The Debt Management Expert

Millions of Americans are feeling the stings and arrows of the declining economy. In 2008, over 250,000 homes were foreclosed each month – which translates into three million homes foreclosed in the entire year. More credit card debt is racked up each month, and millions of Americans are looking to consumer credit counseling services for debt management help. Now that newly elected President Obama has signed his stimulus bill into law, what does that mean for the average American with debt management issues?

Who the Plan Will Not Help

First and foremost, Americans must realize that the stimulus plan is not “free money.” People who have uncontrollable debt management issues will not suddenly see their debt wiped away. With that said, the plan does provide debt help to those in serious trouble with their mortgages and credit card debt.

Remember that the bill is a financial plan to help stimulate the American economy, not pay off personal debt. However, by helping Americans manage and control debt, more expendable income can be spent on goods and services – which is exactly how the plan hopes to revive the economy.

How the Plan Can Relieve Mortgage Debt

Millions of American homeowners are feeling the financial crunch of extreme adjustable rate mortgage (ARM) interest hikes or job loss, and they find themselves unable to make their regular mortgage payment. With an average of 250,000 homes foreclosed per month, what are homeowners to do?

The mortgage bailout portion of the stimulus package tags $75 billion for the setup and aid of getting mortgage borrowers back on their feet to avoid foreclosure. Though the federal funds will not give you free money to pay off your back payments or reduce your principal balance, the money will be used to set up a government intermediary program that puts qualified borrowers and lenders together to discuss real solutions to mortgage problems.

A homeowner who is suffering a financial crisis and is having trouble meeting mortgage obligations can use the program to help set up and negotiate a loan modification. However, if you are not delinquent on your mortgage and have the financial ability to pay your mortgage, this plan will not help you. In addition, should you have an inability to provide evidence of future employment, mortgage companies are unlikely to help you through this plan either.

A loan modification is a change in the original mortgage terms, such as a lower interest rate or extension of payments that reduces the monthly payment amount. Working with the lender in this fashion could result in the forgiveness of much of the principal balance, limited forbearance, and ultimately, help homeowners keep their homes and avoid the expense and trouble of foreclosure.

The Benefit of Tax Rebates

President Obama has also passed tax rebates for most Americans. Taxpayers will receive a portion of their 2008 paid taxes back to them in cash. Some of that money may be needed to pay back taxes owed or can be spent directly on reducing piling credit card debt.

Americans who are careless about their debt management and spend more than their means will not see much help. It is people who are responsible and are making real efforts to pay off debt who will benefit from the stimulus bill.

What is a Loan Modification?
Loan modification is a process whereby a homeowner’s mortgage is modified and both lender and homeowner are bound by the new terms.
A loan modification is a process where one or more of the characteristics of a loan and/or its terms are adjusted because the homeowner is unable to make payments under the original terms or because the value of the property is worth less than the borrower owes.
Great I know what a Loan Modification is. What are the things to watch out for?

The Do’s
• If you work with a loan modification service, Do MAKE SURE YOU CHECK THEM OUT. Go to the better business bureau site www.bbb.org and research the company. Also asking for references is a good idea.
• If you are going to attempt to do your loan modification yourself, Do make sure you have all of your documents collected prior to talking with the bank.
• If you are going to attempt to do your loan modification yourself, do make sure you understand the loan modification process prior to contacting your bank.
• Do make sure you spend the time to write a convincing Hardship Letter. See Tip on How to Write a Hardship Letter.
The Don’t
• Don’t contact your bank’s collection department. They are only interested in collecting payment not helping you with modifying your loan. You must contact the loss mitigation department in the bank.
• Don’t stop making payments on your loans even if a loan modification advises you to. A reputable company will tell you to continue to make payments for as long as possible.
• Don’t rush through your loan modification application. It is critical that you do not make errors and that all forms you submit are correct.

Before you get started on the process of attempting to get your loan modified you must first understand that you will need a little patience. The typical time line for a loan modification is between 60 and 90 days.

