One thing that homeowners need to realize when they hit hard times is that, generally speaking, your lending institution is on your side. They’re not the enemy, nor do they generally want to foreclose on your home. Contrary to popular belief, banks generally make better and more sure money from  homeowners who pay their mortgages on time.

This isn’t to say that a bank can’t or won’t foreclose if it feels the need to do so. Generally speaking though, it isn’t in the bank’s best interest to do so, if they can help it.

Additionally, there are numerous government programs designed to benefit both the homeowner and the bank by helping distressed homeowners to stay in their homes. Nobody wants to lose a home to foreclosure and, believe it or not, the bank doesn’t really win out when they foreclose either.

If you find yourself falling behind on your mortgage payments, the first thing you should do is contact your lender. They can generally help you get back on track if you haven’t fallen too far behind. Even if you are considerably behind on your mortgage payments, most lenders can help you by way of a modification. Depending on your income and other factors, government assistance may even be available to help you catch up on your mortgage.

Modifications can help borrowers in several ways. Your lender will have more specific information concerning what programs your home loans qualify for. Common solutions include adjusting the interest rate, changing the type of mortgage, and extending the term of the mortgage. Whichever scenario is right for you and your lender, you will find that lenders are generally eager to work with you to prevent foreclosure.

Even if you don’t qualify for, or don’t want a loan modification, there may be alternatives to foreclosure. One of the more common ones is a short sale. While it’s not a perfect solution, it beats foreclosure, and has a much lesser effect on your credit.

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Broadening the scope

The Administration announced that the Home Affordable Modification Program will be expanded by $14 billion. Currently, the program is designed in such a way that people can apply for a temporary modification to their home loan. They then make three months of reduced payments on their home loan. After they have made those payments, the modification to their home loan is made permanent.

The program is being expanded to offer unemployed people a temporary break on their home loans. It would lower the mortgage payment for unemployed folks for a temporary period, from between three and six months. In addition, the overall modification programs would be available to people with low credit scores, including those with a credit score as low as 500.

A program with potential

Some experts suggest that the changes being made to the Home Affordable Modification Program could keep as many as 1 million to 1.5 million people from being unable to make their mortgage payments and losing their homes. The program is especially aimed at those who owe more on their home than what it is now worth.

A rocky beginning

The program has had its critics since it started early last year, largely because so many of the people who entered the trial modification program did not complete the necessary payment or paperwork requirements that were needed in order to make the modifications permanent. The Administration made changes earlier this year that closed the paperwork loophole, requiring applicants to submit all of the necessary paperwork at the time they apply for the modification.

Photo via Christian Haugen

However, the program doesn’t reduce the loan amount. It can leave borrowers owing much more than the home is worth. Plus the low rates can increase again in the future.

A HAMP spokesperson suggested that the loans “provide immediate relief to homeowners who have suffered a recent financial hardship.”

The HAMP Process

The HAMP program offers $1,000 per year to the borrower, mortgage servicing firm and the loan holder as an incentive to redo the monthly payments and make them lower. The borrowers are qualified if they’ve suffered a financial setback but have the income to make the payments if the payments are lowered.

The lenders then go through a series of steps designed to set the borrower’s monthly payments to 31% of their monthly income. The loans get converted into fixed rates. If that doesn’t lower the payment enough, the lenders reduce the interest rates. If the payment is still not low enough, the loans are extended for 40 years. Finally, the principal repayment will be delayed. However, that balance will eventually have to be repaid.

Right now, HAMP has had 1.1 million applicants. But only 5.6% of those have been converted to permanent loan modifications.

Critics suggest that while the plan can buy time, it cannot bring back the value of a home. And as of right now, there is no federal plan to address the negative equity issues inherent in these loans.

Photo via Mark Strozier

The new requirements

Starting June 1, if you want to get a trial modification through the HAMP program you’re going to have to submit some documents up front. You’ll need to be able to provide two paycheck stubs, your application form for the program, and an affidavit that proclaims hardship. You’ll also need to allow the home loan servicer access to the data in your tax returns.

