Monday, November 24th, 2008 at 11:18 AM
Loan Modification Soup
The C.A.R. has put the lenders and their modification plans together in one place:
http://www.car.org/legal/mortgage-workout-programs/?view=Standard
If it wasn’t obvious that they are just throwing these plans together, seeing them in one place will clinch it. Not that they need to all use the same criteria, but it sure would be helpful for the consumers to identify clearly whether or not they qualify. Instead, they’ll be inclined to hire a “consultant” and pay for help they probably wouldn’t need if it were a clear, concise, one-size-fits-all modification plan for all lenders to use.
Here is the summary of the differences in plans:
Hope for Homeowners
- Primary residence, can’t own other properties
- Made at least six payments
- Not able to make payment now without help
- Loan modified to 31% housing debt-to-income ratio, as of March, 2008
- Share new equity with FHA created by modification
- 4.5% funding fee to FHA
- Existing lender must participate
- Homeowner has not been convicted of fraud in the last ten years, and did not knowingly or willingly provide false information to obtain existing mortgage.
Countrywide
- Primary residence only, subprime or option-arm only
- More than 60 days late on payments
- Current on payments, but “reasonably likely” to become 60 days late as a result of rate reset or payment recast.
- 34% housing debt-to-income ratio to figure new loan amount
Citigroup
- Primary residence only, must be current on payments.
- 35% housing debt-to-income ratio on new loan
- Program runs Nov 11 – May, 2009
JPMorgan Chase (WaMu)
- Primary residence only
- Program starts 1/31/09, goes for two years
- Goal is to “achieve sustainable payments” at 31% to 40% housing debt-to-income ratio
IndyMac (FDIC)
- Primary residence only
- Adjustable-rate loans, including subprime and neg-am
- Borrower must already be ‘seriously delinquent’, or at risk of default due to payment resets
- Loan modification based on 38% housing debt-to-income ratio
FHFA (Fannie/Freddie, FHA, WFB)
- Primary residence only
- Starts Dec 15th
- Must have missed three payments, and not declared bankruptcy
- Modified to 38% housing debt-to-income ratio
The lower the DTI, the better for the borrower when calculating the new loan amount.
Here are some examples, based on 6.25% fixed-rate on new loan, and 34% DTI:
$400,000 old loan
$80,000 gross annual income
$1,500 consumer debt monthly (car pmts., credit cards, etc.)
$295,000 new mortgage
$1,816 PITI + $1,500 = 50% DTI ratio
********************************************************
$500,000 old loan
$100,000 gross annual income ($8,333/mo.)
$2,000/month in consumer debt
$365,000 new mortgage
$2,247 + $2,000 = 51% DTI ratio
********************************************************
$600,000 old loan
$150,000 gross annual income ($12,500/mo.)
$3,000/month in consumer debt
$575,000 new mortgage
$3,540 + $3,000 = 52% DTI ratio
I just changed the data above (12:41pm Monday) to correct the loan amounts – the lenders are going to re-calculate the new loans based on housing debt-to-income only. If they are going to disregard the consumer debts of the borrower, I’m not sure how much good it will do in the long run. Still no mention about what happens to the second mortgages, I guess they have to be willing to go away too.
Having ‘back-end’ ratios that exceed 50% is dangerous territory in a state where the combined fed and state income taxes are 25% to 40% – what money is left to eat with, let alone put in savings?
Posted on Monday, November 24th, 2008 at 11:18 AM in Loan Mods, Mortgage Qualifying | 25 Comments » | 
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Great info!
Wow pay what you can afford, no matter how much you buy. My friend is getting married and had to sell his Mercedes for a cheaper car. If only his car company would have lowered his payment so he could have his wedding and the car. =)
BDiego | November 24th, 2008 at 11:25 am$600,000 old loan
$150,000 gross annual income ($12,500/mo.)
$200,000 new mortgage
Is it too late to get one? The only difference twixt this and BK is a reward for the perp.
Rob Dawg | November 24th, 2008 at 11:31 amSo I should have bought a house for 600K with nothing down even though I can’t afford it and then walk away with a 400K for 200K?
pipes_surf | November 24th, 2008 at 12:09 pmPresumably, the bank will consider options to modify and to foreclose, and will go with the one that’s more profitable. If the house is worth 250K but the homeowner can only qualify for a 150K mortgage under these guidelines, the homeowner gets the boot. If the house is worth 150K but the homeowner can qualify for 250K, the bank will go ahead and modify.
Nameless | November 24th, 2008 at 12:12 pmThanks nameless, I guess we know how this loan modification experiment will turn out…..not to mention that I forgot to add in taxes and insurance too – the loan amounts should be lower. But I’m going to change the amounts anyway, on further review it looks like they are looking at housing debt-to-income to be 30-something percent (I originally used total DTI).
