United States Congressman John Conyers—a Democrat from Michigan who serves as chairman of the House Judiciary Committee—says loan modification can help stop stem the tide of foreclosures. From today’s Wall Street Journal:

This week the House Judiciary Committee approved legislation aimed at helping Americans keep their homes through bankruptcy.

I introduced the Helping Families Save Their Homes In Bankruptcy Act of 2009 to give courts the power to modify mortgages to bring them in line with underlying home values. For families in distress, this is a much-needed reform. And considering the realistic alternatives, it is fair to all concerned.

I have been working on this bill for nearly two years. I believe it represents one of the most tangible and productive steps we can take to limit the fallout from the real-estate depression that has been sweeping the nation. While it is not the entire answer to the economic crisis, it is a common-sense and practical approach to stopping a downward spiral where foreclosures also depress nearby home values and thereby hurt other homeowners. This spiral is not helping anyone — not homeowners, not lenders, and certainly not communities.

Some argue that we are acting too quickly, and that we should delay my legislation to give homeowners and lenders more time to modify the terms of existing mortgages on a voluntary basis outside of bankruptcy.

But the evidence shows that such modifications don’t work. For one thing, many of the servicers who control the mortgage loans claim they are not legally permitted to agree to voluntary modifications. And even when they are legally permitted to agree, their financial incentives are stacked in the direction of foreclosure.

As a result, the much-vaunted federal “Hope for Homeowners” program launched in October has been only a limited success. The program is supposed to facilitate new mortgages for homeowners if lenders agree to reduce the amount of money owed on a home to 90% of its assessed value. The program went into effect with the goal of helping hundreds of thousands of homeowners. To date, it has processed less than 400 applications.

To those who claim that my bill will end up harming consumers by increasing the cost of credit, I would respectfully suggest that they are not taking account of the track record of the modern-day bankruptcy code.

For more than three decades, the bankruptcy code has permitted the very kind of court modification we are considering today, for every other form of secured debt, including loans secured by second homes, investment properties, luxury yachts, and jets. For over 20 years, this very kind of modification has been available for home mortgages already — if the home is a family farm. There is no indication that this has in any way increased the cost of credit for any of these kinds of loans.

As for my legislation, we have narrowed it to apply only to existing mortgages. So it will have no effect on new mortgages and cannot impact their cost. This is one reason why Citigroup is now among the many business and consumer groups that support this proposal. It’s also one reason why the Obama administration supports my bill.

Finally, to those who argue that this legislation constitutes some form of “moral hazard,” which will encourage reckless borrowing in the future, I would simply ask them to come to Detroit, my home town.

Detroit has had more than 100,000 foreclosures over the past three years. And the pace doesn’t seem to be letting up. The city has an average of 126 foreclosures a day. Block after block, “for sale” and foreclosure signs feed off of each other, driving down home values, uprooting families, decimating communities, and causing local tax revenue that pays for police and firefighters to plummet. We don’t have the luxury of worrying about hypothetical future moral lessons. We need to stop the bleeding today.

What is happening in Detroit is also happening across the country. Communities in Arizona, California, Florida, Massachusetts, Nevada, Ohio and elsewhere are all facing big foreclosure problems.

If we can spend $700 billion to bail out the brokers on Wall Street, the very least we can do is allow working Americans who are willing to repay their debts as best they can, under court supervision, the dignity of staying in their homes. With one in 10 homeowners behind on their mortgages, and 10 million foreclosures expected over the next several years, the time for meaningful action is now.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)

A lot of homeowners considering loan modification want to know what kind of impact loan modification has on their credit. For instance, here’s a question we received here on KeepMyHouse.com just the other day:

Regarding the credit aspect of the loan modification. Will the loan show on your bureau that you have modified it? Will it show settled and a new one opened? Will there be signs to other future lendors that would indicate to them that your convential loan was modified and therefore give them a warning as to the financial hardship that occurred during this period of time. I realize the short term advantage is simply keeping your house, but I am concerned about the long term effects it may have on my family and our future abilities… ~ Ron

Great question, Ron! Here’s what you need to know:

No, the loan will not be stated as “modified” on your credit report. I suppose this classification may come in the future, but I’ve yet to see anything other than “settled.” This is all a pretty new adventure and there will be some items that will need to be worked out as time goes on. But if the account was current when the modification was done (i.e. modification was a preventative measure), then I don’t believe there will be any reporting to the bureau at all. What’s to report, you were current and you still are? Maybe there will be a change in the monthly payment amount, but like I said this is all so new I’ve not seen that yet either. For now, my advice would be; if you see a status reported on your credit report that you do not agree with or that is false, challenge it.

