Beware of Govenments Bearing Gifts

[Susan Templeton]

Perhaps you've read news about the many rescue programs for distressed homeowners. Powering down may need to start with the home itself and go from there. Ultimately, a person in financial distress will always face difficult decisions. Some of which may be as simple as accepting they cannot sustain such a large or expensive home and the attached energy, transportation, tax and insurance burdens. A good chat with your family accountant or bookkeeper is a great place to start. You may be surprised to learn that in the case of short sale or foreclosure, the IRS considers your forgiven principle as 'taxable income'.

If you cannot reduce your home footprint easily and you are stressed financially, then loan modification is a good way to at least buy time while you are adjusting to lowering your own expectations of what kind of home will utlimately support you for the longer term. The basic facts of who qualifies for what are on face value quite simple: your Debt (housing expense) to Income Ratio needs to be 31% or less of your actual income (gross or net depending on the lender and program). And your home Loan to Value should not be over 125%. That means you don't owe more than 25% above the current market value of your home. Unlike a loan application your loan modification application also includes a review of your actual household budget. Your budget is verified by bank statements. So that's where credit card debt or high medical bills or other obligations etc., can really affect your ability to get help. One must show two things: a financial hardship and sufficient income to meet the modified, ie lower nortgage payment. Loss of income or family illness or increased responsiblities qill meet the first criteria.

In many cases, over-extended consumer debt may prevent you from being considered for a loan modification so you may be served by speaking with a bankruptcy attorney about your options before taking this on. While 31% is the starting point for Debt to Income analysis, each situation is different. Your family setting and responsibilities come into play. If you, like most people borrowed for your mortgage based on the standard 45% or higher Debt to Income ratio it stands to reason most people cannot afford their current loans!

Recent news about Mortgage Principal Reduction is encouraging but early: the guidelines are scheduled to roll out in June 2010. A few lenders under heavy government supervision are loweing the mortgage balances in extreme cases - but principle reductions are less than 1% of the loan modifications completed to date. Out of some 450 Million homeowners thought to be helped by the Stimulus programs, only 170,000 have actually achieved loan modification to date. A high percentage of those have failed for many reasons. One borrower was offered $20 off their $3,000 payment after a one year effort negotiationg with their bank. I have personally seen financial statements showing a homeowner was deemed to be making 200% of their actual income. So the person with the $3,000 payment might in fact qualify for a payment of $1,800 rather than the $2,980 bank offer. Quite a difference!

If you really want to keep your home (and there are many reasons not to sell right now!) then it will pay to explore the loan modification programs available. Each program has a number of caveats; including: which lenders offer which ones now (or may) and in what order or circumstance you situation may fit. Some lenders require you to be behind on your payments while others require you to not have missed any payments for the same program. Naturally your free HUD counselor is a good first stop as they receive the releases and train their counselors to advise on whether your situation fits a certain box. Then you get to apply and negotiate yourself based on the HUD counselor advice that your lender 'should' offer you this or that program. No one monitors or follows your case but you. If you run into trouble, you can seek consumer assistance from the various government agencies. But as a consumer, unless you are willing to pay an attorney or loan modification agent to represent you, the lender is not exactly on your side. Your bank's debt mitigators represent the bank's interest first and they may or may not be willing to even return your calls. Licensed loan officers in Washington may represent you according to the MBP Act Interpretative Statement issued by the Dept of Financial Instuttions.

I urge you to write your representatives and ask them to prioritize creation of a Consumer Protection Agency as separate from the Federal Reserve and Banking lobbies with their own powers to enforce the existing laws: http://www.congress.org

All the best! http://www.equitytalks.blogspot.com