Mortgage Loan Modification

In the past when homeowners were faced with job loss or a change in circumstances that restricted their ability to afford their home and were not able to pay their mortgage they would have the option to refinance with lower interest rates or sell their property. For most currently this is no longer a viable option.

Struggling homeowners cannot refinance due to plunging property values resulting in upside down mortgages, and even when they find a buyer for their property there is the challenge of not be able to sell for enough to repay the outstanding balance.

According to the data from the Mortgage Bankers Association (MBA) 11% of the nation’s home mortgages were delinquent by at least one payment, already in foreclosure or entering foreclosure. 7% of mortgage were at least 1 month past due and 3% of the nation’s mortgages are currently in the foreclosure process. MBA estimated that a total of 2.2 million homes went into foreclosure in 2008, a number the group expects will grow significantly in 2009 as unemployment rises while the home values continue to plunge.

The quarterly survey published by the Federal Reserve, called the Flow of Funds Report, shows the movement of funds between households, businesses, the government, and financial institutions. It also shows whether debt levels increased or decreased and what the savings rate is. According to the report, the total value of all home mortgages in the U.S. was $11.2 trillion through the third quarter of 2008, which ended in September. Theses figures in combination with other hardships American’s are facing paint an uncertain picture with a continually shrinking list of options.

There are several plans already underway lead by Federal Housing agencies & the Treasury, which may be expanded. Two plans that are receiving a lot of attention are being presented by the Federal Housing Administration (FHA) and the Federal Deposit Insurance Corporation (FDIC).

The largest plan, known as “Hope for Homeowners” offered by the Federal Housing Administration (FHA) allows lenders to refinance borrowers into an FHA-insured fixed rate mortgage, also know as ‘mortgage modification’, if the lender writes down the existing mortgage balance and pays an up-front insurance premium. Borrowers participating in the plan must share any future appreciation of the home’s value with the federal government. The biggest challenge to face this plan is the resistance of banks and current mortgage holders to agree to write down a mortgage’s principal thus reducing the value of the loan.

The plan run by the Federal Deposit Insurance Corporation (FDIC) and used during that agency’s conservatorship of IndyMac last year, lets individual borrowers and lenders re-work a mortgage themselves, but commits the government to share in 50 percent of the losses, should the borrower re-default. This plan has not received as much attention as the FDA plan, and it seems that every week that goes by another plan is introduced to a sour reception.

The Mortgage Bankers Association’s most recent report shows delinquency and foreclosure statistics are likely less than market reality. It appears that some larger banks have halted all foreclosures while other banks have stopped keeping track of how far behind borrowers are while they work with those borrowers on modifying their mortgages.

In fact, according to MBA, almost every state had an increase in mortgages that were more than 90 days past due but were not in foreclosure. Normally, a mortgage that is more than 90 days past due is foreclosed on.

Any proposed plan faces a daunting task, given the massive numbers of mortgages in foreclosure and the staggering value of the mortgage market itself however there is hope. Working with your lender to find a mutually acceptable agreement to modify your mortgage seems to be the next step in approaching the end of this painful market normalization.