You’re right to be concerned about your long term financial health. Your credit score is certainly a part of that health. You’re also right when you say that the short term goal of keeping your house has to take preeminence. If you can fix the problem now, you live to solve the problem later. If you’ll indulge me in answering your question, I’d like to use the analogy of being in a boat out in a lake.

The boat springs a leak that threatens to sink it. You happen to have some duct tape (next to the dog, man’s second best friend) and manage to slow the leak down to the point where you’re able to get safely to shore. You didn’t solve the problem you just fixed it temporarily. If you don’t permanently seal the leak, you’re sure to sink the next time you venture out. The leak took your immediate attention because it was urgent and was capable of sinking the whole ship. The financial crisis you find yourself in right now also requires your immediate attention. Like the duct tape patch job, a loan modification might only be a short term fix. You have to assess the real problem in your financial hull and solve it.

My personal opinion regarding creditors future perceptions of these hardships is that when they look at credit reports a few years from now and see “blemishes” on people credit between the years of 2006 through 2011, their response will be one of: “Oh yeah, that was an horrible time.”

Your goal should be to make the negative reporting to your credit as short a span of time as you can. I also think that creditors will be more likely to take a chance on lending to someone who took measures to solve the problem than they will be with those who just threw in the towel and walked away. You certainly can not rely on credit forgiveness being reality, but if there’s not something done to address the issues created by these financial times, credit/lending will remain overly tight for years.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)

“The average American trying to get through [sic: to their bank] to negotiate a loan modification will not be able to get it done!”  - U.S. Congresswoman Maxine Waters (January 21, 2009)

You’ve probably heard the expression that an individual who represents himself in court has a fool for a lawyer. This often applies to loan modification, too. While you may be able to achieve some level of success by dealing directly with a reputable and cooperative lender, you can save time, effort, and anguish by hiring a qualified attorney or loan modification professional.

Having legal representation is even more important when the lender is inaccessible or unwilling to work out a solution, as nine-term U.S. Congresswoman Maxine Waters recently learned when she attempted to contact lenders on her own (click on the video below to see how difficult it can be):

Most people wouldn’t hesitate to call an industry professional when they need to borrow money, purchase a house, create a living will, or even fix a leaky roof. When considering a loan modification, however, some people assume they can negotiate a deal with their lender on their own.

While working directly with your lender’s loss mitigation or loan modification department is certainly an option, it’s not always the wisest choice, as Congresswoman Waters found out. You may be better off paying an attorney to negotiate on your behalf, just as you would hire an attorney to represent your best interests in court.

Remember, banks and lenders tend to protect their own interests (and who can blame them, really). They have a right earn a profit just like every other business, and they have a realistic expectation that the people who borrowed from them will honor the terms of their agreement. As a result, some banks and lenders reject loan modification applications because they feel specific borrowers can afford to make their payments if they would just budget more carefully and make what are sometimes unpleasant or difficult to accept sacrifices. Or, in other cases, they negotiate a loan modification that makes your budget so tight that even one missed paycheck or one large automobile repair bill can put you right back into default.

Hiring a qualified attorney or loan modification professional ensures you have someone looking out for your best interests. Now, you can find dozens of loan modification companies on the Internet, but one of the best ways to find a reputable professional is through referrals. If you have a friend, relative, or associate who’s been in a similar predicament and used a loan modification company to save their home, ask for the company’s name and contact information and how satisfied they were with the services they received.

Also, consider asking real estate professionals in your area for recommendations, including real estate agents, attorneys, accountants, and title company representatives. These sources can often lead you to the best in the business and help you avoid not only worst but the hassles of trying to do-it-yourself, as evidenced by Congresswoman Waters frustrating experience in attempting to deal directly with the lenders herself.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)

Over the past year or so, the American homeowner has taken it on the chin-a one-two-three punch that has knocked many out of their homes and threatens to do the same to millions more. First, the housing bubble burst, stripping billions in equity. Tight credit landed the next blow, preventing homeowners from refinancing their way out of trouble. Finally, a severe economic downturn has led to record job losses, making it difficult or impossible for many families to keep their homes even if they otherwise would be able to negotiate a loan modification with their lender.

