If a group of consumer-minded California State Senators get their way, loan modification companies may soon find themselves out of business or scratching their heads as they consider how to successfully adjust their revenue model.

California Senate Bill 94 (SB 94), which looks like it might be days away from being passed by the full California State Senate, would prohibit the charging of advance fees to homeowners in connection with a loan modification, and require anyone who wishes to charge a fee for loan modification services (after performing them) to provide a state mandated notice beforehand regarding the availability of non-fee options for the borrower.

Here’s California State Sen. Ron Calderon (D-Montebello), discussing the measure:

More on yesterday’s development from the California Political Desk at the California Chronicle:

The Senate Judiciary Committee today passed a measure by Sen. Ron Calderon (D-Montebello) that will protect California borrowers who are struggling in today´s troubled housing market.

The bill, SB 94, authored by Sen. Calderon, will prevent a person or a business from charging an upfront fee to a borrower for helping negotiate a loan modification on that borrower´s behalf. Such services are free of charge from non-profit housing counselors.

“Economic times are difficult enough without homeowners having to worry whether they are being scammed when they want to modify their mortgage loans,” said Senate President pro Tem Darrell Steinberg (D-Sacramento). “The bill is a common sense, consumer measure that will make it clear to struggling homeowners that they can get help with their loan modification needs free-of-charge. I commend Senator Calderon for introducing SB 94.”

Tens of thousands of Californians face default and possible foreclosure if they are unable to negotiate a loan modification with their lender. A cottage industry has sprung up to exploit these borrowers, prey on their fears of foreclosure and their ignorance of the complicated foreclosure process. Loan modification “consultants” charge borrowers fees - often up-front and nonrefundable - for services available elsewhere free-of-charge.

“Fear and desperation create a fertile climate for exploitation,” said Senator Calderon, chairman of the Senate Banking, Finance and Insurance Committee. “Borrowers facing financial ruin are misplacing their trust in these so-called consultants who charge fees for limited services that often leave the borrower worse off than before.”

“The Senate Judiciary Committee heard testimony last month about the increasing number of consumer scams targeting people facing foreclosure,” said Senator Ellen Corbett (D-San Leandro), chair of the Senate Judiciary Committee. “I strongly support these important protections that will help to put an end to unscrupulous scammers who take advantage of trusting homeowners desperately looking for help.”

Unscrupulous loan-modification consultants can be found lurking outside every mortgage fair, trolling for troubled borrowers. Their advertisements flood neighborhoods that have been hardest hit by foreclosure.

Senator Lou Correa (D-Santa Ana), in support of the measure added, “I´ve heard horror stories from my constituents who were facing foreclosure and paid thousands of dollars to heartless individuals offering false hope and unmet promises. This has to be made a crime.”

Sen. Calderon´s measure, SB 94, cracks down on these loan-modification con artists by prohibiting lenders from charging borrowers for loan modification services. Non-lenders can charge a fee for helping arrange a loan modification only after providing promised services and informing customers that similar services are available for free from non-profit housing counselors.

The bill´s next stop is the Senate Appropriations Committee.

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

In several blog entries here on KeepMyHouse.com, I point out that loan modification is a no-brainer for lenders. In short, when dealing with distressed homeowners, lenders essentially have the following choices:

• Loan modification
• Foreclosure
• Forbearance
• Deed in lieu
• Short sale

All things being equal, offering a loan modification to borrowers is usually the best option for lenders, because they avoid the high cost of foreclosure (by some estimates $50,000 to $100,000 per foreclosure) and they continue to collect interest on the loan – at a lower rate of return, but still more than enough to earn a profit.

Unfortunately, in many cases, another factor comes into play – mortgage insurance. If a loan is FHA- or VA-secured or the owners are paying PMI (private mortgage insurance), the lender stands to lose much less from foreclosure, because insurance will make up a portion of the difference. In other words, the lender’s motivation to work out a reasonable deal with the homeowner/borrower is undermined by mortgage insurance – often mortgage insurance that the homeowner is paying for!

When foreclosure numbers spiked, so did mortgage insurance claims. This is what contributed to the need for insurance giant AIG to receive bailout money from the government. Without it they could not have paid all the claims being made and still remain in business. AIG going out of business would have jeopardized the stability of millions of loans and caused even greater market insecurity.