The second thing you must understand is that you need to be very open in terms of your current financial and personal situation. Not disclosing information to your bank or third party negotiator will only lead to disappointment down the road for your loan modification.

Third, you must collect a number of documents. You should have them ready before you start the process so that the process can be expedited. You will need: Last years taxes, your original loan documentation, recent pay stubs, and recent bank statements. The information you provide for a loan modification is very similar information you provided when you received your loan in the first place.

Forth, you will need to write a hardship letter detailing why the bank should provide you a loan modification. For more information on hardships letters go to: Tips on How to Write a Hardship Letter and Sample Hardship Letter.

Fifth, be clear on what you actually can pay when it comes to your loan modification. Understand what new terms for your loan you can live with. Getting your loan modified but not being able to afford the new terms of the modified loan does not help anyone.

Finally, decide if you want to go it alone on your loan midifcation and negotiate with your bank all by yourself or hire a professional negotiator or attorney who has done a significant number of loan modifications. The banks do not want to end up with your home if they can help it but they will have their own interest at heart rather than yours. If you do decide to go with a third party to help you make sure you check references and make sure that the operation is a legitimate one.

A hardship letter is a letter written to your bank or mortgage company telling them why you can no longer afford to make the payments on your home. This letter describes your hardships and specifically what has happened that caused you to fall behind.

Based on the current credit environment, hardship letters are being used as a tool to help homeowners avoid foreclosure on their homes. The result can be a modification of the loan or the acceptance of a real-estate short sale by the bank.

Some basics to remember in writing your hard ship letter are to:
• Write the letter in your own words with feeling. Also show your appreciation for their time. A real person will be reading this.
• Be specific on your hardship. Good examples of hardships would be: A significant cut in pay or loss of employment, a medical issue that prevents you from working, or becoming a single parent with out child support.
• Provide the reason you fell behind on your monthly payments. Detail each delinquency with specific dates.
• Provide an offer to resolve the debt issue and show a willingness to cooperate in a solution to retain your home.
• Provide documents that show that your are having financial hardship. Examples could be recent late notices on bills, your taxes from the previous year and your bank statements.

For specific examples of a hardship letter you can use click here:  Sample Hardship Letter For Loan Modification

Overview
If you are a homeowner interested in and qualify for a loan modification, it is important to keep in mind that the lender is forgiving a portion of your debt. There are several types of loan modifications that a lender can offer you: interest rate, length of amortization, principal balance reduction for a first mortgage as well as for a second mortgage. Principal balance reduction is the most coveted approach of all loan modifications. Make sure to avoid quick fix loan modifications that may be offered to you such as a simple forbearance, short sale, deed in lieu, or temporary interest rate reduction. These types of loan modifications may seem appealing at first, but they will generally hurt you in the medium- to long-term.

While your home can be repossessed through foreclosure if payments are not made, the lender or the loan modification company cannot make any changes unless all individuals on the mortgage agree. Your notarized permission must be received to implement any changes.

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Interest Rate
The simplest feature in a loan modification that can be adjusted by a lender is the interest rate. If the interest rate is lowered, so is the mortgage payment.

If you are a homeowner who originated a sub-prime short term adjustable rate mortgage several years ago at 5% and then saw it adjust to 9%, for example, you probably are having quite a bit of difficulty making the additional monthly payment. Now that loan modifications are more available from lenders, you have another option.

All lenders are willing to aggressively lower interest rates for loan modifications to qualified applicants when they are not requesting a reduction of the balance reduction of the mortgage or an increase in the length of amortization. A lower interest rate on the mortgage is the simplest, safest and most cost effective loan modification for lenders.

