With the enormous foreclosure rates more and more homeowners are faced with the crisis of deciding about what to do with their homes. In our experience, clearly 95% of homeowners want to keep their homes and could do so if their mortgage was alternation in some way to reduce their monthly payments.
The usual methods of alteration include putting any arrearage on the back-end of the payments, reducing the interest rate to between 2% and 3%, extending the term of the loan up to 40 years, and various combinations of these in a shortened time period ( 3- 5 years). While the initial impact of these changes amounts to a few hundred dollars a month, nearly 78% of all loan modifications consequence in a foreclosure in the future. The alteration has only extended the time the homeowner has in the character, not solved the problem.
The real solution that is long-term is a principal reduction of the mortgage amount due in combination with an interest rate reduction and the due date of the loan. Ideally, lenders should “mark to the market” by an appraisal course of action the current value of the character. This value would then become the amount of the mortgage payoff in the future. With appropriate restraints on possible market appreciation and the homeowner selling the character in the near future, this is an answer to the growing problem of strategic defaults.
Strategic defaults are where the homeowner makes a conscious economic decision that his character is no longer worth what is owed on it and he stops making any further mortgage payments. This is likely the next wave of foreclosures as character values are slow to rebound because of a without of traditional financing.
Most governmental agencies advertise that homeowners should do their own modifications and that it isn’t necessary to hire someone else. This is true, but in a functional real-world ecosystem, what is a homeowner to do if he wants to try a loan alteration himself?
First, he should seek out local self-help agencies in the county or state where he lives and get help from their experienced staff. The meaningful is to learn what actual offers of settlement lenders are doing in his area which depends on how distressed the area is. These settlement offers are then his worst case solution and if these don’t fit his needs, he may have to consider a strategic default.
Next, he should be in contact with his lender and get the required loan mod package they use. The material required for the application package is the same whether he hires an attorney to do it or he does it himself, and generally includes a financial statement, a hardship letter request, and supporting documentation for income verification. The lender uses these documents for two reasons – to determine if the homeowner has additional funds the lender can get at the closing of the loan alteration, and where to find his assets if it goes to foreclosure. Of course, the income verifications are used to calculate a new affordable payment, which should be approximately 31% of the homeowner’s gross income. Any higher ratio is unfair, so the homeowner needs to be aware of this in the final negotiation.
In summary, everything is negotiable despite what a lender may tell a homeowner. The homeowner should always try for a principal reduction and stick to this by asking for a larger principal reduction, already when the negotiator says it won’t happen. To determine what a new mortgage payment will look like, a homeowner can go online to any no-cost mortgage calculators and play with the parameters of interest amount, principal amount and already monthly payments until he finds a combination that meet his needs. Negotiate hard and if no fair and reasonable resolution is offered by the lender, consider the different of a strategic foreclosure – it isn’t fatal and you will retrieve as millions of Americans have already.