The U.S. government yesterday announced details of new plan aimed at helping distressed homeowners modify second mortgages. The Second Lien Program is slated to work in tandem with first lien modifications offered under the government’s Making Home Affordable Program to deliver a “comprehensive affordability solution for struggling borrowers,” says the U.S. Department of the Treasury.

Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Under the Second Lien Program, when one of the government’s Home Affordable Modification’s is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by the U.S. Dept. of the Treasury.

Yesterday’s announcement may make it easier for borrowers to modify or refinance their loans under FHA’s Hope for Homeowners program. Here are two examples of how the program could work:

Family A: Amortizing Second Mortgage

• In 2006: Family A took out a 30-year closed-end second mortgage with a balance of $45,000 and an interest rate of 8.6%.
• Today: Family A has an unpaid balance of almost $44,000 on their second mortgage.
• Under the Second Lien Program: The interest rate on Family A’s second mortgage will be reduced to 1% for five years. This will reduce their annual payments by over $2,300.
• After those five years, Family A’s mortgage payment will rise again but to a more moderate level.

Family B: Interest-Only Second Mortgage

• In 2006: Family B took out an interest-only second mortgage with a balance of $60,000, an interest rate of 4.4%, and a term of 15 years.
• Today: Family B has $60,000 remaining on their interest-only second mortgage because none of the principal was paid down.
• Under the Second Lien Program: The interest rate on Family B’s interest-only second mortgage will be reduced to 2% for five years. This will reduce their annual interest payments by $1,440.
• After those five years, Family B’s mortgage payment will adjust back up and the mortgage will amortize over a term equal to the longer of (i) the remaining term of the family’s modified first mortgage (e.g. 27 years if the first mortgage had a 30 year term at origination and was three years old at the time of modification) or (ii) the originally scheduled amortization term of the second mortgage.

Here’s what U.S. Dept. of Treasury Secretary Tim Geithner has to say about the Second Lien Program:

“With these latest program details, we’re offering even more opportunities for borrowers to make their homes more affordable under the Administration’s housing plan. Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall. Every step we take forward is done with that imperative in mind.”

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)

The U.S. Department of the Treasury and the Department of Housing and Urban Development (HUD) yesterday launched a new website for distressed homeowners seeking information about the Obama Administration’s Making Home Affordable loan modification and refinancing program.

MakingHomeAffordable.gov offers features including interactive self-assessment tools that seek to empower homeowners to determine if they’re eligible to participate and calculate the monthly mortgage payment reductions they could stand to realize under the Making Home Affordable program. Additional site features include:

• Extensive information about the Administration’s Making Home Affordable plan
• A calculator feature that allows homeowners to estimate the reduction to their monthly mortgage payment that they might stand to realize under the plan
• Resources to find free, HUD-approved counseling services for borrowers who have additional questions
• A handy checklist to ensure homeowners collect all the documents they need before calling their servicers

First announced by President Barack Obama in February, Making Home Affordable is said to offer assistance to as many as nine million homeowners making a good-faith effort to make their mortgage payments, while attempting to prevent the destructive impact of the housing crisis on families and communities.

Since releasing the guidelines to enable servicers to begin modifications of eligible mortgages under Making Home Affordable on March 4th, representatives from Treasury, HUD and other members of a broad interagency task force, have conducted detailed briefings and training sessions for mortgage loan servicers and investors, nonprofit housing counselors and nationwide borrower advocacy groups. Through these early and aggressive efforts to arm those interacting directly with borrowers with information, interagency representatives have briefed more than 2,500 participants on the Administration’s plans in the last two weeks.

A wide array of large banks to small lenders have already agreed to participate in Making Home Affordable, and servicers have undertaken steps to proactively engage borrowers and respond to their inquiries related to the new program. For example, JP Morgan Chase has put several special tools into place and initiated proactive solicitations to eligible borrowers around the Making Home Affordable program, including an online site to provide program details and allow borrowers to download a new financial information package; increased staffing in a dedicated service center that provides simple entry point for all borrowers, including CHASE, heritage Washington Mutual and EMC; a partnership with Fannie Mae to solicit over 125,000 eligible borrowers; and solicitation to an additional 180,000 non-GSE eligible borrowers.

