requests you make by phone with a letter, and make sure all agreements are put in writing. And stay in the property�you may not qualify for certain types of assistance if you move out.

Housing counselors play important role

Housing counseling agencies approved by the U.S. Department of Housing and Urban Development (HUD) to provide default or delinquency counseling are another source of help for homeowners. A housing counselor can help you narrow your options and weigh the pros and cons of each one. He or she might also make the MHA process more comfortable for you if you don't want to deal directly with your lender or if you're having trouble navigating the system.

Harper, whose agency counsels thousands of homeowners each year, sees firsthand how a housing counselor, as a disinterested third party, can help lenders and borrowers succeed.

"As counselors, we aren't asking for the money, and that alone separates us from the lender," says Harper.

Housing counseling agencies that are nonprofit credit counseling services also can provide budget and debt counseling. Depending on your situation, a counselor may be able to enroll you in an agency-administered debt management plan that could reduce your monthly payments to other creditors, which may be enough to keep you current on your mortgage payments without ever having to contact your lender.

Borrowers with a debt-to-income ratio of 55% or more who modify their loan through the MHA program must meet with an approved counselor to design a plan for eliminating non-housing debt, reducing expenses, increasing income, and building savings.

Find an accredited, nonprofit credit counseling agency through the National Foundation for Credit Counseling's (NFCC) Web site, or call 800-388-2227 to search by phone. If you need housing counseling as well, choose an agency that provides both types of counseling. Or contact HOPE NOW, an alliance of housing counseling agencies, mortgage companies, and others that provide free foreclosure prevention assistance, at 888-995-HOPE or hopenow.com.

Published July 13, 2009