BofA breaks logjam, signs up for piggyback loan modification program

Here's hoping that lenders are just as much as lemmings as other businesses and join Bank of America in signing up for modifying 'piggy-back' loans as part of President Obama's $75 billion foreclosure prevention program. This is a big step in preventing foreclosures, as these lenders have traditionally been stuck in second place behind first mortgages and didn't want to take huge losses on short sales. From BuilderOnline.com:

Mortgage companies are finally starting to sign up for a long-delayed piece of the Obama administration's $75 billion foreclosure-prevention program.

The administration had been offering lenders who made so-called "piggyback" mortgages - second loans that allowed consumers to make a little or no down payment - incentives to lower payments or eliminate the loans entirely.

But no one signed up until Tuesday when Bank of America became the first to do so.

During the housing boom, lenders readily gave such second loans. While home prices soared, such mortgages were even extended to borrowers with poor credit and people who didn't provide proof of their incomes or assets.

Those loans are now an obstacle to alleviating the housing crisis. That's because piggyback lenders - fearing they won't be repaid - can veto a borrower's efforts to modify their primary mortgage..

If more lenders follow Bank of America it could clear the way for more mortgage companies to cut borrowers' principal balances on their primary loans. But administration officials appear wary of subsidizing such reductions with taxpayer money.

That could spark a backlash from critics who claim it's unfair to people who are still paying their mortgages on time and a bailout for banks that made reckless loans.

With foreclosures still at record-high levels, The Obama administration's program to aid homeowners has been a disappointment. Only about 66,500 borrowers, or 7 percent of those who signed up, had completed the program as of December.

The Treasury Department plans later this week to announce a streamlined process designed to get more borrowers to complete the loan modification program. The program reduces mortgage rates to as low as 2 percent for five years.

But many experts say more dramatic changes are needed.

"Unless you modify principal, there is absolutely no hope of restructuring mortgages on a mass scale to keep people in their homes," Daniel Alpert, managing director of the New York investment bank Westwood Capital LLC said earlier this month. "Eventually their hand will be forced."

Obama Administration extends housing aid to second mortgages

Since one of the major issues blocking loan modifications has been the fact that under-water homeowners have both first and second (or piggyback) loans on their properties, the Obama Administration is expanding its incentive program to second mortgages. From an L.A. Times story:

The Obama administration, stepping up efforts to stem foreclosures, will offer lenders and homeowners incentives to cut payments on second mortgages, write down balances on first mortgages that are underwater, and repay loans in a timely fashion.

The new measures announced Tuesday would especially help many distressed homeowners who have both first and second mortgages -- and can't afford either. The Treasury Department now wants lenders and their customer-service agents to agree to modify both loans as part of a comprehensive solution...

The program would slash second-mortgage interest rates to as low as 1% for five years for some borrowers. It also seeks to revive a Federal Housing Administration effort to persuade lenders to cut loan balances enough so that borrowers again have equity in their homes.

Money for the plan would come from a previously authorized $50-billion allocation from the $700-billion Treasury Department bailout fund that Congress established last year. The $50 billion already has been used to create incentives for modifying first mortgages...

Home builders reverse course on court-ordered loan modifications

Things are looking so bleak for the nation's home builders that they've recently changed course, and now support allowing bankruptcy judges to order mortgage holders to modify loan terms to avoid foreclosure. From an L.A. Times story:

Bankruptcy judges would be able to reduce payments and principal for homeowners with troubled mortgages under a proposal that appeared to be gaining momentum Wednesday...

Such reform is also supported by key advisors to president-elect Barack Obama, including former Treasury Secretary Lawrence H. Summers, who will be chairman of the National Economic Council in the new administration.

On Tuesday, Jerry M. Howard, chief executive of the National Assn. of Home Builders, said his group would no longer oppose the proposal. Continuing home foreclosures and the economic recession have opened the group to previously off-limits ideas, he said.

"The situation's deteriorated so much [that] every proposal needs to be considered," Howard said...

Howard said his group's newfound flexibility on the issue was "a huge acknowledgment by the home-building community that in this crisis, old doctrines don't necessarily fly." He said the builders would be most likely to agree to a temporary expansion of bankruptcy provisions, not a permanent one.

Builders will not oppose court-ordered mortgage modifications because they could keep more people in their homes, which in turn would mean fewer foreclosures flooding the market. Competition from cheap repossessed houses has made it difficult for builders to sell their vacant, surplus homes in many areas, Howard said.

Conyers' bill would empower bankruptcy judges to order reductions in mortgage principal, waive prepayment penalties and stop or modify interest rate changes on adjustable-rate mortgages. Judges could also extend the length of mortgages to 40 years. Such measures would apply to mortgages on primary residences...

Click here for full story.

What if you don't qualify for the new loan modification plan?

