(Note: In part one of this two-part series on loan modification program, I told you to watch out for the growing number of loan modification scam artists, and how you can avoid them (or better yet, help prosecute them). Here, in Part Two, I’ll walk you through the process of getting a good loan modification.)
Being a trader on Wall Street for more years than I care to remember, you run into some great stories. Usually they’re funny, and they have a great point to make.
Take this one about legendary financiers J. P Morgan and John D. Rockefeller. Morgan once wanted to buy a big Minnesota ore mine from Rockefeller. They sat down to talk, and Morgan asked, “Well, what’s your price?
Rockefeller looked at Morgan and said; “Why Mr. Morgan there must be some mistake. I did not come here to sell; I understood you wish to buy.”
Rockefeller knew he had Morgan over a barrel, and was ready to use that leverage to get the best deal he could.
That’s how banks and lenders view this loan modification – or “workout” deals – that we’re hearing more about. Uncle Sam is all over the place touting them and telling everyone they’re great. The FDIC says that loan workout programs could save more than 1.5 million homes from foreclosure – and who wants to come out against that?
Not me. But I will come out against the increasingly popular notion that Uncle Sam is going to wave a magic wand and make our mortgage problems go away with these programs. And I will warn consumers about the fine print inside some of these deals and tell you that banks, like Rockefeller over J.P. Morgan, have all the leverage against troubled homeowners when the two parties sit down to hammer out a new deal.
I’d also like to warn financially-strapped homeowners that even if you get a new deal on your mortgage, you probably will owe the same amount of money, if not more, over the life of your revamped loan. Banks aren’t crazy. Sure, the government can push them to the negotiating table and make them work out a new home loan deal or two. But lenders aren’t going to give up the golden goose – they’re still going to get the money they’re owed. Banks being banks, they’re not going to reduce your mortgage amount – they’re just going to spread your payments around so your monthly mortgage bill is more affordable.
One way lenders accomplish that is by stretching your 30-year-loan out to a 40-year-loan. That way, your monthly payments go down, presumably making your home more affordable. But watch out – in the end you’ll owe more on your home because of longer interest payments over the term of the loan.
In other words, you won’t see your principal reduced under any of the loan workout programs I’m seeing, although I have been campaigning for it for months on Mad Money. There are rumors that Citigroup (Stock Quote: C) will offer some kind of principal reductions, but that’s only if you file for bankruptcy. Even with that, nobody is out there promising to cut mortgage principal via these loan workout programs. (If that changes, I’ll let you know in a future column.)
But, to paraphrase Shakespeare, I come here today not to bury loan workout programs, (but I won’t praise them, either). Such programs might actually work for some people. They’re a good bet for folks who can eke out their monthly payments for a while, and who want to wait out the lousy real estate market so they can sell their homes at a better price. Or, if you lost your job and need to stem the financial bloodletting from a big, fat mortgage payment, loan workout programs might buy you the time you need to get your financial act together. Or, if you can’t refinance because of lousy credit, and need time to bring your credit score back up to speed, loan workouts may be your best bet.
In that spirit, let’s take a look at how the loan modification process works. If you think loan workouts are for you, by all means, use the steps I’m about to lay out. When you do so, just remember that old Cramer maxim; caveat emptor, or “buyer beware."
Are you eligible? Step one in trying to cut a new home loan deal is to make sure you’re eligible. Trust me; banks are stubborn over who qualifies. In general, loan workout candidates must . . .
• Be 90 days or more behind on their mortgage payments.
• Prove significant financial hardship
• Must not have declared bankruptcy
• Before taking up the loan program the borrower must occupy his property or house as his primary residence.
Don’t be surprised if your lender insists that you have a fixed, regular income (which is not what people out of a job want to hear). And some might balk over a mediocre credit score. Like I said, they hold all the cards.
Who’s offering loan workouts? Most of the major banks are onboard, including Citigroup, Bank of America (Stock Quote: BAC), and JP Morgan Chase (Stock Quote: JPM), the latter of which says it has renegotiated more than 300,000 mortgages. They usually try to help troubled homeowners by offering (often temporarily) lower interest rates, longer repayment timetables, and will likely structure a new mortgage payment that is equal to a fixed percentage of your gross monthly income (say, 40%, for example).
Where to start? If you’ve contacted a reputable loan workout provider you’ll need to have your paperwork in order. Usually that will mean 30-60 days worth of pay stubs; two months worth of bank statements, a hardship letter detailing your financial situation; copies of your layoff notice, and copies of medical bills (if applicable); a current mortgage statement, and copies of your last two tax returns.
Figure out your debt ratio. Your loan workout agent will likely ask you about your debt ratio. Don’t sweat it. All they’re looking for in a debt ratio is to find out whether, under the new loan terms, you’ll be able to handle the mortgage payment. To calculate your debt ratio, combine all of your housing expenses, including your principle and interest payment, property taxes, insurance and HOA (if applicable). Then, divide the total number by your gross monthly income to calculate your debt ratio.
Get analyzed. If you’re house is “underwater” meaning you owe more than it’s worth, a good Comprehensive Market Analysis can help turn the tide in your favor. A good real estate agent can put a CMA together for you. All it does is pull together recent purchases and sales of homes in your neighborhood to calculate the current market value of your home. If a lender sees that your home has decent value, it’s more likely to offer a workout deal and less likely to foreclose.
Fill out a mortgage loan modification application. Every lender has their own special application, but they all usually include the above information: the hardship letter, your financial documents, your debt ratio, and a Comprehensive Market Analysis. Make sure your application is flawless. Many times, inaccurate or incomplete applications are tossed to the bottom of the heap. A good tip: hire a good real estate attorney to review your loan workout application. I know money is tight for a lot of folks, but the few hundred bucks you’ll spend on a smart lawyer can vastly increase your chances of getting your application approved.
After your application is reviewed, your bank or lender will get back to you, usually in a few days, and let you know whether you’re approved or not. In the meantime, keep making your mortgage payments and do all you can to get your credit score in good shape.
Overall, getting a loan modification deal is a bit tricky. The idea is to show your lender that your current payment is too tough to meet, but a new, lower mortgage payment isn’t. It’s a subjective process, and one that is tilted in favor of the banks getting what they want – over you getting what you need.
But if you stick with it, watch out for the scam artists, and get a good application in order, you might catch a break with a newly revamped mortgage.
If you’re in a tough spot, here’s hoping you do just that.
—Brian O’Connell contributed to this article.