If American homeowners weren’t down for the count just yet, some of their fellow citizens are lining up to stomp them into the dirt. These folks, no doubt consisting of those who have been fortunate enough to dodge the foreclosure bullet so far, are calling for the end of the bailouts-specifically for the end of any bailouts for homeowners. These are the people who post comments on blogs and discussion forums every day claiming that homeowners who are drowning in debt shouldn’t be “rewarded” with special deals.

What most of those who are clamoring for an end to homeowner bailouts, such as loan modifications, fail to realize is that we are all in this together. What’s good for homeowners is good for America.

Here’s why:

• Foreclosures reduce property values for everyone in the neighborhood.
• Lower property values usually mean states, counties, and towns have less money to fund education and other services.
• Lower property values also lead to lower commissions for real estate agents and less business for everyone who makes a living off of the real estate industry.
• Foreclosures leave vacant homes that tend to attract vandals, vagrants, and other criminal types who either set up shop in the homes or use the homes to commit real estate or mortgage fraud.
• Rising default rates convince lenders to tighten credit, making it more difficult and costly to borrow money.
• As families lose their homes, they have less money to spend on products and services, lowering demand and increasing unemployment.
• The mass exodus of families from an area destabilizes the neighborhood, often attracting transient (just passing through) populations. This makes it difficult for schools and other township agencies to plan for development.

Foreclosures feed on foreclosures as the repercussions from one foreclosure ripple through the economy.

Don’t be fooled-when a family loses its home, everyone in the neighborhood becomes a victim of foreclosure. This is why it is so important for us to work together, as Americans have traditionally done in the face of crises, to stem the tide of foreclosures and stabilize the housing market. We need to stop worrying about homeowners who have gotten breaks that seem unfair and begin to realize that we have a lot more to lose if homeowners across America are not given the breaks they need.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)

The State of Virginia has joined a nationwide settlement agreement with Countrywide that spells good news for the state’s distressed homeowners. In total, the settlement will provide more than $8 billion in loan modifications and foreclosure relief to as many as 397,000 homeowners across the United States, including projected relief of $210 million for nearly 9,000 homeowners in Virginia. (Countrywide was acquired by Bank of America Corporation in July 2008.)

Under terms of the settlement, Countrywide and its affiliates have agreed to offer loan modifications for eligible borrowers, allowing hundreds of thousands of Americans to keep their homes. According to the settlement agreement, borrowers eligible for loan modifications are those who received either a qualifying sub-prime adjustable rate mortgage or a Pay Option adjustable rate mortgage prior to Dec. 31, 2007, and who meet other specific requirements.

Depending on the type of loan, Countrywide’s loan modifications may include an automatic freeze or reduction in interest rates, conversion to fixed-rate loans, or refinancing or reduction of the principal owed. Under the company’s proposed loan modifications, first-year payments of principal, interest, taxes and insurance will be targeted to equal 34 percent of the borrower’s income.

In addition, as part of the settlement, Countrywide has agreed to pay a total of $150 million nationwide under a Foreclosure Relief Payment program for particular borrowers who either already have lost their homes or are at least 120 days delinquent. Virginia’s share of this amount is approximately $2.5 million. Countrywide will also pay up to $70 million nationwide for relocation assistance to borrowers who do not qualify for a loan modification and who subsequently face foreclosure. Virginia’s projected portion of these payments is estimated at $2.3 million.

On December 1, 2008, Countrywide began sending mailings to eligible Countrywide borrowers notifying them of the loan modifications that may be available under the terms of the settlement. Countrywide customers who have questions about their eligibility for a loan modification are encouraged to call Countrywide toll-free at 1-800-669-6607.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)

Once you’ve decided you’re ready to apply for a loan modification, you may be wondering what sort of documentation is required to start and complete the process. The simple fact of the matter is this… applying for a loan modification is similar to applying for a loan – your lender wants to see a short stack of documents proving your need for a loan modification and your ability to afford any lower monthly mortgage payment that may result from the loan modification.

Most lenders require that you submit the following documents:

• Hardship letter describing the event(s) that triggered your inability to make your mortgage payments.

• Copy of any documentation supporting your hardship claim, such as hospital bills, a pink slip from your work, or divorce papers.

• Borrower information sheet (sometimes referred to as a financial worksheet) showing your income and assets, similar to the Uniform Residential Loan Application – 1003 you completed when applying for your loan.

