There are many blog posts and news reports out there describing the plan, usually riddled with technical terms and formulas that are hard to follow. In reality the rules of the Obama Loan Modification are fairly simple. You can qualify if:

• Your total monthly housing costs (mortgage, taxes, insurance, Homeowners Association fees etc…) are greater than 31% of your average gross monthly income.

Example of calculation:

Gross Monthly Income: $2000

Combined Housing Costs: $800

Your Percentage: 800/2000*100 = 40%

If your housing costs are over 38% of your monthly income, the mortgage company is partially compensated by the government to reduce that ratio to at least 38% by whatever means available. Such means include increase of the loan term, decrease of the interest rate as well as others. The important thing to remember here is that the lender participation is voluntary.

• You have not originated your loan after January 1, 2009 – Simple enough: they want to make sure you didn’t close your loan after the January 1st deadline. Any date before that is acceptable.

• The property has no more than 4 units. 5-unit or larger properties are excluded from the Obama Loan Modification plan

• You must occupy the property. Rental and investment properties are excluded to ensure the plan helps those who need it most.

• You must be experiencing financial hardship. What this means is that you have to be able to explain the reason you can no longer afford you monthly payments. These reason can range from dramatic increase in monthly expenses to loss or reduction of income.

• Your current loan balance must be under $729,750 as of the 1st day of 2009

The Obama Loan modification plan at the very least has given guidance to an industry that truly needs it. At its best — millions of homeowners will once again be able to afford their houses and our economy will start to bounce back over time with a new confidence in the housing market and our nation.

Typically these type of loans have a cap built in to protect borrowers from getting stuck with an unreasonable payment amount however the downward spiraling of home values has pushed the loans to their cap sooner than expected. The cap allows the principal to accrue to a percentage of a homes value, in many cases this is 120%. Due to the current dip in home values the balances on these loans have already reached the max, forcing homeowners to pay the principal & interest payments they weren’t expecting to pay for years – payments which many cannot afford to make.

As we are all too aware job losses are still on the rise and there is no clear sign that the vicious cycle is coming to an end any time soon. As part of the new efforts put forth by the Obama administration new opportunities are available for homeowners who find themselves in this situation. Borrowers who wanted to refinance in the past but could not qualify because their properties have lost value may be able to get a new more affordable rate meaning a lower payment.

There are a few indicators to consider when determining if you are eligible for this type of loan re-modification. First, is your loan held or guaranteed by Fannie Mae or Freddie Mac? Second, is your property a primary residence? Third, is your first loan amount equal to or less than 105% of your current property value? If you can answer yes to all 3 of these indicators then you are one step closer to getting off the track of foreclosure.

Re-negotiating your loan directly with the bank can be a daunting task at best. Imagine how much the bank does NOT want to loose money and then combine that fact with the reality that they are the ones that “set the rules” for what rate they will offer in the re-negotiation. You are clearly the underdog in this match.

Reportedly more and more homeowners contact non-profit loan modification companies after hitting the wall trying to negotiate with banks directly. Contacting a non-profit company to assist with the negotiations has proven to be a benefit to thousands of borrowers to date. The non-profit already has a relationship with the banks and experience re-negotiating loans for struggling homeowners. They know how low the bank can go and what rate other struggling homeowners in similar scenarios have received. Non-profit companies also know the logistics of the new government plans, such as HASP, Making Home Affordable, etc. and finding the right plan for you even if you don’t know what plan you want to utilize, if one is available.

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.

While the plan which is scheduled to begin on March 4th 2009 is estimated to help 9 million homeowners, there are certain groups that are unfortunately outside of the plan’s reach. Here are the five most important things you Must know about the HASP:

1. Homeowners with conforming mortgages (mortgages under $417,000) may qualify to refinance at a lower rate. Some homeowners may be able to qualify even if they have never been seriously behind on their mortgages.

2. Homeowners with subprime or so-called “exotic” loans may qualify
to modify their current loans to make the payments more affordable.

3. Both of the above groups may be able to qualify even if their property is worth as much as they owe.

4. Homeowners who’s loan amounts are much higher than the value of their property most likely are outside of the scope of the proposed plan. This unfortunately will affect the markets where real estate prices have taken the steepest declines, such as California, Florida, Nevada and Arizona.

5. Homeowners who’s loans were not securitized by Fannie Mae or Freddie Mac may find it difficult to refinance or adjust their rates. Most homeowners may not know or realize that unless they have specifically asked their lenders.