Posted on Friday, March 6, 2009
It seems the administration is beginning to get the ball rolling in the right direction with the latest $75 billion plan. Finally a strategy acknowledging that, although we may have that same sinking feeling, the boats we're all in can be different. To extend the medical metaphors we keep seeing, just as a doctor would not treat a heart attack the same way he would treat a severe head trauma, the method for solving the problem faced by a homeowner who cannot afford his mortgage payments (for example) will need to be different from the method used to help a homeowner who can afford his payments but is considering walking away from the home because he is upside down.
About six months into writing Foreclosure Nation I began white-boarding a flow chart for how we might be able to address our country's residential foreclosure crisis. The flow chart includes "stop/go" junctures separating homeowners into several different "buckets" to address their specific set of circumstances in a manner that could solve their problems without creating new problems for America. Our latest $75 billion strategy is looking a little bit like the flow chart with one important distinction. The chart's very first stop/go juncture is "Is there conclusive evidence that the borrower committed mortgage fraud?" If so, as we used to say in the game Monopoly: proceed to jail, do not pass GO, do not collect $100.
It's a puzzle why the Obama administration is not sending that important message about mortgage fraud, not to mention preserving our tax dollars to help honest folks as opposed to criminals. But let's focus instead for now on the good stuff that is making its way to us from Washington so far and make sure everyone understands the new options we seem to have on the table.
The latest $75 billion plan has two primary components:
DO YOU NEED HELP BECAUSE YOU CAN'T AFFORD TO PAY YOUR MORTGAGE?
Part one of the newest plan will hopefully help those of you who have had dramatic interest rate/mortgage payment adjustments or are no longer bring home as much income (perhaps from a lost job) and now can't afford to pay your mortgage. This plan will hopefully reduce your monthly payment to fewer than 31% of your income. This is done by reducing your interest rate (to as low as 2%!), lengthening the time you have to repay your mortgage or other modifications to your mortgage. The 31% is not just a random number. It's the "ratio" traditionally used by old fashioned conservative (i.e. smart) lender in deciding how much mortgage payment we can afford and how much they would lend to us. Foreclosure Nation explains how you can use mortgage loan qualifying ratios to your best advantage. And there's a bonus kicker. There is no fee for the program AND if you make your payments on time you can earn up to $1000 a year five years paid down on your mortgage!
Now this help is only available to some of us. To determine if you're included among those lucky ones;
+ Do you actually live in your home (i.e. it is not available for income properties, second homes, or vacant homes)?
+ Is your current first mortgage balance is under $729,750?
+ Can you prove that you cannot afford your current payment? You'll need to sign and affidavit under oath and show that you don't have cash or other asset you can use to make your payments with but this time - thankfully - you don't need to have already missed mortgage payments.
+ Is your payment (principal, interest, real estate taxes, homeowner insurance and association or condominium assessment) more than 31% of your total monthly income?
+ Did you have your mortgage before January 1, 2009?
If you answered "yes" to all of the above, you should be calling your mortgage servicer (the company you make payments to). You have until December 31, 2012 when this program is schedule to end, but who the heck knows whets going to happen next...I'd take care of this as soon as you can. Servicers have already warned us to be patient. Foreclosure Nation talks about the problems servicers have been having being under-staffed and overwhelmed. This has not changed and is bound to worsen as calls increase along with new programs. The servicer's telephone number should be on your monthly statement. Here's the catch...your servicer will apply what is being called the "net present value test" to determine whether or no granting you the mortgage modification is also in the best interest of the lender or investor who owns your mortgage loan. If it is, congratulations you can get the modification. If not, to bad so sad, return to the sinking ship, do not pass GO, do not collect $100. You see we still have not figured out how to deal with the owners of our mortgage loans (by way of mortgage backed securities - explained so that we all understand in Foreclosure Nation). And if your mortgage is owned by an investor or lender who has specifically stated that modifications are forbidden, you are out of luck. Many of our mortgage loans were packaged into mortgage back securities with agreements like this also explained in Foreclosure Nation for those of you who would like to know more. While the new strategy may help servicers defend themselves from their lender and investor client complaints that the servicer is not acting in those clients best interest by modifying our mortgage loans (and under this new plan servicers can earn up to $3,500 plus reimbursement of some costs from the government for participating in the plan), many servicers will presumably still hesitate to stick their necks out and do the modifications without congressional protection and lender and investor lawsuits and it is unlikely government will take on that political hot potato anytime soon. So if your servicer just won't participate, you are also out of luck. Balancing the challenges faced by home owners, servicers and investors is a slippery slope. So much of this is still left to things we have no control over.
OR DO YOU NEED HELP BECAUSE YOU OWE MORE THAN YOUR PROPERTY IS WORTH?
OK, now for the second part of the plan. And the good news is those of you worried about second homes, income property and larger loans may get to play this time and it doesn't even matter how rich you are. This strategy is designed to help an estimated 8.3 million of us who bought properties at bubble prices and got slammed when the bubble burst.
+ Are you current on your mortgage payments?
+ Is your loan owned or guaranteed by Fannie Mae or Freddie Mac? (you can find out by asking your servicer or calling 1-800-7FANNIE or 1-800-FREDDIE. Also, their websites are including as links from www,foreclosurenationthebook.com).
+ Can you prove that you will be able to make your new mortgage payment? If you've been more than 30 days late on a payment in the past 12 months faagedabowdit.
+ Is your mortgage balance between 80% and 105% of the value of your property? Your servicer will use computer models (isn't this what helped cause the crisis in the first place?) or other ways yet to be fully determined (maybe a crystal ball?) to determine the current value of your property.
If your answers were "yes, yes, yes," you should be calling your servicer too. As of now, this program is only expected to be in effect until June of 2010. You will have to pay your loan servicer a fee.
If your mortgage is not owned or guaranteed by Fannie or Freddie, you can't afford your payment, or your current loan is more than 105% of your properties value...sorry Charlie.
Although these two new strategies are predicted to help 9 million of us, actual outcomes remain to be seen. And we've still got folks in other boats to save (or with other medical conditions, depending on the metaphor you prefer). For example, how do those of us with second mortgages address those lenders and investors? Given the qualifying criteria, many of us are still out of luck. For example, in the hardest hit areas like Florida and California, those of us who are upside down are way over the 105% threshold. Americans lost a collective $4.3 billion in real estate equity!
But this is just the beginning and the Obama administration's crisis solving flow chart will no doubt continue, as our real estate market and lending markets hopefully recover hopefully leading to solutions for the rest of us.
This newest plan may encourage more creative problem solving in the private sector and elsewhere. Already some of the larger banks like Citigroup, Bank or America, and JP Morgan Chase have been promoting their own modifications options and instituted voluntary foreclosure moratoriums for properties with modification potential. The judiciary in several states are considering requiring lenders to attempt mediation before proceeding with residential foreclosure actions. Mediation is one alternative all property owners should consider and is discussed in more detail in Foreclosure Nation and on www.foreclosurenationthebook.com. Some state bar associations are offering assistance to homeowners seeking to modify their loans. And legal aide organizations offer foreclosure defense help. Links to these valuable resources can also be found at www.foreclosurenationthebook.com.
As further details about these strategies emerge, updates will follow. And, as always, I'm keeping my fingers crossed for us all.