• Copy of past two years’ federal income tax returns.

• Copy of past two years’ W-2 forms.

• Copy of past two months’ bank statements. (If you have a pile of money sitting in the bank, the lender is less likely to grant you a loan modification based on hardship.)

• Copy of past two months’ pay stubs showing income from your job.

• Copy of most recent mortgage statement.

• Copy of most recent property tax statement (if escrow payments for property taxes are not shown on your mortgage statement).

• Proof of homeowners’ insurance (if escrow payments for homeowner’s insurance are not shown on your mortgage statement). Your insurance agent should be able to provide you with what you need.

• Current financial statement (sometimes referred to as a financial worksheet) detailing your monthly income and expenses and showing how much you are coming up short each month with the current house payment.

• Projected financial statement detailing any changes to your monthly income and expenses and the payment amount you will be able to afford assuming you obtain a loan modification.

• Any letters from credit counselors demonstrating your commitment to getting your financial house in order and what you are currently doing to achieve that goal.

• Cover letter or form explaining why you’re submitting all these documents and providing a list of all documents included in the package. Make sure the cover letter includes your name and account number.

Prior to submitting your application, make sure you have signed all documents that require signatures. Your significant other may need to sign, as well, assuming his or her name is on the original mortgage. You may also want to include your loan number on copies of all documents in the package.

Keep in mind that you may get only one shot at having your application approved, so make absolutely sure you follow your lender’s instructions to the letter and include each and every document the lender requests in whatever form specified.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)

Homeowners facing foreclosure may consider loan modification a possible solution but often wonder whether it’s worth the time and effort. Many dismiss the option, mistakenly assuming they can’t possibly qualify for one reason or another – perhaps they already received a foreclosure notice and think it’s too late, they’re too far behind on their payments to ever catch up, or they believe their bank stands more to gain by foreclosing on them.

The truth is that you won’t know whether you qualify until you actually apply for the loan modification and discuss the possibility with your lender or legal representative. The best that this short blog post can do is to reveal the types of information the lender is likely to examine in reviewing your application:

• A statement showing your willingness to keep your house. Your lender wants to see that you are committed to a long-term solution.
• A hardship letter describing the event that has made your monthly mortgage payments unaffordable. Hardships can include loss of job, reduction in pay, medical illness, costly medical bills, a sudden and significant interest rate increase on an adjustable rate mortgage (ARM), and so on.
• Your ability to afford a reasonable lower monthly payment. Lenders have all sorts of ways to lower your monthly payment, including dropping the interest rate, spreading payments over a longer time period (say 40 years rather than 30), reducing the balance due, forgiving late payment penalties and fees, and rolling missed payments into the balance due. If the lender is unable or unwilling to reduce the monthly payment to an amount you can afford, you won’t have a successful loan modification – nor would you want to.
• Supporting documentation, including W-2’s, current credit report, pay stubs, federal income tax returns, bank statements, and so on.

To determine whether you qualify for a loan modification, most lenders are going to take a close look at your debt to income ratio (DTI) – your monthly debt payments divided by your gross monthly income. (Debt payments do not include what you spend on groceries, utilities, clothing, gas, and so on.) The back-end ratio consists of all your debt payments (including house payment, car payment, credit card payments, and so on). The front-end ratio covers only your monthly house payment including anything you pay into escrow to cover property taxes, homeowner’s insurance, and any homeowner association fees (HOA).

Debt Ratio = Total Monthly Payments / Gross Monthly Income

Although your lender may have different guidelines, the FHA recommends that your back-end ratio not exceed 41 percent and your front-end ratio not exceed 29 percent. This is a pretty good guideline to follow in determining whether your new, lower monthly mortgage payment will be truly affordable.

A more conservative approach to calculating debt ratios is gaining some support. It involves generating the DTI using net pay instead of gross pay – in other words, basing the calculations on your take-home pay. This makes sense – after all, the only money you really have to spend is your net take-home pay, not your gross pay. You probably won’t see this new approach gain nationwide support, because it would further tighten lending restrictions and disqualify many would-be borrowers, but it is out there and something to be aware of. Personally, it’s what I suggest people look at when applying for any credit, especially when considering a major monthly payment like a mortgage.

Remember: You want to qualify for a loan modification only if the modification is going to leave you with a truly affordable monthly mortgage payment. You don’t want your lender qualifying you if the loan modification is simply going to put you back on the path to losing your home.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)