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)

Uncertainty still swirls around President Obama’s stimulus plan, particularly the foreclosure fix embedded in the stimulus package. Many homeowners, like the one who recently asked me the following question, are  confused over whether they should accept a deal currently on the table or wait until all aspects of the stimulus plan are understood and take affect:

Question: I reside in Bronx, New York, and have paid my monthly mortgage on time for the past 5 years I’ve owned my home. My current interest rate is 6.25% and my monthly mortgage payment is $1,840.55. This past week, I contacted my lender to negotiate a lower interest rate and was told that because my FICO score is 780 and I have excellent credit, my lender could refinance my loan to 5.125%, which would bring down my monthly mortgage payment to $1,440.00 (a difference of $400.55). My bank is charging me $11,200.00 minus a $3500.00 tax discount making my total closing costs for this refinance $7,700.00. My question is, should I wait until Obama’s Stimulus Plan takes affect or should I go with my lender’s offer?

Answer: Congratulations on properly managing your finances and your mortgage and earning a FICO of 780. In times like these, maintaining a score over 750 is quite an accomplishment, and you should use it to your benefit. With a score of 780, you deserve additional perks, such as a lower interest rate and closing costs.

With a 780 FICO score, it seems to me that you shouldn’t have to pay a lot of points and/or fees to refinance your loan. Ask your lender the following questions:

• Why your closing costs are so high? I don’t know the balance you’re refinancing, but you might find you can get a reduction in the closing costs simply by asking. Closing costs are negotiable.
• How many points are you charging?
• Why are you charging points?
• Are you charging a loan origination fee? If so, how much?
• May I see a Good Faith Estimate? You shouldn’t have to ask, but if you’re lender has not provided you with a Good Faith Estimate, ask for one. It should provide a detailed breakdown of all costs associated with the loan.

The standard score to avoid fees in the market today is around 740. You’re at 780, so you shouldn’t be forced to pay a lot of fees. The interest rate seems to be in line with the market trends, but the more points you pay the better your rate should be, make sure that’s the case. The industry is trending toward larger percentage drops for points paid. This means that paying a point years ago might have reduced your rate by ¼ % (.25%), but in today’s market that same point might reduce your rate by 1/2% to 2/3% or more (.5% - .67%). Just make sure you’re asking the questions to find out what your points are buying you.

Using your monthly savings of $400.55 per month, it will take you over 19 months to recover the closing costs at $7,700. So, yes you’re saving $400 per month, but is it costing you more than that savings is worth? If you roll the closing costs into the loan, it will take you even longer to recoup that amount because there will be interest assessed. You have to make this decision for yourself, but if you’re planning to stay in your house for a while then it makes more sense because all the savings after the 19 month period will go straight into your pocket. It’s a cost-benefit analysis, plain and simple.

Shop the loan. Get a second or even third opinion on the rate, term, fees, closing costs, etc…. Don’t accept the first loan your offered. Don’t tell the other lenders what you’ve already been offered. Have them give you an independent quote. Tell the loan officer that you’re comparing loans before you decide which one to accept, so he or she should come up with their best and most competitive loan available. Then sit down with the loan offers you’ve received and compare them. If you have an accountant, attorney or other trusted advisor, consider sitting down with them to help you compare the loans’ pros and cons. Go with the one that benefits you the most. Please let me know how it goes. I’m very interested to see what the final loan looks like and what you were able to save.

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

The U.S. House of Representatives approved H.R. 1106, the Helping Families Save Their Homes Act of 2009, by a vote of 234- 191 on Thursday evening. The Act, if approved by the U.S. Senate (see S.61 for the Senate version) and signed by President Obama, gives bankruptcy courts the authority to modify the terms or reduce the principal balance of a homeowner’s mortgage, while protecting lenders from investors when loan terms are altered. More on this developing story from Inman News:

The Senate bill’s sponsor, Sen. Dick Durbin, D-Ill., has said he is considering amending the legislation to restrict bankruptcy judges’ cram-down powers to subprime mortgages.