If you are wondering why the federal government is willing to subsidize lenders for modifying mortgages and subsidize homeowners for making their monthly mortgage payments, wonder no more. One reason the government wants to bail out homeowners is because it has to. The government stands to lose more if homeowners with government-secured mortgages default on their loans than by paying ten thousand dollars or so to subsidize loan modifications for at-risk loans.

You can also stop wondering why mortgage lenders approved all of those risky mortgage loans in the first place. Risks to the lenders were often reduced by the fact that the loans were insured. They could afford to gamble, because after all, someone else would be there to pick up the tab on any losses.

Having insurance when disaster strikes is usually a good thing, but in the case of the foreclosure crisis, having mortgage insurance can work against you. It’s not like homeowner’s insurance that protects your investment in the case of a natural disaster. It only protects the lender’s investment – leaving you and your family without a roof over your heads. In addition, as a recent visitor here on KeepMyHouse.com pointed out, eliminating PMI for loans that require it could make house payments more affordable, put more money in people’s pockets, and help stimulate the economy.

I am not entirely against having the government secure loans or requiring homeowners to pay PMI on certain mortgage loans. Up to this point, these programs have helped more people achieve the American Dream of Homeownership. However, when these same programs are working against homeowners during an unprecedented economic crisis, I think it’s time to review the real purpose of these programs. Lenders need to start relying less on mortgage insurance and more on loan modification to mitigate their losses and help more Americans keep their homes.

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

HOPE NOW — a two-and-a-half-year-old alliance between HUD approved counseling agents, servicers, investors, and two of the nation’s largest banks — issued a press release last week touting a campaign it feels will make a difference in the lives of distressed homeowners.

The “Reach Out” campaign (that’s what the big announcement refers to) amounts to little more than computer-generated form letters mailed to homeowners who are 90+ days late on their mortgage payment, encouraging them to seek the assistance of a HUD-approved counselor.

Why on Earth HOPE NOW is touting this as a major initiative worthy of a press release is beyond me, and frankly, it gives none of us — especially those of us who understand the impact of the crisis at-hand — very little reason for any hope whatsoever!

Before going any further into what I believe HOPE NOW Alliance members can and should be doing to help distressed homeowners, read the following press release for yourself:

Apr 08, 2009 09:30 ET

HOPE NOW Launches “Reach Out” Campaign to Encourage At-Risk Homeowners to Work With Counselors

Seriously Delinquent Homeowners Urged to Work With HUD-Approved, Free Counseling Agencies

WASHINGTON, DC–(Marketwire - April 8, 2009) - HOPE NOW, the private sector alliance of mortgage servicers, non-profit counselors, and investors that has been working aggressively to prevent foreclosures and keep homeowners in their homes, today announced that it had begun a new initiative to encourage homeowners at serious risk of losing their homes to work with counseling agencies certified by the U.S. Department of Housing and Urban Development to determine options that will best serve their needs.

The “Reach Out” campaign is a targeted state-by-state initiative. The first initial phase of the campaign is an intensive effort targeted at Wisconsin homeowners who are 90+ days delinquent. In collaboration with the Wisconsin Housing and Economic Development Authority (WHEDA), HOPE NOW and 11 of its member servicers have begun to mail letters to homeowners about the HUD-certified, free, legitimate counseling agencies in their area and to urge them to take advantage of the services these agencies provide to get help.

HOPE NOW plans to expand Reach Out to other states with the highest percentage of extremely delinquent borrowers, including New Jersey, Texas, South Carolina and Florida.

Faith Schwartz, HOPE NOW’s executive director, said that working with a HUD-certified counseling agency is the best way a homeowner can be certain that they will actually get help. “HOPE NOW wants to make sure that homeowners are aware of the legitimate housing counseling services available to them in their community,” she said. “Qualified, professional assistance is available at no cost to the homeowner and we want to be sure everyone who needs it actually gets it.”

“We know that hundreds of homeowners are struggling with their mortgage but don’t know where to turn. We hope that by lending our name to this campaign, people will see the importance of contacting their servicer. So far, more than 900 struggling homeowners have received letters from HOPE NOW and WHEDA, and hundreds more will be receiving letters,” said Antonio Riley, executive director of WHEDA. “As the Executive Director of the state’s housing authority, I strongly urge every Wisconsin resident who has received one of these letters to pick up the phone and call for help now.”

Reach Out is an extension of HOPE NOW’s ongoing efforts to contact at-risk homeowners. Since it began in October 2007, HOPE NOW has sent more than 4.1 million letters to borrowers 60+ days delinquent urging them to make contact with their servicer. A significantly higher percentage of homeowners typically respond to the HOPE NOW mailings than similar mailings from individual mortgage servicers.

