The housing market has shown some signs of stabilizing, and even improving in some areas. Unfortunately, record levels of unemployment coupled with the loss of equity in homes that had little to no equity to begin with, continues to feed the foreclosure machine. Despite some signs of stability in the housing market, foreclosures remain a major obstacle to a meaningful recovery. And more borrowers in good standing are likely to miss their mortgage payments as the recession claims more jobs.
Sub Prime Loans Did Not Cause the Mortgage Crisis
In an online article from the Wall Street Journal titled, New Evidence on the Foreclosure Crisis: Zero money down, not subprime loans, led to the mortgage meltdown, dated July 6, 2009, writer Stan Liebowitz attempts to expose the continued increase in mortgage foreclosures. His answer, “The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house- that is, the balance of the mortgage is greater than the value of the house.”
His article presents an interesting view of this present crisis. Citing "no money down" loans, not "sub-prime" loans, as the primary cause of the problem, Liebowitz asserts that policy aimed at addressing the sub-prime problem won't fix the bigger issue.
No Equity Means No Refinancing
The current mortgage crisis is affecting Main Street, Park Place and everywhere in between. Borrowers that previously could have refinanced their way out of trouble are unable to do so because they have no equity in their home. And while some areas have seen dramatic drops in home values, the reality is that many Americans had little to no equity in their home to begin with. For these people, a loan modification is the only real option to prevent a dreaded foreclosure.
What is a Loan Modification?
A loan modification is a permanent change in the terms of a mortgage in order to make payments more affordable payments for the borrower. President Obama's Making Home Affordable plan is an attempt to encourage banks and servicers to modify home loans. Unfortunately, according to a Treasury Department report issued in late June 2009, the number of new delinquencies continues to outpace the number of modifications. Despite disheartening statistics, loan modifications are a real and viable option for many homeowners in crisis.
How to Obtain a Loan Modification
Homeowners seeking a loan modification should understand that there are countless factors that change on a daily basis that will impact whether or not they receive a loan modification. To have a fighting chance at succeeding, borrowers should be prepared prior to contacting their lender.
Paperwork Needed for a Loan Modification
Before calling the lender or servicer, borrowers should gather important documents, including:
- Most recent mortgage statement
- Homeowners association statement
- Paperwork for equity line of credit, second or third mortgage
- Recent job payroll stubs
- W-2 and previous year tax return
- Property tax statement
- Profit and Loss statement from self employed borrowers
- Active credit card, student loan, car loan and other debt statements
- An candid hardship letter that paints an accurate picture of the borrower's situation
These documents empower the lender to evaluate the borrower's situation and determine if they qualify for a loan modification. Borrowers should also prepare a budget that paints a real picture of actual income and expenses so that banks can evaluate how much they can actually afford to pay in monthly housing expenses, including insurance and taxes.
What About Using a Loan Modification Firm?
Loan modifications can be complicated. They involve contracts, legal agreements and are a negotiation with the bank. Borrowers that enter this process can benefit from having a lawyer guide them through the process. Real estate attorneys understand the law and help borrowers to work through issues to make sure the lender is taking the correct steps.
While there have been numerous mortgage-reduction scams, where individuals or businesses claim that they can save the borrower from foreclosure, then disappear after collecting a hefty up-front fee, there are also countless stories of individuals who have been helped by attorneys that specialize in this process. Working with an attorney is different than working with a so-called loan-mod specialist who may, or may not, have the right licenses to help.
In a recent blog, CNN.com asked real people to talk back about their loan modification experience. These were people who had attempted to modify their loan on their own by working directly with the banks. The public outcry was deafening. The banks appear to be the biggest problem in this scenario.
In a video statement about his own experience working on his own, then with real estate law firm United Law Group, John Wright of Sacramento, CA said, "I tried to modify my loan on my own loan through Countrywide. I thought I could do this but they weren't cooperating very much. I felt swept under the rug. I needed help. I needed an attorney."
Loan Modification Fraud Warning Signs
The federal government recently came out with a list of loan modification fraud warning signs. These signs include:
- Aggressive marketing tactics
- Requests for upfront fees from businesses that are not law offices
- Guarantees of foreclosure rescue
- Offers to buy the house and rent it back to the homeowner
- False claims of government affiliation
Consumers have also been warned against signing any document- whether its from a bank or loan modification firm- without reading it carefully.
Properly managed, a loan modification is an excellent alternative to foreclosure. While never guaranteed, it is an avenue worth pursuing by homeowners who finds themselves burdened with a mortgage they can no longer afford.
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