When I first read it, they are talking about debt-to-income ratios, which to an old school guy like me means including the consumer debts too. It seemed reasonable that they would go further to make these deals stick, but instead they’re probably looking at 50-60% DTIs in reality – isn’t that part of the problem that got us here?
Do you get the feeling that not many lessons were learned here? Between letting the old subprime brokers refi people into FHA loans, and using the same (or higher) qualifying ratios, aren’t there still going to be problems down the road? Maybe not, as long as everyone has a job and can really afford their new payment.
Jim the Realtor | November 24th, 2008 at 12:17 pmCountrywide is missing a HUGE constraint, that cannot be met by most recent borrowers
“and loan-to-value is 75 percent or greater at the time of the modification.”
Humm, so what is a 10-year interest only…
So, responsible people are penalized in multiple ways… which will only encourage irresponsible behavior. Run up the debt… beg for mercy.
just someone | November 24th, 2008 at 12:20 pmI would be very careful on what these modification loan will include. In doing so, many or all of the loans may become a “recourse loan” meaning the banks now have the right to go after other assets when the residents default. Check with your attorney and see if it’s worth it.
BAM | November 24th, 2008 at 12:20 pmKeep the gains private, SOCIALIZE THE LOSSESS!
WOOHOOO!!
Seriously.. this is ugly.
Stephen Waits | November 24th, 2008 at 12:31 pmHere’s my bailout plan. If a house is underwater and the “owner” can’t make the payments, reverse-auction the mortgage to the public. Someone else is more reliable and capable of paying 80%-100% of the loan balance. The bank can even take its pick of the best offer.
The former “owner” can even rent the apartment the new buyer lived in. This is a net win for all of society. Taxes, HOA, bank profits, stable economy are all solved in one swoop. Bottom line, there are millions of cures lined up for the defaults we’re seeing.
BDiego | November 24th, 2008 at 1:07 pm“When I first read it, they are talking about debt-to-income ratios, which to an old school guy like me means including the consumer debts too. It seemed reasonable that they would go further to make these deals stick, but instead they’re probably looking at 50-60% DTIs in reality – isn’t that part of the problem that got us here?”
I don’t think they are looking at this question at all. In order to make a “streamlined” plan work, it has to be easy for the servicer to make happen. Trying to consider back end ratios would make impossible a streamlined program. Simplicity of servicer guidelines trump the reality of whether the borrower can really afford the modification.
Kingside | November 24th, 2008 at 1:24 pmI’m not quite clear on the Citigroup deal. They’re modifying loans only of those who are current on payments, i.e. not in default? I ask because I am a Citi mortgage payer in good standing and would like to pay less!
Kwaping | November 24th, 2008 at 1:33 pmThe other thing that no one seems to want to talk about, is the large # of borrowers who pumped their income figures on stated income loans, and now are going to be required to show their real income, tax returns, etc. in order to get considered for a loan mod.
The politicans lambast the servicers for not doing enough loan mods, but these borrowers won’t submit the paperwork to get the ball rolling. Wonder why?
If the politicians wanted to deal with reality in pushing loan mods, they should stop dancing around the issue and announce that anyone who applies for a loan mod will get immunity from prosecution for loan fraud. Its not like anyone really relied on those pumped up stated income figures in the first place anyway.
Kingside | November 24th, 2008 at 1:36 pmGood point Kingside.
Some of the servicers want up-front fees too. I wonder how many borrowers will give up the minute they hear this:
“If you want us to consider modifying your loan, just send in your pay-stubs and W-2s to verify your income, and a check.”
Jim the Realtor | November 24th, 2008 at 1:40 pm“I wonder how many borrowers will give up the minute they hear this:”
I wonder how many borrowers who had to pump their income figures to qualify for a mortgage in 2005 are still paying in 2008.
Nameless | November 24th, 2008 at 1:48 pmI was under the impression that these programs no longer were forgiving debt. I thought I read that the programs would extend the number of years on the mortgages, or have bubble payments at the end of the 30 year mortgage.
Which one of these programs are forgiving the debt?
garbler | November 24th, 2008 at 2:45 pmThe lenders are conveniently leaving out any mention of reducing the loan amount, I’m sure that’s the last resort. But supposedly they are all willing to consider it.
Jim the Realtor | November 24th, 2008 at 3:15 pmExtending the years of the mortgage would be interesting. It’s about the only way to lower payments without lowering the balance or interest rate. If there’s appreciation down the road, the owner can always sell. And if the owner makes more income in the future, they can refinance. It’s one honest way someone can pay without a subsidy, if keeping the home is someone’s top priority.
On the other hand, if you can vote yourself free money, people will.
BDiego | November 24th, 2008 at 3:45 pmCitigroup
* Primary residence only, must be current on payments.
So, you need to show you can’t pay going forward, but you must have been able to pay right up until that point?
hmmm…
daveg | November 24th, 2008 at 3:47 pmWhen I first read it, they are talking about debt-to-income ratios, which to an old school guy like me means including the consumer debts too. It seemed reasonable that they would go further to make these deals stick, but instead they’re probably looking at 50-60% DTIs in reality – isn’t that part of the problem that got us here?