How is it different?

Up to this point, the current practice has been for loan servicers to grant the trial modification based on the statement of income that the homeowner provides to the servicer over the phone. While the trial modification is in effect, the servicer then requires that the homeowner get the necessary documentation together to be reviewed.

Why the changes may help

Once the documentation is assembled, the application can be considered. If everything is in order and the homeowner meets the necessary requirements, the home loan modification can be made permanent.

It’s in this area of paperwork that things seem to be getting stalled, however. Consumers are having difficulty with being able to provide the necessary documentation. In other cases, the loan servicers appear to be losing the documentation that’s been submitted by the homeowners. In a significant number of cases, as well, it would seem that the homeowner could not provide any necessary verification of their income in order to get the modification to their home loan made permanent.

The administration has even pointed to the issue of documentation as a reason why so many trial modifications are never made permanent. They claim to be learning the lessons of the past, and these new upfront documentation requirements are how they’re proposing to fix this problem.

How it will work now

People who try to enter the HAMP program after June 1 will have to submit the required paperwork. Once it’s approved, they will then need to make three modified payments in a row on time. Once they’ve done that, the modifications will be made permanent automatically. In this way, the second step of having to submit paperwork after the trial starts is eliminated.

It’s also hoped that this new process will help eliminate some of the confusion that may have take place during the early days of the program.

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As of now, loan servicers are no longer able to cancel a Make Home Affordable trial modification that is scheduled to expire prior to January 31 for any reason, other than that the property doesn’t qualify. This means that borrowers who missed trial modification payments or who did not turn in the required documentation can’t be dropped from the program. The servicers are required to notify the borrower in writing of what’s missing, and the borrowers have another 30 days to comply.

This directive comes as recent reports show that the vast majority of people that enter the trial modification program – over 80 percent by some estimates – aren’t following through with the entire process, and are winding up in redefault.

Part of the administration’s Mortgage Modification Conversion Drive, this instruction was designed to help borrowers whose trial period expired at the end of the year. The administration has blamed both borrowers and home loan servicers for the problems, as servicers have severely struggled to get the necessary documentation to make the changes to the home loans permanent.

This followed a move by the administration in October to try to loosen the requirements for documentation. In October, they allowed an extra two months for an initial set of trial modifications to be completed, beyond the original three months.

The raw statistics for the home loans modification program aren’t encouraging. Servicers have made permanent only 31,382 modifications by the end of November. It’s estimated that 4 million mortgages in the United States are eligible for the program. There are an estimated total of 728,000 home loans stuck somewhere or another in the modification process, with many set to expire on December 31. The administration hopes to see as many as 350,000 of those become permanent.

The good news is that home loan servicers seem to have made some progress. Servicers have added extra staff to not only process the home loan modifications, but to handle the process of getting the required documentation from home loan borrowers in order to keep the process moving along.

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To this point, many lenders have either been unwilling or unable to draw from the $50 billion in federal dollars that the administration made available to banks last spring. The purpose of the funds was to slow the growing number of foreclosures. Through November, only 23 percent of homes nationwide that are delinquent and eligible for the modifications have entered the program. That means that around 760,000 of nearly 3.3 million homes have entered trial modifications.

Of those trial modifications only 31,000 have actually made it through the program to the point where they have a permanent home loan modification arrangement.

Home lenders claim that the reason these results are so poor is that many homeowners either fail to turn in their paperwork in a timely fashion, or that others have lost their jobs since applying to the program and now no longer qualify.

The Making Homes Affordable program used $50 billion in TARP funds to try to get banks to restructure home loans that were in immanent risk of foreclosure. A homeowner can qualify for the modification program if over 38 percent of their gross household income is dedicated to a mortgage, they can’t afford their monthly home loan payments and if they’re at a risk for foreclosure.