Length of Amortization
Length of amortization refers to how many years a borrower will be paying back the mortgage. The most typical timeframe is 30 years. The amortization does not reflect the length of time that the interest rate is fixed, just the total years that the mortgage will be repaid. For example, if you have a five-year adjustable rate mortgage amortized over 30 years, the interest rate will adjust after five years and can adjust up or down for the remaining 25 or until refinanced. In order to make payments more affordable, a lender may offer you the option to stretch out the loan modification payments over 40 or 50 years. This will lower your monthly payments considerably since you would now have an extra 10 or 20 years to pay off the loan modification. Any recalculation of the amortization is always done using round numbers. The options for loan modification are 30, 40 and occasionally 50 years.

Stretching out the amortization in a loan modification does not help the higher interest rates nearly as much as it helps the lower rates. During the mortgage boom, sub-prime lenders were much more inclined to offer longer amortization for loan modifications since they were qualifying the borrower with around the same payment as the 30-year loan but they were collecting 10 more years worth of interest.

Stretching out the amortization for a loan modification has additional benefits. Borrowers who paid interest only payments for the first few years were not paying down any principal. That means that your loan lost a year of amortization each year. Therefore, if you were to have kept your loan, it would have converted after the interest only period into a fully amortized fixed loan of usually 20 or 25 years. Those payments are enormous compared to the new 40- or 50-year term. Lengthening the years of repayment in a loan modification might be helpful but usually not enough to turn around a troubled homeowner’s financial situation.

Principal Balance Reduction
The principal balance reduction is the most coveted of all loan modifications. The lender is forgiving a portion of your debt. Simply speaking, you just do not owe that money any more. Banks and lenders are very reticent to do this because this is a loss that is not recoverable and therefore not given away easily.

When banks or lenders do grant a principal balance reduction, it is because the value of the property is so much less than the balance owed that there is no reason for the homeowner to remain. If you owe $500,000 on a $400,000 property, would you want to pay those huge mortgage payments only to realize that you are still upside down? Even if you were to wait it out until the market recovers, you would not know how long it would be until the property value appreciates to $500,000 again. It would be wiser to walk away from the home, take the credit hit, and rent a very similar house down the street for half the monthly payment.

Principal balance reductions help in more ways than just reducing your debt. It also reduces your payments and the amount of interest you pay over the life of the loan.

Principal Balance Reduction involving a 1st and 2nd Mortgage
Principal balance reductions are much easier to get when you have a first and a second mortgage because in the instance of a foreclosure, the lender of the second mortgage is likely to get nothing. The proceeds from a foreclosure will result in the first mortgage getting paid off first. Then whatever is left over goes to the holder of the second trust. Holders of second mortgages are absorbing massive losses while recuperating nothing. Since lenders realize this, they are much more likely to grant a reduction. The banks or lenders would rather get 10 to 20 cents on the dollar rather than nothing. If you cannot make your payments, you are going to lose your house. Lenders are going to do what it takes to prevent that. If the same lender owns your first and second mortgages, you are in the overall best position for a principal balance reduction.

Overview
If you are a homeowner considering a loan modification, keep in mind that a bank is as interested as you are in avoiding foreclosure. If you are a borrower who can continue to make payments, a bank will make every reasonable effort to help you modify your loan. However lenders will not grant loan modifications to every applicant. If you are a borrower and you cannot show the ability to repay the loan on time and consistently for the foreseeable future, then a bank would lose more money in the process and there is little benefit for the lending institution to do a loan modification with you. Foreclosure is a better option for the bank.

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A loan modification becomes more of a liability than a foreclosure to the bank when the borrower stops making the payments. Foreclosure is designed to rectify this situation while incurring the least amount of losses from the borrower.

The notion behind turning around a liability is based on income. What amount of income can a homeowner allocate to the mortgage payment while still making ends meet? Is this a reasonable number for the bank to agree upon for a loan modification and let the homeowner stay in the house? What is the loss comparison between the proposed loan modification and the foreclosure? Can that homeowner actually make the loan modification payments that are proposed? What proof of income and cash flow is provided to back up these proposals?

