Talking Money: Making Home Affordable--A Run-Through

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Posted: Aug 12, 2009 2:16 PM

The announcement of President Obama's Making Home Affordable plan took the mortgage industry by storm, but so far, it's been slow going to actually get homeowners the help they need. So slow, in fact, that at the end of July, the Obama administration called representatives from the top 25 mortgage servicers to Washington for a meeting. They wanted to know why, in five months, only about 270,000 borrowers have received modification offers.

That number may seem high, at first. But when you consider how many homeowners need help, you can see why the servicers are coming up a bit short. "This is a big problem -- 3.1 million people are 60 days past due. The pipeline of troubled borrowers is still very large, and there is a lot of attention on what still needs to be done," says Faith Schwartz, the executive director of HOPE NOW, an alliance of housing counselors, mortgage lenders and other folks in the industry.

So what are the issues at hand? For one, homeowners who need help are confused. They don't know if they qualify for the offer, and they're not sure how to find out. When they call their lender, they don't always get a clear-cut answer. It's frustrating, and many give up. On the flip side, servicers just aren't ready to deal with the influx of people needing modifications. They're scrambling to pull their resources together, but it's not an easy process. The hope is that things will speed up in the coming months. During the July meeting, servicers were given a goal of reaching 500,000 trial modifications by Nov. 1. In the meantime, here's a run-through of the program's basics, how to find out if you're eligible, and clarification of the fine print.

-- The program has two parts: one for modifications, which is when your loan is essentially reconfigured to lower your monthly payments, and one for borrowers looking to refinance. In order to refinance, your loan must be owned or guaranteed by Fannie Mae or Freddie Mac. (If you don't know, call your lender and ask.) Modifications, on the other hand, are open to any servicer who agrees to participate in the program -- and they are given financial incentives to do so.

-- To be eligible to qualify for a loan modification, you have to meet these following requirements: You must be the occupant of the home, and you can't owe more than $729,750 on a one-unit home; your first mortgage must have originated before Jan. 1, 2009, and your monthly payment has to be more than 31 percent of your pre-tax income; you're also going to have to prove hardship -- for example, documentation that your income was significantly reduced, or that you've had major medical expenses. If you qualify, your loan servicer will reduce your interest rate until your monthly payments are less than 31 percent of your pre-tax income. They can bring the interest rate as low as 2 percent to make that happen.

-- If you're unemployed, you may not get a loan modification. You have to be able to make the payments, bottom line, and there is only so much your lender can do to bring those down. They'll first try to lower the interest rate, then they may extend the life of the loan -- so you'll be paying it off over a longer period of time, and paying more interest over time as a result -- and they could even, in extreme cases, defer a portion of the amount you owe until the loan matures. But if you don't have sufficient income to make any of these options result in an affordable payment -- or your servicer doesn't want to go to these lengths -- you may be out of luck. That means considering other options, like a short sale or even foreclosure.

-- A loan modification may hurt your credit score. Because loan modifications are a relatively new phenomenon, the credit bureaus are having trouble calculating them into your credit, or FICO, score. Your lender has to report the fact that your loan was modified, and right now, the formula used to calculate your FICO is viewing that modification as a negative. How badly you're hit depends on how high your score was in the first place.

"It's possible that a score could drop by 100 points. For someone who has a relatively high score, where this code could be the first big negative, this could cause the score to drop significantly. For someone who already has delinquencies, their score wouldn't fall as far," explains Craig Watts, public affairs director for Fair Isaac, the company that developed and calculates the FICO score.

He adds that this should change come November, when a new way to report loan modifications takes effect. But until then, you need to weigh your options carefully. "It's important to understand that there may be this negative effect, but if it's about saving your home, I'd of course do the loan modification even with the credit hit," says Gerri Detweiler, credit advisor for Credit.com and author of the e-book "Reduce Debt, Reduce Stress."

-- You can get help for free. To answer any more questions you may have, I'd encourage you to contact a HUD-approved housing counselor by calling HOPE NOW at 888-995-HOPE. "Borrowers need to stay very focused on working with their servicer by calling them, and if they're not getting a status update, they should contact a third party like HOPE NOW. You will get help, and the servicers have agreed not to foreclose on anyone without looking through the alternatives," says Schwartz. Having a third-party counselor to help you through this process is priceless.