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Mortgage modifications with cash payments to homeowners?

by Broderick Perkins

1/22/2010 - The Feds are planning yet more adjustments to its heavily criticized mortgage modification program to give greater relief to struggling home owners facing foreclosure.

The effort could address lenders' reluctance to reduce the principal as a way to make a mortgage more affordable.

New provisions aren't carved in stone, but the New York Times reported this week that they could include direct cash assistance to homeowners or a grace period allowing home owners to postpone payments, along with reduced paperwork and faster processing by banks.

As of December, only about 100,000 of a potential 4 million eligible homeowners are enjoying permanent mortgage modifications that have reduced their mortgage payment by an average $500 a month, according to the Treasury. Another 750,000 homeowners have trial modifications with the same average mortgage payment reduction.

A mortgage modification occurs when the lender reworks the terms of your existing home loan, typically to lower payments and make the home more affordable. Lenders lower the interest rate, extend the loan term, reduce the principal or use any combination of those approaches to get the payment down. Rarely, however, do they reduce the principal.

When it comes to impacting your credit, a modification is a better deal than a foreclosure or short sale.

Under the Obama Administration's Home Affordable Modification Program (HAMP), qualifying homeowners begin with a trial modification period of up to five months. During the trial, homeowners must provide required documentation to make their case for a permanent modification and determine if the trial modification's monthly mortgage payment is affordable.

Borrowers who meet the documentation requirements during the trial period, including making all the modified payments on time, get a "permanent" modification. Borrowers who fail are rejected for a permanent modification and must resume paying the original mortgage and face the potential of foreclosure.

Mortgage modifications are only "permanent" for up to five years, at which time the lender can revert to the original loan, take other steps to assist the home owner, or resume foreclosure proceedings. Chances are, after five years, on a mortgage deep underwater (with a mortgage balance larger than the home's value), the borrower will return to the same submerged predicament.

"You will be back at square one when the loan modification expires. Do lenders really think that these homes will double in value in two to five years and you will be able to refinance?" asks Robert Aldana, a San Jose, CA real estate agent who created Home Resolution & Credit Services Inc. to help homeowners through modifications.

Because of the sluggish rate of mortgage modifications, the Feds recentlyramped up the production line with extended trail periods, streamlined application process, heightened lender accountability, and for consumers, enhanced the information available to better explain the modification process.

More recently the Treasury added a moratorium to the mix, banning mortgage lenders from canceling trial modifications due to expire before Jan. 31, 2010.

HAMP critics say if more lenders include a mortgage principal reduction (to put the mortgage balance more on par with the home's depressed value) along with a reduced interest rate and extended term, the borrower gets a better shot at retaining homeownership and will be more unlikely to walk away from the home.

The Times' reported the possibility of a provision for direct cash assistance or a grace period allowing home owners to postpone payments as part of new Treasury efforts to improve HAMP's success rate. That could be the Feds' way of addressing the fact that banks rarely reduce the principal when they modify mortgages.

"Loan modifications with principal reductions should be the norm. The banks could easily solve the problems and keep stability in family neighborhoods," said Mark K. Hicks, broker/owner of Seabrooke Group in Campbell, CA.

He added, "What they are doing is putting a band aid on a wound that requires stitches. A loan modification sometimes is done now with no real decrease in payments so the borrower defaults immediately. If the banks played fair, we could resolve the crisis in one year."

Banks, however, have been reluctant to make moves that turn off investors. Reduced principal show up on the books as losses. First mortgage holders are also unwilling to budge on the principal reduction issue unless the second mortgage holder does likewise to share the loss.

"Banks need to realize that they lose more money by allowing the properties to be foreclosed upon since there are foreclosure fees, property taxes and maintenance fees that need to be paid by the banks. Furthermore, at the foreclosure sale, these homes usually sell for less than current fair market value," said Michael D. Rodriguez, broker/owner of Platinum Capital Mortgage & Real Estate in Salinas, CA.

"In addition, why not keep a customer a happy customer by allowing them to remain as homeowners? I'm certain that they will return the favor once the housing market recovers," Rodriguez added.