Many loan modifications are resulting in lower interest rates and payments for homeowners. Last quarter, almost 80% of all loan modifications resulted in lower mortgage payments. Some homeowners are receiving interest rates as low as two percent. The eighty percent of loans having lower interest rates is an increase from just over 50% from three months earlier. While the percentage of people receiving lower payments has increased, still only a small fraction of people who need a mortgage modification are getting them, and that percentage is estimated at five percent. This information and stats are according to the Office of Thrift Supervision and the Office of the Comptroller of the Currency (OCC).
If a bank or lender works with a homeowner to make a mortgage more affordable, studies show that homeowners are much less likely to default on their loan. A review of the statistics from the OCC report and other information supports this. For example, one year after a loan modification is completed, only 35% of borrowers whose loan payments had been reduced by 20% or more had defaulted on their loan. This is compared with 63% of borrowers who defaulted if their monthly payments had been left unchanged and were not lowered.
RealtyTrac, which is a major real estate services company and is the leading online marketer of foreclosed properties, is confirming that there are better deals and a lot more give coming from lenders. The reason this is occurring is that it often makes sense for the banks to take anything they can get from the homeowners, as that will limit the banks loss from the foreclosure process. It is in the bank's self interest to provide help to homeowners, even if the assistance provided involves reducing payments and interest rates, because the alternative of foreclosure can cost the bank more and hurt their bottom line.
Neighborhood Assistance Corporation of America Save The Dream
Thousands of homeowners are receiving assistance from the Neighborhood Assistance Corporation of America (NACA). They sponsor events across the country in their Save the Dream Tour.
The events bring together banks, lenders, mortgage servicers, and homeowners, and the NACA help facilitate a modification. Lenders from almost all major banks and mortgage servicers are in attendance at these events, and these lenders do their best to restructure mortgages based on what borrowers can afford. Hundreds of homeowners attend these Save the Dream events with their mortgage problems and they end up walking out with solutions and many have new, low interest loans.
According to a Bruce Marks, who is the founder of NACA, on average about forty percent of attendees leave these events with decisions the same day. In addition, about 80% of homeowners are expected to receive workouts within weeks of the events. The events are held all across the nation, and to date about 400,000 borrowers have attended.
What type of new loan can I expect?
While it does vary based upon your personal financial situation, the most common type of restructuring is one that reduces the interest rate on your mortgage to the minimum of 2% for the entire life of the loan. You may ask, how can they do this? One of the big reasons is that it is because the Neighborhood Assistance Corporation of America has pre-negotiated agreements in place with all the top lenders and banks to reduce a homeowners interest rate to as low as 2% if that is what it takes to make loans affordable to the homeowner, and if that is what it takes to both stop the foreclosure from occurring and also help limit the banks loss.
Some examples of people experiencing success include Elena and Steve Servi from California. They attended an event and received a new, low interest 2% fixed-rate loan from Wells Fargo. This new mortgage replaced the 6.75% adjustable rate mortgage that they previously had on their Rowland Heights house. The loan is even a jumbo loan, which is often harder to get help with.
Another real life example is Rodney Wynn from North Carolina. He had in place an $1,800-per-month, 13.4% interest rate mortgage. After attending the Save the Dream tour that was held in New York City, at the end of the day he had a new 4.7% loan with a total of a $970 monthly payment. This will allow him to afford the payments going forward and stay in his home.
Wells Fargo is one of the banks that attends the event. Their process involves having a counselor send each applicant through a process that is a type of flow chart of possible solutions. Their process starts with reviewing the applicants financial situation and current mortgage terms. They first need to see if the applicant can qualify for the guidelines for the federal government’s Home Affordable Modification Program (HAMP) workout solution. If the borrowers does not qualify for the HAMP program, then Wells Fargo will determine if the applicant can qualify for any of its own programs and solutions. They go down the list of options and try to find one that will work for the persons situation, working down the list of options with a goal of finding more radical solutions or possible cuts until they reach one that will work for the both the borrower and Wells Fargo.
The primary goal is to offer the borrower some type of solution to prevent a foreclosure and help the borrower keep their home. However, there may be a point in which the lender does need to determine whether the situation is to dire. They need to make the difficult decision as to whether it is more profitable for the bank to offer that workout or low interest loan modification to the borrower, or whether the homeowner is to far behind and if it is more profitable for them to foreclosure on the property. That being said, banks and lenders are trying harder to make the loan modification work as foreclosures are simply too costly for the bank and lender. Wells Fargo estimates that they restructure about one half of borrowers loans.
So why do banks offer aid in some cases, but not in others?
Usually it comes down to the bottom line for the bank or lender. In the example above, of the Servi’s, due primarily to the housing crisis, their home lost perhaps 40% of its total value since they purchased it over five years ago. Wells Fargo reviewed their situation and the local real estate market, and they decided that foreclosing on and repossessing the home would have cost Wells Fargo more than $100,000 in lost value alone. That does not include the additional expenses that the bank would have needed to incur for numerous other expenses, such as taxes, commissions, and others.
What seems to be occurring is that borrowers in many hard-hit areas of the country have gotten even better deals as lenders would tend to lose more in those areas.
The interest rates that banks and lenders are offering are a lot lower than they used to be. According to Empowering and Strengthening Ohio's People (ESOP), which is a foreclosure prevention organization located in Cleveland, they are seeing more reports of lenders reducing interest rates to 0% for three years, then 2% for a year, then 4%, capping out at 5%. They even have a reported case in which the lender reduced the interest rate to zero percent for the entire life of the loan. Once again, the primary reason for this is lenders are reluctant to foreclose on and repossess properties in the worst hit parts of cities such as Cleveland. This is also supported by information from Jim Rokakis, who is treasurer of Cuyahoga County, where Cleveland is located. He states that instead of going to a sheriff's sale, some banks are just giving back the houses to the homeowners as it cost them a lot of money to repossess the house in these markets.
There are even some cases and information being reported on people who are having their debts forgiven entirely, but that is very rare. One example is Rosie Brooks, who is a retired hairdresser. She has been paying off her home for more than 20 years,. However recently she has struggled as one of her daughters came down with leukemia 10 years ago. Most of her money was going towards the medical bills and unpaid debts, and she fell behind on her mortgage payments.
While she had paid only $38,000 for the house 20 years ago and had refinanced the loan a couple of times over the years, by last year her mortgage balance was more than $42,000. The payments became impossible to afford due to the medical bills and her lack of a high enough income.
Rosie called up ESOP, and the mortgage counselor assigned to her situation knew that her lender was unusually sympathetic. After a few weeks of negotiating and working with the lender, the bank who held her mortgage ending up forgiving her entire unpaid debt in exchange for a one-time payment of just $3,000. The bank decided this was the best option for both parties.
The bottom line is that loan modifications are becoming more common, and lenders are offering lower interest rates. Contact a counselor, or your lender, to determine your best options.
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