EMC Mortgage executive director Dana Dillard, who helped design the “Reach Out” campaign for HOPE NOW, said, “The Reach Out Campaign is one more way that HOPE NOW and its members are being proactive with the ultimate goal of keeping as many homeowners in their homes as we can.”

The “Reach Out” campaign is just one part of HOPE NOW’s aggressive five-prong homeowner outreach effort for 2009. In addition to “Reach Out” and the traditional mailing campaign, HOPE NOW is also in the midst of a “Bringing Hope Home” celebrity campaign headlined by Queen Latifah, is planning a phone-a-thon campaign for later this year, and plan to hold more than 30 homeowner outreach events across the country.

The 11 HOPE NOW servicer members participating in the “Reach Out” campaign include:

American Home Mortgage
Bank of America
Carrington Financial
Countrywide Financial
HomEq Servicing
HSBC
Litton Loan Servicing
Ocwen Financial Corporation
Saxon Mortgage Service
Select Portfolio Servicing
SunTrust
Wells Fargo
Wilshire

So let me get this straight…HOPE NOW’s mission is “to help as many homeowners as possible prevent foreclosure and stay in their homes” and they think sending letters to people in Wisconsin and elsewhere who are 90+ days late on their mortgage payments is going to help? Are they delusional?

HOPE NOW’s urging of seriously delinquent homeowners to work with HUD-approved counselors is like a conglomerate of ambulance services and hospitals standing along the side of the road urging seriously injured victims of a chain reaction automobile pileup to seek medical attention. Seriously, don’t you think now’s the time for a little Good Samaritanism?

The type of help Main Street needs right now is not found in an 8.5″ x 11″ sheet of paper encouraging delinquent homeowners to meet with a HUD-approved counselor. Main Street needs its loans modified, and HOPE NOW’s members know this but individually demonstrate little interest in offering real help. Rather than spend valuable taxpayer money on letters and press releases touting said letters, how about stepping up and offering more hard-working American’s the same bailouts some of these companies received from the federal government?

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

Nowadays, everyone wants to know the same thing… How likely are they to get approved for a home loan modification? While no one can answer that question with any level of certainty — after all, everyone’s situation is different from everyone else’s — there are contributing factors and circumstances that both increase and decrease a loan modification’s likelihood.

The following question is one I see a lot. Take a look and see if my response helps you determine how your current financial situation might impact your ability to secure a loan modification:

Question: I am hoping to get my mortgage modified to affordability, refinance my loan, get help in selling my home through a short sale, or secure a payment deferment or forbearance. Can you look over my details and tell me what you think?

Currently, my mortgage payment is $2,226.00 per month, which I am hoping to reduce in half to avoid foreclosure. Unfortunately, I have fallen behind on my monthly payments  due to a divorce. Considering my current monthly income of $3,945.86, I am struggling. I have contacted my lender on numerous occasion but they weren’t able to help. I have even taken a  hard look at my financial situation with a credit counseling services. My home is in San Joaquin county in Northern California, and here are some additional details:

• A single family home
• Owe $416,000.00
• 10 year Arm loan with interest only (since 2005)
• I have PMI on the loan
• $2,226.00 monthly payment
• I pay my own Insurance and taxes

Thanks in advance for your thoughts and advice.

~ Ade A.

Answer: The fact that you sought out credit counseling is a great first step and shows your commitment to honoring your commitments including the commitment to your mortgage.

Based on the rough numbers you gave me it appears that your front end Debt To Income (DTI) ratio for your mortgage is nearly 56% (presuming the income # you gave was gross income) and that’s not including your taxes and insurance. It is no wonder you’re struggling.

My “Ralph’s Rule of Thumb” is that DTI ratio over 30% is a ticking time bomb. I know your ex probably contributed to the household income so the ratio was more in line with that percentage and has just become unmanageable since the divorce.

A divorce can be a qualifying hardship when it comes to qualifying for workout and modification programs with your lender. I know you have not had much luck dealing with your lender, but the rules have somewhat changed since March 4th, 2009; you might now qualify.

If your servicer and investor are participants in the new Making Home Affordable Plan, you might find a more accommodating voice on the servicer end of the telephone. You need to act quickly however so that the foreclosure is adjourned. Most lenders are halting foreclosure while they see if the borrower qualifies for a modification, but you need to make sure yours is one of them.

