Loan Modifications: Damned If We Do and Damned If We Don

upside down house1 Loan Modifications: Damned If We Do and Damned If We Don

Did you know there is an estimated 11 million Americans that owe more in their mortgage than their home is worth? 

There is a great debate happening in Washington that somehow, isn’t making headlines.  The Obama Administration has been putting pressure on Fannie Mae and Freddie Mac to allow principle reductions for troubled homeowners who are facing foreclosure.

What is the debate? 

The FHFA (Federal Housing Finance Agency) was created in 2008 in response to the housing market crash whose regulatory creation was for the following:  The supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.  Edward DeMarco is the Deputy Director for Housing Missions and Goals.  Mr. DeMarco was handpicked by President Obama in 2008 and it is his decision that will impact over half million homeowners who would have qualified for the Principle Reduction program.

What is the FHFA argument?  

The risks outweigh the benefits of the program.  More specifically, this program intended to help those in need to avoid foreclosure, would also encourage many more to strategically default on their loans to also qualify for the principle reduction program.

Here is a true story about one family affected by the promise of a Loan Modification.

 There is a couple who are now selling their home as a Short Sale through the recommendation of their mortgage company.   One year ago, the homeowner suddenly found himself without a job when the company he was working for, abruptly closed their doors.  Immediately, he contacted his mortgage company and explained his situation.  The mortgage company advised him to stop making payments on his mortgage because in order to qualify for a loan modification (interest rate reduction or principle reduction), they would have to stop making their mortgage payments, thereby, defaulting on their loan. 

The homeowners did not want to do this because they felt between unemployment benefits and their savings account; they could still make their house payment.  With the promise of being able to stay in their home, they decided to move forward with the loan modification.  Unfortunately, this process took much longer than they had anticipated.  Several months went by; hundreds of pages of financial information (multiple duplications of submitting tax returns, bank statements, pay stubs, etc) were submitted.  This delay, including multiple levels of bureaucratic red tape, caused the homeowner to fall behind tens of thousands of dollars on their loan.  By the time the mortgage company approved their financial hardship status and assigned a Mediator to their case, several months had passed making it impossible for the homeowner to financially pay the back mortgage payments, late fees, attorney fees and penalties associated with their default.  The Mediator provided them with only one option; which was to make a $ 5000 upfront payment, extend the loan by 5 years, add the outstanding fees to the principle balance and increase their interest rate (due to their poor credit score); therefore increasing their monthly house payment by roughly $ 900/mo.  Although the homeowner was later able to find employment, his new job did not pay as much as his previous job making the new house payment unaffordable; forcing the homeowner and his family to sell their home as a Short Sale.  At the end of this loan modification process, the homeowner has lost his home, destroyed his credit and will have to live in a rental property for the next several years as they work to restore their good credit standing (average time for individuals to restore their credit score as a result of a short sale, is 7 years).

Bad news for homeowners:  The FHFA has turned down the Obama Administrations request to approve Principle Reduction loan modifications.  

At the end of the day, homeowners who are faced with similar circumstances are forced into a no-win situation.   Should you put your financial future at risk in order to pay for a home that is worth less than you owe, when the potential of the housing recovery may not be corrected for many years to come?  Or, should you stop  your personal  financial bleeding by selling your home as a short sale and begin your personal financial recovery process sooner than later?  If you were targeted by predatory lending practices and the housing crash that was caused by the very financial institutions that have received tax payer bail outs, is it really fair that you are not entitled to the same opportunities as those who caused the housing crash in the first place?  So, if you are going to be “damned if you do and damned if you don’t”, what is the best financially-based decision for you and your family?

What Next?

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