If a bank agrees to a loan modification in lieu of foreclosure and the borrower still cannot make the payment, the bank is likely to lose even more. When a loan modification is agreed upon, the borrower usually has a forbearance period. The borrower’s status is also made current and past due balances are erased. Sometimes those balances are forgiven and other times they are added to the principal balance. Here is an example of the losses that the bank will take if the borrower still cannot meet the modified loan payments:

If a borrower is 90 days late when a loan modification is agreed upon and the forbearance is for three months, the bank is not receiving any payment during that time. The borrower then becomes current and is given a fresh start. But if after the loan modification is complete, the borrower starts missing payments again, the bank must now start the entire foreclosure process again.

Lenders generally will give the homeowner a few months into the loan modification before they file a notice of default, leading to foreclosure. Lenders will eventually foreclose on the property and get about the same in return at auction as they would have had they not engaged in a loan modification with the borrower. The difference is that if the property had gone into foreclosure, they would have had the money months earlier and not spent the time and resources modifying the loan. Loan modifications are very expensive to the bank, especially when they do not work, which is why banks place more stringent requirements on borrowers now to prove their ability to meet the loan modification standards in lieu of foreclosure before adjusting the terms.

More specifically, it is difficult to say exactly what the banks are looking for prior to granting a loan modification, however, ideal candidates have a number of the following characteristics:

• An interest rate above 6.9%
• Unaffordable Payements
• An Ajustable Rate Loan
• Are Deliquent on Payments
• Are Currently in Forclosure
• Have Negative Equity in their Home
• Income to pay a new negotiated payment schedule

Overview
Loan modification is not a new practice, however it is more common now due to the mortgage crisis, declining home values and the economic recession. When property values are remaining consistent or are rising, your ability to get a loan modification tends to be very difficult. When a home facing foreclosure has equity, the bank takes a minimal loss or no loss at all. With nothing to gain the bank has no interest in approving a homeowner for loan modification with a track record of financial difficulties. The lender can place the property in foreclosure, find a new homeowner who can make the payments on time and remain profitable. Banks do not want to engage in loan modifications or deal with a risky borrower in a stable economy.

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Declining property values combined with tougher lender guidelines and adjusting interest rates have resulted in the loan modification boom. No one is going to buy a home for 15%-30% above market value and no lender is going to refinance that property. Your mortgage, or mortgage-backed security, is the collateral for the note that a bank lends a borrower.

In the current economy, equity in homes has dwindled and, in many cases, has become negative. In lieu of foreclosure, banks would rather reduce the borrower’s mortgage payments and/or balance. Neither banks nor borrowers have power in these difficult times. In fact, banks and borrowers must work together to avoid foreclosure to not only keep families in their homes but also turn this recession around. Loan modification might mean immediate financial losses for our banking institutions, but the long-term mortgage payment losses are minimized versus mass foreclosures.

Millions of Americans have taken out high home equity loans against their mortgages in markets that were at the time appreciating but now have rapidly depreciated. Then, when the homeowner’s adjustable-rate mortgage (ARM) changes and the payment can no longer be made a bank will try to refinance the mortgage, only to discover there is little chance. Most homeowners believe their only option is foreclosure. Since they cannot make the payments, sell, or refinance, are there other options other than foreclosure? The first options that a bank gives are a short sale, deed in lieu of foreclosure, or forbearance agreement.

With so many homeowners wanting to keep their home and a vast supply of empty homes, the banks are forced to revisit their loan modification strategy. In today’s economy, banks are willing to engage in loan modification to keep people in their homes. They can reach many more homeowners by doing so and continue receiving monthly mortgage payments.

Overview
For qualified homeowners that need to renegotiate the terms of their mortgage with their lender, a loan modification is a good option when properties values are dramatically declining. Loan modifications are the best recourse for homeowners looking to renegotiate the terms of their loans, because the homeowner is unable to make payments under the original agreement or because the value of the property is worth less than the homeowner owes on the mortgage. Loan modifications also serve the needs of lenders that would prefer to avoid foreclosure and a sale of the asset at a significantly reduced price.