Here’s how your situation might fit into the Obama Plan, as it’s commonly called.

• You would need to undergo credit counseling because of the high DTI, but you already have, so point for you. You need to have a verifiable hardship, divorce would qualify, another point for you.
• You are delinquent so you’re at risk of losing your home to foreclosure, another point for you (under the plan).
• You own and occupy the home, yet another point.
• The first (and only) loan is under $729,750, add a point.
• You have income and can afford to make a payment, just not this high payment, and you’re in a risky interest only ARM loan, two more points.

Where it becomes tricky is your investor needs to modify your payment down to a 38% DTI, and then partner with the Treasury Department to bring the DTI down to the targeted 31%. This 31% is PITIA (Principal, Interest, Taxes, Insurance, Association fees, but not PMI). This could mean that your loan is more costly to modify than to foreclose. Huge point against you, and really this could be a deal-killer.

Using the numbers you provided and presuming the $3,945.00 is a gross monthly income number, that would mean that you need to get the PITIA payment down to about $1,223.00/month and this payment needs to include PITIA. ($3,945.00 x 31% = $1,223.00) Meaning you need to get your payment of $2,223.00 lowered approximately $1,000.00.

Okay, let’s assess it:

1. The Waterfall Approach starts by reducing the interest rate and fixing it for 5 years (min).
2. The minimum interest rate that can be charged is 2%.
3. Drop you all the way down to 2%, you’ll need it.
4. The next item in the hierarchy is to extend the term out to up to 40 years.
5. Extend your term all the way out to 40 years, you’ll need it.
6. So based on those two changes a $416,000 loan at 2% with a 40 year amortization = $1,259.75 just in P&I.
7. Getting close, but you need to include Taxes, Insurance and Association fees (if any) as well so we need to get the investor to also either forbear or forgive principal.
8. Not knowing what the taxes and insurance costs are for your area, I’m just going to give you a range of numbers that need to come off the principal so you have a payment of $1,223.00 that includes everything (PITIA), and to do that I’m going to set the taxes at $4,000.00 annually and the insurance at $1,000.00. That gives you $416.67 dedicated to T&I each month ($5,000.00/12 = 416.67).
9. Okay, so given that your total payment can only be $1,223.00 to fit within the 31% rule, your monthly P&I payment can’t exceed approximately $810.
10. The Investor would have to forbear or forgive between $150,000 and $155,000 to bring the payments down to a 31% DTI. ($265,000.00 at 2% for 40 years = $803.00/month). $803.00 (P&I) + $417.00 (T&I) = $1,220.00.

Not impossible, but if the Net Present Value (NPV) of cash flows with the modification is less than the NPV of the cash flows without the modification, the modification is purely discretionary. If the Investor denies the modification, under the Plan, alternatives to foreclosure should be sought, but the house will not be staying in your name.

So my final answer is you may qualify (for a loan modification), but if not, you can clearly show that you can’t afford the house and securing a deed in lieu of foreclosure (DIL) or permission to pursue a short sale should not be extremely problematic. There is so much to consider when trying to see if you qualify for the Obama modification, that I suggest homeowners seek out some professional help. The Treasury Dept. tells you that you can do it all yourself and the cost of a modification is FREE. That’s true, but you’re also placing your future in this home into the hands of the same people that placed you in this loan in the first place. I can’t tell you to run out and hire a company to act as your representative, that’s a decision you have to make on your own. What I can tell you is that you should consider what’s at stake and whether the cost of assistance has value.

Note: The numbers used in this example may not be reflective of your true situation and may not accurately qualify or disqualify you for any loss mitigation workout. The numbers exercise above is for example purposes only and is strictly hypothetical.

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

When applying for a loan modification, your debt-to-income (DTI) ratio is the key to calculating an affordable house payment. President Obama’s foreclosure prevention plan sets the target front-end DTI for the first mortgage at 31 percent. In other words, your house payment or PITIA (principal, interest, taxes, insurance, and homeowner association fees) cannot exceed 31 percent of your gross monthly income. The DTI ratio comes in two flavors:

• Front-end DTI ratio is based on your house payment. (Under the Obama plan, the front-end DTI target of 31 percent accounts only for the first mortgage. If you other loans against your home, such as a second mortgage or home equity line of credit, you account for those separately as part of your back-end DTI.)
• Back-end DTI ratio is based on all monthly debt payments combined, including your house payment, credit card payments, payments on auto loans, and other loan payments.

