Tick. Tick. Tick. Tick. Tick.
That's the sound of the federal government's Making Home Affordable loan modification program, which is set to explode sometime after 2014.
In case you haven't heard, the program is the federal government's latest attempt to reduce the high rate of foreclosures. The program creates a process for loan servicers to modify the mortgages of homeowners who spend more than 31 percent of their income on housing costs and have missed a payment or are in imminent danger of default due to financial adversity. The mortgage payment typically is reduced through an interest rate as low as 2 percent, a term as long as 40 years, and deferral of a portion of the loan balance.
The program has some positive features, but homeowners should be concerned about the longer-term implications.
The program allows the loan servicer to add unpaid interest, property taxes, homeowners insurance premiums and other costs onto the loan balance and then defer part of that balance. No interest is charged on the deferred amount, but the loan now has a balloon payment, which is due whenever the homeowner pays off the loan, refinances or sells the home. The only change in the homeowner's precarious situation is that repayment is postponed until sometime in the future.
What's worse is that the low modified interest rate expires after five years. After that, the rate can increase as much as 1 percent each year up to the market rate on the day the loan was modified. That means a 2 percent modified interest rate could pop up to 3 percent, then 4 percent, then 5 percent and then, perhaps, 5 percent and change in the subsequent years. Homeowners who can't afford the higher payment today may well see that same payment again sometime after the five-year teaser rate on their modified loan expires.
The inducement for homeowners to participate in the program is the avoidance (for now) of foreclosure and a $1,000 incentive payment each year for the first five years of the modification. The incentive is applied to the loan balance, so in effect it chips away $5,000 of the balloon payment, if there is one, courtesy of the U.S. Treasury (read: taxpayers). Five grand is nice but for many homeowners it won't be enough to make that balloon payment affordable. ...CONTINUED
Copyright 2009 Marcie Geffner
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Submitted by Terrence Askew on August 25, 2009 - 12:25pm.
Thanks Marcie! I wasn't even aware of the 5 year rule until now. It seems like the Government is just kicking the can down the road. No surprise!
Mortgage TN
Refinance TN
Submitted by Marcie Geffner on August 25, 2009 - 12:38pm.
Unfortunately, the five-year reset is buried in the fine print.
Marcie Geffner
www.marciegeffner.blogspot.com
Submitted by Vicki Lloyd on August 25, 2009 - 12:45pm.
I don't understand how you can say someone wouldn't want to "bet their house" on the loan mod. They ALREADY bet it and lost!
For the borrowers who are upside down and can't afford to make payments at their current rate, they have NOTHING to lose.
This may only be delaying an inevitable foreclosure, but from the consumer's (homeowner) point of view, it's a windfall.
Vicki Lloyd, MBA, e-PRO, ACRE, Realtor
http://LiveLakeForest.com
(949) 457-0281
Submitted by Kevin Liske on August 25, 2009 - 4:26pm.
Interesting perspective. While I can certainly appreciate your point, I am curious as to what your solution would be to help homeowners in distress.
I would hate to see what an already decimated housing market would look like should borrowers be forced to walk away from their home simply because they have no option. Granted the “refault” rate is high but default would be an absolute certainty if lenders did not provide some sort of relief to struggling borrowers.
If, by providing the borrower the ability to modify the terms of their note, we are only providing a temporary stay of execution as foreclosure may be an inevitability, at least it will provide a bit of time for the market to absorb the current wave of foreclosure before the next tidal wave hits.
Even with low interest rates and tax incentives, currently, there is not a large enough base of buyers to consume the existing inventory—let alone a wave of foreclosure caused by the fact that the borrower has no where to turn.
Kevin Liske, MBA, CMPS
Academy Mortgage – Las Vegas
www.academymortgagelv.com
Submitted by Marcie Geffner on August 25, 2009 - 4:31pm.
Hi Vicki, It was grand meeting you in person at Connect. : ) You're absolutely correct. I meant to suggest that I wouldn't want to bet my own house on my (hypothetical) neighbors being able to beat the five-year time clock, but sure, homeowners who have nothing to lose do have a lot to gain through the program, so some of them may be better off if they do indeed "bet the house."
Marcie Geffner
Submitted by Marcie Geffner on August 26, 2009 - 6:27am.
My chief concern about the time-bomb is not only that these loan modifications won't solve the problem for many homeowners, but also whether the five-year reset has been well enough disclosed to them. Remember, these are the same people who didn't read their original loan documents or understand the risks of multiple cash-out refinances.
I agree that so far no good solutions have been offered up for homeowners who are in distress, partly because there are no one-size-fits-all solutions. Some people have been victimized; others have been foolish, ignorant, short-sighted or greedy, and the newest wave have lost their jobs.
I continue to believe that mortgage-loan bankruptcy reform is the best of a lot of bad options because it would allow the bankruptcy judge to better assess the individual circumstances and would better balance the power between the borrower and the bank.
Marcie Geffner
www.marciegeffner.com