The home lender then agrees to write down the mortgage until the monthly payment is equal to 38 percent of the gross income. If they do, the federal government then subsidizes an additional write down of the home loan to 31 percent. In addition, the government pays banks $1,000 for each loan that is modified, and an additional $3,000 if the loan goes all the way through the program and remains modified. Borrowers also get an incentive of $1,000 per year toward their loan for staying current.

While banks claim that the abysmal rates have to do with borrower issues, many borrowers report being confused by the program, and have had lackluster response from lenders. It’s unclear just what will be necessary to get the program moving in the right direction.

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This represents action on the part of national banks and thrift servicers to implement over 680,000 home loan modifications. These modifications help to prevent foreclosure, and represent a significant degree of progress.

The report wasn’t all good news, however. Overall, the amount of mortgages in the servicing portfolio that were current dropped again, which represents the sixth consecutive quarterly drop. Currently, only 87 percent of mortgages in the servicing portfolio were current and performing. Approximately 3.2 percent, or over one million mortgages, were in foreclosure. Another 6.2 percent of the home loans were in a state of serious delinquency. Prime mortgages, which represent the biggest home loan category, were up nearly 20 percent from the second quarter. Today, prime mortgage delinquencies were at twice the levels of the same quarter in 2008.

The other problem with these numbers is that the rate of re-default seems to be staying pretty high overall. While the most recent home retention actions have had much lower re-default rates that actions taken previously in the year, the rates are still way too high. Around half of the loans modified find themselves under re-default within just six months of the modification. The report defines “re-default,” as being 60 or more days past due or in foreclosure.

Overall, home loan servicers implemented a whopping 274,000 trial plans. These trial plans were set up under the Home Affordable Modification Program. In addition to these trial plans, over 400,000 other actions involving home retention were done by servicers. This includes things like payment plans, trial plans and loan modifications. These actions don’t require any incentive from the federal government and are handled purely by the loan servicers themselves.

The vast majority of home loan modifications served to reduce monthly payments on the home loan, both in terms of interest and principal.

This is also a trend in the right direction. Home loan servicers implemented around double the number of actions as they did new foreclosures. For every two home loans that were lost in a foreclosure sale, home loan servicers made home retention actions for nine other families.

You can download the complete report from the OCC web site at www.occ.gov or the OTS website www.ots.gov.

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http://www.flickr.com/photos/balamurugan/

One of the major efforts by the current administration to help the economy during times of crisis has been the Make Homes Affordable program. This government program is designed to get borrowers who are facing foreclosure on their home to the point where they can afford their home loan and where they can begin to pay  it back and not face the looming specter of foreclosure. The program has met with some success, although a quarter of people in the program today have found themselves again behind on their home loans.

Chicago’s Struggle

In some areas, people are struggling to qualify for the program. Take Chicago, for example. In that city around 36,000 homeowners have had temporary or permanent home loan modifications. This makes Chicago one of the leading areas in the nation for the plan. This is good, as around 9.5 percent of mortgages in Chicago were more than 90 days delinquent during the month of October. Foreclosure filings in November were 108 percent more than what they were the previous year.

Yet, home owners struggle to get assistance through the program. The borrowers complain that the process is confusing at best. They complain that home loan servicers are losing track of paperwork. On the home loan servicer side, these companies are claiming that the homeowners aren’t giving them the necessary documentation to get them fully into the program.

A Nation’s Struggle

About 728,000 home loan modifications were in place by the end of last month. The vast majority are in a trial phase, during which the homeowner is to gather the appropriate documentation to make the modification permanent. Less than 32,000 home loans nationwide have been made permanent.

The program was projected, initially, to help as many as four million home loan borrowers. The process is much slower than anticipated, however. In addition, of the 78 home loan servicers, there is little consistency in terms of success rates. Bank of America, for example, is the nation’s largest home loan servicer and has only made 98 permanent modifications to date.

How to Fix It

There’s no easy way to fix the problem, it would seem. A homeowner can only do so much to provide the home loan servicer with the required documentation, and they can’t force the servicer to take the necessary steps to complete the process. Ultimately, it’s a matter of having all of your ducks in a row and then following up with the servicer until the process is complete.