Calculating Your Front-End DTI Ratio

To calculate your front-end DTI, divide your house payment by your gross monthly household income:

House Payment / Gross Monthly Household Income = Front-End DTI Ratio

This is easy, assuming your monthly house payment includes a monthly amount held in escrow to pay your property taxes, homeowner’s insurance, and any homeowner association fees. Such a payment is often referred to as PITIA (principal, interest, taxes, insurance, and association fees). You simply divide your PITIA amount by your gross monthly household income.

If you pay property taxes, insurance, and homeowner association fees separately, then add them all up, divide by 12 months, and add the result to your monthly house payment (principal and interest). You can then divide the resulting house payment by your gross monthly household income to determine your front-end DTI ratio.

Note: Private mortgage insurance (PMI) payments fall outside this calculation under President Obama’s guidelines.

Calculating Your Back-End DTI Ratio

To calculate your back-end DTI ratio, add up all your monthly debt payments, including:

• House payment or PITIA, as discussed in the previous section
• Any payments on second mortgages, home-equity loans, or home-equity lines of credit
• Credit card payments
• Auto loan or lease payments
• Alimony
• Other payments on credit accounts or loans

Now, divide your total monthly debt payments by your total gross monthly household income:

Monthly Debt Payments / Gross Monthly Household Income = Back-End DTI Ratio

Exploring DTI Ratios Under Obama’s Foreclosure Prevention Plan

The government’s Home Affordable Modification Program accounts for both front-end and back-end DTI ratios. When attempting to reach the 31% Target Front-End DTI, the focus is only on the first mortgage:

• For qualifying homeowners, the lender will have to first reduce payments on the first mortgage to no greater than a 38 percent front-end DTI ratio. Treasury will match further reductions in monthly payments dollar-for-dollar with the lender/investor, down to a 31 percent front-end DTI ratio.
• Borrowers who qualify for a modification but would have a post-modification back-end DTI ratio greater than or equal to 55 percent, will be provided with a letter stating that they are required to work with a HUD-approved counselor. The modification will not take effect until they provide a signed statement indicating that they will obtain counseling.

Keep in mind that only lenders, investors, and servicers who choose to participate in this program are bound by its guidelines and that the guidelines may change over time. Your lender may have its own DTI ratio targets and limitations.

I encourage you to consult with a qualified third-party representative who has experience in loan modifications to assist you in determining what your lender’s DTI-ratio targets and limitations are. Although you can negotiate directly with your lender, you really should have representation of your own to protect your interests.

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

Homeowners facing foreclosure often dig themselves into a deeper hole by agreeing to unaffordable repayment plans. It’s a shame that lenders even pitch such plans, because they ultimately lead borrowers on the path to failure. Recently, a visitor to KeepMyHouse.com described a situation that’s a classic case of a servicing company setting up the homeowners for failure.

Question: We are currently with Litton Loan Servicing and have had a foreclosure started…. We contacted them and have gotten a forbearance agreement that raises the payment $200.00, not lowered it. We are also upside down because of the market and all the fees associated with their attempt to foreclose. We have made 4 payments at the higher amount but can’t keep borrowing to do this. Can we mitigate with the attorneys you recommend or is that not possible until we start missing payments? We are employed but our income has dropped as we are self employed in the health care field.

Answer: Forbearance is not a loan modification. Forbearance is a repayment plan – an installment plan to catch up on late and missed payments and any penalties associated with them. As such, forbearance is a viable option only for homeowners who have recovered from a temporary financial setback and now have sufficient income to cover both their original monthly house payment plus an extra payment to catch up on late and missed payments.

Your situation, as you describe it, makes you a poor candidate for forbearance. Assuming your lender knew the details of your financial situation, it should have never offered you a forbearance agreement. As you explain, you are now having to borrow money to afford the higher payments. This is not a sustainable situation.

Based on the scenario you’ve presented, yes I think you would be a good candidate to re-negotiate your monthly payment. A loan modification requires in its barest and most basic form, three elements:

1. A verifiable hardship (reduction in income)
2. Affordability (some income to make a house payment, albeit it a lower payment)
3. Mitigation of lender-losses (the lender stands to lose less money through loan modification than foreclosure)

Without knowing more, you appear to meet the first two eligibility requirements. Now whether it’s less expensive for the lender to modify than to foreclose; I don’t know. Don’t wait until you’ve defaulted on the forbearance agreement to try to get a loan modification. Start by contacting your servicer immediately or employ the services of a third-party to do it for you (preferably an attorney experienced with loan modification). Make sure you tell any third party that you currently have a workout in place, but it’s not affordable because of a reduction in household income.