Refinancing is advisable in a stable or increasing market. It gives homeowners the ability to take cash out when needed, lower their interest rate, and fix their interest rate, among other options. In today’s declining market, refinancing is available to a much smaller group of homeowners — only those who are current with their mortgage payments, have a strong credit history and job security, disposable income after all bills are paid, and significant equity in their property are eligible.

Comparison Shopping
Whether you will be able to refinance or qualify for a loan modification depends on your individual situation. Most homeowners interested in making a move in this market are the ones who are in trouble and therefore do not qualify for a refinance. If you are behind on your mortgage, always attempt a loan modification first. When a homeowner is late but can show the ability to pay a lower payment, the benefits from a loan modification will greatly outweigh that of a refinance. The interest rate on such a loan modification will generally be lower than that of an on-time homeowner with good credit who pays to refinance.

Getting approved for a traditional refinance is extremely difficult. Since Wall Street is no longer purchasing loans from originating banks, lenders have cut programs to less qualified homeowners. When considering refinancing in a market where equity has evaporated, causing balances to exceed value, there is no option to refinance. This is true for all homeowners, sub-prime as well as qualified homeowners.

If you are a homeowner that is upside down, you would have no option to refinance and your best bet would be to seek out a loan modification. If you are not late but are upside down, loan modification companies such as ours can make it a seamless and transparent effort that could potentially knock tens of thousands of dollars off of your principal balance. Who could argue with that?

Overview
Loan modification is a process whereby a homeowner’s mortgage is adjusted and both lender and borrower are bound by the new terms. The mortgage terms are adjusted because the borrower is unable to make payments under the original agreement or because the value of the property is worth less than the borrower owes on the mortgage.

When homeowners fall behind on their payments, they are faced with a few very tough choices: foreclose, deed in lieu of title, short sale or loan modification. Loan modification is the only one of these options that does not force the borrower to vacate their home. Loan modifications are designed with three basic objectives in mind:

• Offer proactive workout solutions designed to address borrowers who have the willingness but limited capacity to pay.

• Provide borrowers the opportunity to stay in their home while making an affordable payment for the life of the loan.

• Ensure investor interests are protected; loan modification must always result in a positive net present value outcome for the investor; the cost of the loan modification must be less than the estimated cost of foreclosure.

Banks will allow certain changes to be modified for borrowers who can document the ability to repay the loan in a reasonable and sustained manner. The most common loan modifications are:

• temporarily or permanently lowering the interest rate,
• reducing the principal balance
• ‘fixing’ adjustable interest rates
• adding an interest only option
• increasing the loan term (i.e., from 30 to 40 years)
• a forbearance agreement
• forgiveness of payment defaults and fees

… or any combination of these changes.

Loan modifications are designed with payment levels so that the borrower can consistently make his mortgage payment as well as pay his other bills. Mortgage payments within an arranged loan modification are not intended to consume an entire monthly budget. Lenders will generally take the homeowner’s entire budget into consideration i.e. car payment, cell phone, utilities, credit card payments, and other necessary expenses needed to live a normal life while still maintaining a reasonable mortgage payment. With loan modifications, the benchmark ratio for calculating a borrower’s affordable payment is 38 percent of monthly gross household income.

A loan modification is a negotiation between your modification company and the primary lender (a bank or other financial institution). Your modification company will present the lender with a proposal backed up by your documented income and monthly expenses, which includes both hard and soft expenses. Soft expenses are difficult to document. Your modified monthly mortgage payment is determined by the difference between your total income and your expenses.
Great! I know what a Loan Modification is now. Do I Qualify?

Until you go through the process it is difficult to say if you qualify. Ideal candidates have a number of the following characteristics:

• An interest rate above 6.9%
• Unaffordable Payements
• An Ajustable Rate Loan
• Are Deliquent on Payments
• Are Currently in Forclosure
• Have Negative Equity in their Home