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Under a new modification program, known as the Streamlined Modification Initiative, people who are saddled with high-interest loans will be able to successfully modify them without the usual hassles and roadblocks.
Mortgage modification is a process wherein the lender agrees to alter or modify the terms of a home loan for the purpose of making the monthly payments more affordable. The goal is to reach a compromise that enables the borrower to avoid default – while simultaneously saving the lender from expensive foreclosure proceedings. When they were first introduced, loan modifications promised to save millions of homeowners from foreclosure, but most of the modification programs failed miserably. Finally, just last month, a process that really seems to live up to its promise has been instituted by the Federal Housing Finance Agency (FHFA).
This special Streamlined Modification Initiative covers Fannie Mae and Freddie Mac loans that are seriously delinquent. Best of all, there’s none of the complicated, annoying mortgage modification paperwork involved that has frustrated so many homeowners and triggered problematic delays. In fact, there really isn’t any paperwork for the borrower to file. To see if you have a loan with Fannie Mae or Freddie Mac, go here. If you find you do not have a loan with them, rapid repayment may be a good alternative, so long as you can manage the payments.
Failure of Other Modification Programs
Numerous other loan modification programs, either offered by individual banks or through various government agencies, have been tried during the ongoing foreclosure crisis. None of them, however, have succeeded on a widespread basis.
Many housing industry experts and consumer watchdog groups blame the failure of all these plans on banks and other lenders. Thousands of homeowners have applied for loan modification and been told to wait for an answer, for instance, but while they waited around for months their homes slipped into foreclosure.
Some believe that this was an intentional tactic by banks with no genuine intention of doing a modification in the first place, but were only going through the motions to pacify customers and appease government regulators. While there may be no hard evidence of that kind of strategy, many homeowners have had experiences that made them highly skeptical of the sincerity of their lenders.
Oftentimes people would file the paperwork necessary for a loan modification, for example, and then wait around for months without hearing anything back from the lender. Then the bank would contact them to say that one or more of the essential documents were lost, effectively halting the modification process. Banks would often ask homeowners to resubmit the same documents, or to start the process over from scratch.
Regardless of who or what was to blame, the bottom line was that families lost their homes because of paperwork problems, protracted delays and a lack of adequate communication from banks. Once somebody initiated a modification they would not be able to pursue other avenues like selling or refinancing. The status of their mortgage was in limbo – until it was too late. So, many of these flawed modification programs were not just ill-conceived and useless, but they were harmful.
Details of the Streamlined Modification Initiative
Under this new program that kicked-off in June, however, Fannie Mae and Freddie Mac mortgages that are at least 90 days can have their monthly payments lowered to a manageable level without any paperwork. To qualify, borrowers cannot be more than 24 months behind on their payments and their principal balances have to represent at least 80 percent of the market value of their homes. The loans also have to be at least one year old.
- Borrowers who are deemed eligible for the program will soon begin to receive letters from their lenders, which will spell out the terms of the modification.
- Once they receive their notice they have to opportunity to start making their new, significantly lower monthly mortgage payments for a 3-month trial period.
- During that time they need to continue making those payments on time. If they can successfully do that, then after the three months is up the modifications become permanent.
- Homeowners don’t have to submit proof of their financial circumstances and they do not have to write a letter explaining why they are experiencing financial hardship.
Banks will modify mortgages by lowering the interest rate on the loan and/or extending the amortization schedule from the normal 30 - 40 years. The longer the amortization schedule, the lower the monthly payments, so adding 10 years can make a big difference. When a loan of $200,000 that carries a 5.5 percent rate is modified into a 40-year, 4 percent interest rate loan, that change reduces the monthly payment by about $300. So the burden on the borrower can be considerably lessened through the Streamlined Modification Initiative.
Where the Program Falls Short
Unfortunately, the program does not reduce the principal owed on any of these loans, which has been the biggest obstacle for most homeowners. In fact, the head of the FHFA has been consistent in his refusal to support initiatives that include principal reduction.
Longer amortization periods make monthly payments easier to manage, but they simultaneously increase the number of years that a borrower must continue to repay the loan. If someone plans to keep the loan and not sell or refinance their home, they will ultimately wind up paying thousands of dollars extra. Meanwhile this program – which is scheduled to continue through the end of 2015 – only applies to Fannie Mae and Freddie Mac loans, which will automatically exclude a great many homeowners.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.
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