———————
The problem with trying to consider back-end ratios for loan mods is the borrowers have probably run up high credit card balances because they never could really afford their mortgages…so they ran up the credit cards to make up the difference.
Besides, if we did consider back-end ratios, what would stop the borrowers from running out and buying Escalades and TVs, etc., right before applying for a bailout. The scammers are thick out there, and as soon as someone figured this out, everyone would be doing it.
But you’re right, Jim…the borrowers probably can’t afford the new, modified loans either. This has been my point all along. Prices are simply too high for most people to actually afford their mortgages AND have something to live on (and SAVE!!!) afterward. We will not get out of the morass until all of this is washed out. The more money they throw at it, the longer the recession/depression will last.
CA renter | November 24th, 2008 at 6:58 pmFrom The Press Enterprise: “Modifications used by lenders range from adding the past due amounts to the loan balance — which results in a higher monthly house payment — to temporarily halting rate increases on adjustable mortgages, lowering interest rates and lengthening the life of the loan. Reducing the mortgage balance is the rarest solution, experts say, because it is often unpopular with the investors who own the loans.”
Here’s another, much more disturbing part of the article:
“Paul Lloyd said he works seven days a week — weekdays as a water delivery man and weekends as a handyman — and his wife works as a nurse so they can continue to make a $3,800-a-month, interest-only payment on their house in Fontana. They worry that they may lose the house to foreclosure in eight years when they will have to start making an even larger monthly mortgage payment to cover principal and interest.”
$3,800 a month interest only – what kind of house is this, and how on earth did this couple qualify for it?? This mess is far from over.
Simone | November 24th, 2008 at 7:52 pmExtending the mortgage term is the “fairest” way in my opinion
The Blur | November 24th, 2008 at 9:01 pm“$3,800-a-month, interest-only payment on their house in Fontana. They worry that they may lose the house to foreclosure in eight years when they will have to start making an even larger monthly mortgage payment to cover principal and interest.”
Don’t these people understand they are only renting this house. They can easily rent the same home in Fontana for 2K a month. If the monthly is $3800 IO that mean at say 6.5% apr loan there loan is probably around 700k. You can purchase new homes in Fontana for 350k above Baseline all day. They need to sallow there pride an move today. I think in two years house will still be afforable for them. They have good jobs seem to be stable and nurse do very well salary wise. They will be able to afford the same home for half the loan amount. Even if they let it go in foreclosure it will only take two years to cure and they can get a FHA home loan. I dont see staying in a places for eight years and no chance at equity or growth. Maybe they fill price will return to pre-bubble amount by then but I don’t think it will.
inland empire | November 24th, 2008 at 11:21 pmI wonder how many borrowers who had to pump their income figures to qualify for a mortgage in 2005 are still paying in 2008
The pay option ARM holders come to mind for me. They do take 4-5 years to recast, and when they do you need to pay principal+interest on a higher loan than when you started. If somebody could only afford the minimum payments on a pay option ARM, how big of a loan could they afford with a 30-year fixed P+I loan? The big problem is that a 100K income can’t afford a 550K 30-year fixed mortgage. They can afford a 350K loan, and I have a feeling banks don’t want to drop principal that much.
JordanT | November 25th, 2008 at 8:35 amI haven’t seen how they are going to verify income? When you’re trying to show lower income to keep a house you can’t afford in the first place, aren’t there a lot of tricks? Have 2 jobs, turn in one pay stub. Cut out overtime. Take some unpaid time off. Have wife quit working. Increase deductions (choose most expensive benefits, max out flexible spending accounts), etc. etc etc etc etc etc etc. How in the world do they keep people from lying about income??
anonymous | November 25th, 2008 at 2:20 pmThe pay option ARM holders come to mind for me. They do take 4-5 years to recast, and when they do you need to pay principal+interest on a higher loan than when you started.
That is true. However, back in 2005 you could have legally obtained a loan for 50% DTI without having to lie about your income. If you had to lie, your DTI must be even worse than that. I can’t imagine a borrower who lives on bread and water and tries to hold onto his house for 3 years.
When you’re trying to show lower income to keep a house you can’t afford in the first place, aren’t there a lot of tricks?
You don’t gain anything by trying to show lower income.
Loan modification options consist of temporary interest rate reductions and principal reductions. In case of principal reductions, the bank will have a certain value in mind (perhaps 80-90% of the market value of your house) and it will NOT reduce your principal lower than that. It is up to you to PROVE that you have enough income to be able to pay modified mortgage. The bank needs to be convinced that you won’t default on the modified loan. That’s there the requirement of 34% DTI enters. You must have enough income for 34% DTI on the minimum amount to which the bank is willing to reduce your principal.
Nameless | November 25th, 2008 at 6:38 pm