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Loan Modifications for Homeowners

The U.S. Department of Housing and Urban Development (HUD) defines a loan modification as a permanent change in one or more of the terms of a mortgagor's loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford. Loan modifications have been receiving a lot of press recently.

In July 2008, a new California law (Civil Code 2923.6) was passed to enforce and promote loan modifications to stop foreclosure in the state. In August 2008, FDIC implemented a new program to systemically modify troubled mortgages originated with the failed IndyMac Federal Bank, FSB ("Indymac Federal"). Earlier this month, lawsuits against Countrywide Financial Corporation alleging predatory lending practices were brought by the San Diego City Attorney's Office, and Attorneys General of California, Florida, West Virginia, Connecticut, Illinois and Indiana.

"Countrywide's greed turned the American dream into a nightmare for thousands of Californians who now face foreclosure," said state Attorney General Jerry Brown, who led the negotiations for the states with Lisa Madigan, the Illinois attorney general.

California Attorney General, Jerry Brown entered into a settlement with Bank of America, new owner of Countrywide Home Loans has agreed to the nation's largest loan-modification program to settle charges of lending abuse brought by California and other states. Bank of America, owner of Countrywide, introduced a new systematic mortgage loan modification program as part of a predatory lending settlement. Countrywide customers may qualify for these new benefits:

  • $8.7 billion earmarked to assist in loan modifications.
  • 400,000 loans to be reviewed.
  • Loan modifications offering a lower interest rate and reduced principle.
  • Foreclosures on delinquent loans to be suspended pending loan reviews.
  • Late fees and pre-payment penalties to be waived.
  • Lump sum payments to borrowers who can't afford their monthly payment after a loan modification and who lose their homes thru foreclosure in the future.

Another program recently put in force to help curb the tide of foreclosures is the Federal Housing Administration's Hope for Homeowners program. It was passed in July 2008 and became effective on October 1, 2008. Hope for Homeowners was designed to refinance troubled borrowers into low, fixed rate, government insured loans. This new program is expected to help thousands of homeowners refinance into an affordable monthly mortgage payment. Here is a brief outline of the program:

  • $300 billion allotted to assist distressed homeowners.
  • Qualified borrowers must live in their homes and have loans that were originated between 1/1/2005 and 6/30/2007.
  • Borrowers must be spending at least 31% of their gross monthly income on their current monthly mortgage payment.
  • To participate, lenders are required to forgive all debt above 90% of the homes current appraised value-this means a reduction in the loan balance to accurately reflect the home's current market value. Because of the anticipated losses to which lenders are exposed, participation on their part is voluntary.

Many reasons are offered on why the foreclosure epidemic took place. In some cases it was predatory lending practices. However, in others it was a simple matter of homeowners taking on bigger loans than they were able to afford. Others still were able to afford their loans, but lost their jobs as a result of the current economic and financial crisis.

No matter what the reason is for the foreclosure problem and subprime loan meltdown, the federal government and state governments have recognized that a solution is needed to help homeowners stay in their mortgage loans. This is why more and more laws are being put in place to help troubled homeowners. The governments know that if the foreclosure crisis isn't resolved that housing prices cannot stabilize. And, that's what is one of the key components of getting the faltering housing market turned around. All these laws have one thing in common: loan modification. The whole idea is to keep homeowners in their mortgage loans. Mortgage restructuring is the only way to reduce the excess inventory, and there is proof that loan modifications are working.

Loan Modifications Work

The LA Times today says that foreclosures in California declined sharply in the third quarter, 2008, due to the new California law mandating delay and communication between the bank and the homeowner before foreclosure. This is proof that loan modification works.

Once Countrywide borrowers are able to start with their loan modifications, the stem of foreclosures will most likely be curbed even more. Countrywide will start contacting its borrowers on December 1st. The ultimate goal is to modify 395,000 loans - 125,000 in California. Indy-Mac mailed 15,000 loan modification proposals to borrowers and some 3,500 have accepted the proposal and "thousands more are being processed."

Are you facing mortgage foreclosure?

You may qualify for a loan modification. The only way to find out if a loan modification is feasible for you is to contact your lender ASAP. Lack of action on your part is the worst thing you can do. If you've already been in contact with your lender, but have been met with non-responsiveness, contact us now. We may be able to help.