Critics say changing the bankruptcy code would flood courts with distressed homeowners, and raise the cost of borrowing by introducing new risks for lenders.

Cram-down supporters say those fears are exaggerated, as only those loans made in the past would be eligible for judicial modification, and lenders would step up their efforts to engage in workouts with borrowers to avoid having loan terms re-written in court.

HR 1106 includes language that would provide a legal “safe harbor” for loan servicers who modify loans and expand the scope of the Federal Housing Administration’s “Hope for Homeowners” guarantee program for refinancings.

The Obama administration said it advocates “careful changes” to the bankruptcy code that would subject only those mortgages within Fannie Mae and Freddie Mac’s conforming loan limits to court-ordered modifications.

The Helping Families Save Their Homes Act seeks to help the estimated 7- 9 million households facing possible foreclosure by including key incentives that encourage lenders to renegotiate affordable mortgages for homeowners who are underwater, at risk of foreclosure, and those nearing bankruptcy.

Specifically, the bill fixes the Hope for Homeowners (H4H) program, implemented October 1, 2008, which was designed to get more families into affordable mortgages by:

• reducing current fees that have discouraged lenders from voluntarily participating, and
• offering new incentives for lenders to negotiate loans.

To further encourage participation in this program, the bill protects lenders from lawsuits for modifying loans. This will make reasonable loan modifications available to more homeowners at risk of foreclosure.

To help families who have exhausted options for relief, the bill also allows bankruptcy judges to modify the terms of a loan for existing primary residence mortgages.

Currently, the mortgage for a primary residence cannot be modified in bankruptcy — unlike every other secured debt — including debts secured by second homes, investment properties, luxury yachts, and private jets.

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

The U.S. Department of the Treasury recently released its Home Affordable Modification Program Guidelines, which include eligibility requirements to determine which homeowners qualify for relief under the plan. Following are the eligibility requirements as specified in the guidelines:

• Mortgage must have originated on or before January 1, 2009.

• Home must be an owner-occupied primary residence (verified with tax return, credit report, and other documentation such as a utility bill) – this program is not designed for investor-owned properties.

• Home must be a single family 1-4 unit property (including condominium, cooperative, and manufactured home affixed to a foundation and treated as real property under state law).

• Home may not be vacant or condemned.

• Borrowers in bankruptcy are not automatically excluded from consideration.

• Borrowers in active litigation regarding the mortgage loan can qualify for a modification without waiving their legal rights.

• First lien loans must have an unpaid principal balance (prior to capitalization of arrearages) equal to or less than:

1 Unit: $729,750
2 Units: $934,200
3 Units: $1,129,250
4 Units: $1,403,400

• Foreclosure actions are suspended during the trial period or while borrowers are considered for alternative foreclosure prevention options. If homeowners fail to qualify, foreclosure proceedings may resume.

• No minimum or maximum LTV ratio for eligibility purposes.

• Loans are eligible for only one loan modification under the program.

• Subordinate liens (such as second mortgages or home equity loans or lines of credit) are not included in the Front-End DTI calculation, but they are included in the Back-End DTI calculation.

• Servicers should follow any existing express contractual restrictions with respect to solicitation of borrowers for modifications.

Applicants will be accepted into the program until December 31, 2012 (the program expiration date), but incentive payments will continue up to five years after the date of entry into the Home Affordable Modification Program. Monitoring will continue through the life of the program.

Keep in mind that these eligibility requirements are simply government guidelines. Avoid the temptation to qualify or disqualify yourself based solely on what the eligibility requirements indicate. Consult a loan modification specialist who works with lenders on a daily basis to review your situation and determine whether you are likely to qualify. Sometimes the only way to determine whether you qualify is to actually submit your loan modification application.

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