Just because many critics contend that the new & streamlined loan modification program announced yesterday will leave many other homeowners out in the cold, that doesn't mean they're out of luck completely. First, who does qualify for a loan work-out based on the new rules? From the Wall Street Journal:

Under the FHA plan, lenders will modify interest rates or forgive a portion of the principal, to bring the ratio of mortgage payments, including homeowners' association dues, to 38% of income. Among the requirements for borrowers:

• Must have a loan on a primary residence that was made before Jan. 1, 2008.
• Must contact loan servicers and cooperate on supplying need information.
• Must be at least 90 days behind on payments.
• Must not have filed for bankruptcy protection.
• Must certify that a hardship, such as job loss or illness, has affected their ability to repay, and that they did not purposely default to get a loan modification.

But what if you don't qualify -- say you can no longer afford the mortgage on a vacation home? From a WSJ.com story:

Here are some suggestions:

• Contact a reputable credit counseling agency to see what your options are besides foreclosure. The Department of Housing and Urban Development links to free or low-cost counselors. The non-profit National Foundation for Credit Counseling has an online tool for locating members nearest your home.
• Call your loan servicer to see who owns your loan; then call the lender to try to work out a deal. FHFA says that borrowers who don't meet the requirements for the new streamlined process can still be considered for loan modifications customized to their personal circumstances.
• Sell a family car, take a second job, ask relatives for help or do whatever else you can to raise enough cash to pay the mortgage until the housing market improves. If zoning laws allow it, think about renting out rooms or a finished basement.
• Consider a short sale, where a lender agrees to take less than the balance of the loan. You avoid foreclosure, though you may have to pay taxes on the shortfall. While short sales have become common in places where home prices have fallen precipitously, bear in mind that you must find a patient buyer, since many lenders are overwhelmed by short sales and are slow to respond to offers.

Click here to read full story.

Affluent home owners also took out adjustable mortgages

For those who think that adjustable rate mortgages were taken out mostly by entry-level buyers, an article in the New York Times profiles more affluent borrowers -- those making more than $100,000 per year -- who have also been hit with re-setting rates that they find unaffordable:

They took out adjustable-rate mortgages at the peak of the housing bubble to buy homes they would otherwise not be able to afford. Or they refinanced existing mortgages to take cash out. And now, two or three years later, the day of reckoning is here.

These are not lower- and middle-income borrowers, but more affluent consumers with annual incomes of $100,000 or more who are increasingly being ensnared in the home mortgage crisis.

People in all income categories “are facing the shock of new payments that can be twice as much as previous ones,” said Susan M. Wachter, professor of business and a real estate specialist at the Wharton School of the University of Pennsylvania...

According to Loan Performance, a unit of First American CoreLogic, a real estate information company based in Santa Ana, Calif., about 870,000 borrowers took jumbo ARMs — mortgages of $417,000 or more — from 2005 to 2007.

In the fourth quarter of 2007, 8.10 percent were two or more payments late, it found, while 2.62 percent were in the foreclosure process and 1.35 percent had been foreclosed. All the numbers were up from the third quarter...

Today’s ARMs were “designed to fail, so you have to refinance,” Ms. Wachter said. “It shouldn’t be surprising that values go up and down in this kind of situation. And when you most need to refinance you can’t — the crux of the crunch.”

Jeffrey Conner, a San Francisco real estate lawyer, says he regularly hears from his clients “that lenders assured them they could always refinance.”

Refinancing requires some equity. Even if homeowners put a substantial amount of money down, many have no equity because their homes are worth less than they owe. In real estate parlance, their mortgages are under water.

Richard Geller, founder of Mortgage Relief Formula, a for-profit venture based in Fairfax, Va., that counsels troubled ARM borrowers, said he received calls from affluent consumers in almost every major metropolitan area...

Homeowners with at least 3 percent equity may qualify for refinancing through the Federal Housing Administration. On March 6, it began making loans up to $729,750, a new higher limit that expires Dec. 31 unless Congress extends it. Limits are 125 percent of median home prices, by county. Consumers can find their local limits at

https://entp.hud.gov/idapp/html/hicostlook.cfm.

To find a qualified lender or broker, consumers may call (800) CALL-FHA, look in the Yellow Pages or visit www.fha.gov for the four regional centers.

Loan modifications entail freezing or reducing interest rates and may also include balance reductions...

Negotiating a loan modification means understanding that in most cases “the lenders really don’t want to force people into foreclosure because that virtually guarantees large losses in the market,” said Dean Baker, an economist with the Center for Economic and Policy Research in Washington...

Borrowers should determine if they live in a state with nonrecourse laws. In general, lenders in those states cannot pursue borrowers for money owed. But these laws are complex and change often, so consulting with a lawyer may be necessary, Mr. Geller said. He has compiled a list of nonrecourse states at www.mortgagerelief formula.com/recourse.