Many homeowners mistakenly believe that they cannot qualify for a loan modification until they have missed one or more payments. Theoretically, this is not true, but in practice, lenders often refuse to consider a loan modification until a homeowner has missed one or more payments.

If you are having trouble making your mortgage payments due to a qualifying and verifiable financial hardship, you should take action sooner rather than later. The sooner you act, the more options you have available and the more time you have to pursue those options. Under president Obama’s plan, the loan may not have to be in default for homeowners/borrowers to qualify for relief, but the details of this plan and its implementation are still unfolding. Don’t assume the answer is no… call your lender to find out or work with a qualified attorney to find out for you.

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

There are two kinds of mortgage loans in this world — bank owned and investor owned — and the type you have often determines the level of difficulty you face in obtaining a loan modification. A bank-owned mortgage is one that the bank services and owns (the bank is also the investor). An investor-owned mortgage is one that has been repackaged as a mortgage-backed security (MBS) and sold to Wall Street investors or sold on the secondary market as a pool or package of whole loans. A servicer collects and processes the payments, but the servicer does not own the mortgage and can make only limited decisions regarding it.

Modifying a bank-owned mortgage loan is sort of like working out a deal with your local bank in the good old days. Because the bank owns your loan instead of merely servicing it, the bank owners can make a decision without having to consult investors, because they are the investor. While the bank may have a list of eligibility requirements and guidelines regarding standard concessions it’s willing to make, it is more able and apt to make exceptions based on extenuating circumstances. The bank owner can make a case-by-case determination faster than when the servicer must consult a third-party investor.

Modifying an investor-owned loan is more complex, because another layer exists between the mortgagee (the lender) and the mortgagor (the borrower). Instead of the mortgagor dealing directly with the mortgagee, both parties negotiate through an intermediary — typically the servicer representing the mortgagee’s interests. As a result, the servicer has very limited decision-making power. The mortgagee sets the decision-making parameters for the servicer. If the decision falls within what the investor allows, then the servicer can make the decision. But if what’s being requested is outside the pre-established parameters, then the servicer must contact the investor for permission. As you might guess, this can further complicate the process.

Larger banks/servicers are likely to have several loan modification departments or divisions, each of which specializes in a particular third-party investor’s decision-making parameters. This enables them to process applications more quickly and efficiently.

Knowing the party that owns your mortgage loan can give you a strategic advantage in assessing your situation and evaluating your options. Certain investors and their insurers (including FDIC, Fannie Mae, Freddie Mac, FHA, and HUD) are taking a proactive approach to working out non-performing loans and keeping people in their homes. If you are able to determine that your loan is with one of these investors you can gain a better sense of available programs and options available for your situation. For example if your loan is with IndyMac (taken over by the FDIC), you have a greater chance of obtaining a principal forbearance (assuming you’re eligible).

Principal Forbearance

If your home is worth considerably less than the unpaid balance [UPB] (the amount you owe on it), a principal forbearance may be an attractive option. Monthly payments are recalculated on the estimated market value of the property rather than on the UPB, which can significantly reduce the monthly payment. You still must pay back the UPB in full, but you don’t have to pay the difference between the UPB and your home’s current market value until you sell the home or refinance.

As another example, suppose you’re dealing with a lender that’s notorious for presenting terrible loan modification offers. You then know that negotiations are likely to be complicated and you may need to have one or more contingency plans in place – for example, refinancing with another lender or selling your home and starting over.

Unfortunately, discovering the true identity of the mortgagee can be extremely difficult. Some investors take great measures to remain anonymous and may even protect their anonymity in their agreement with the servicer. Ask your servicer, who may or may not tell you. You can also call Fannie Mae or Freddie Mac – if they own the note, they may tell you. Do your best to identify the owner of your mortgage, but don’t knock yourself out trying – knowing is useful but not worth knocking yourself out over.

Warning: Don’t make assumptions based on the reputation or track record of a particular lender or investor. You really have no idea what a lender or investor is ultimately willing to agree to until you ask. If you’re committed to keeping your home and believe that you are eligible for a loan modification, submit your application and invest some time and effort in pursuing this option. Knowing the investor, however, may expedite the process or help you prepare for plan B in the event that the lender/investor rejects your application or makes you an offer you cannot accept.

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