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Loan Modifications

Qualified for the Home Affordable Modification Program?


If you’re deciding on what to do with your ‘upside down home’


How it works is: 


I.                   People filing for bankruptcy protection covering all their debts will get hit with an average 355- to 365-point drop in their scores.  Bankruptcies remain on borrowers’ credit bureau files for 10 years.

II.                Homeowners who choose to walk away from the home and stop payments (allowing a Foreclosure to Occur) should expect their credit scores to fall 140 to 150 points, plus negative marks on their credit bureau files for up to seven years.

III.             Short sales on the other hand can trigger large declines in credit scores, according to researchers.  A homeowner with an excellent credit score might see a 120 to 130 point decline after a short sale unless there is a contingency for lender to assist homeowner after SS is complete in issuing a letter of deletion to go to credit bureaus.

IV.            Loan modifications that roll late payments and penalties into principal debt owed on the house can actually increase borrowers’ scores modestly, while refinancing underwater mortgages may have little or no negative effect on credit scores, according to Vantage Solutions, a scoring company created by the three national credit bureaus.  Other Loan Modifications can show temporary distress but will recover in a year or two, providing new payments are made on time.




From July 2007 through August 2009 over 1.8 million homes were lost to foreclosure, and 5.2 million more foreclosures were started. One in eight mortgages are currently in default. 


The average foreclosure in California costs $58,000 and on top of this home values have gone down an average of 35% therefore to avert further catastrophic exodus of homes affordable loan modifications are the answer.  In California, with Senate Bill 1137, it’s also the law!


President Obama hopes the Making Home Affordable (MHA) program will assist 7 to 9 million homeowners who are trying to pay their mortgage and make it all work. There are two programs connected with MHA, one is called HARP or the Home Affordable Refinance Program and the other is called HAMP or the Home Affordable Modification Program. HARP Refinances can get people into 4.5% for a 30 year fixed mortgage on their homes with a relatively simple application process and lots of forgiveness.  This is only available until June of 2010 and only available for people with OK credit or better; who are NOT in default.


As of September 1, 2009 HAMP facilitated 1,711 permanent loan modifications, with 362,348 more on ‘trial programs’.   Before a HAMP modification can be made permanent there is a 3-4 month window of time where if the payments are made on time, the file gets reviewed and underwriters ensure all the guidelines are being followed and if all successful the permanent loan modification goes into effect.  Because the program rules didn’t surface until May and modified further in July, very few have achieved permanent status, but these are right around the corner.


Many people do qualify for assistance with their home loan and don’t know it.   But, this program will not provide money to income property investors.  It must be your primary and ONLY residence.  Overall it isn’t that difficult to get assistance if you qualify but it’s good to know how it works; know the calculations being done and know the agencies where you can get some free help to see if you qualify.  If you don’t qualify for this, lenders do have other option modifications that you may qualify for – though usually a bit less of an offering.  In California even income property must be reviewed for modification and modified if that value is greater than the value of the foreclosed loan.





If one’s home loan isn’t more than 125% of the current value of their home, then (with moderate credit scores ~620) one could qualify for a refinance with HARP and it just may be the perfect solution with a modified fixed term interest of about 4.5%.  .








October 8th 2009, the government came out with a ‘Streamlined Borrower Evaluation Process’, where the borrower can, with no further prompting, call or query initiate sending the 6 pages of forms to their lender to see if they qualify for the Home Affordable Modification Program.  To get these 6 pages to download and print go to link http://foreclosurefreedomnetwork.com/FFN-Blog/?p=943 or call you lender or HOPE as outlined above.   It’s really very simple to allow them to do these calculations for you and find out if you qualify, just be very sure the data you give them is accurate.  Where you may err is not enough data.


If qualified your Servicer sets up a Trial Period. The Trial Period will last for three payments at modified terms.


When you are approved for the Trial Period BE SURE TO MAKE ALL OF YOUR PAYMENTS FOR THE NEXT FOUR MONTHS ON TIME! If you’re not going to be able to do that, do not apply for the loan modification then, wait until later – YOU ONLY GET ONE CHANCE. 


BE SURE TO LOOK AT YOUR MAIL EVERY DAY AFTER THE THIRD MONTH OF YOUR TRIAL PLAN!  This is relatively easy, do what you are told and be sure to send all documents via a carrier where tracking confirmation is provided getting a signature of who received this so that it can be tracked. 


Call 4-5 days later to confirm all forms have been received.  You may need to Send all funds out Certified Bank Checks and keep the receipt for this!


Once you get your loan modification it is a recordable document that you sign and it has all of the terms spelled out.  Be sure you understand and agree to all terms.  This is negotiable, within certain limits.


For more information click the Blog There is tons of data on this Crisis from 2008 to present.  I research and update this information weekly to keep it as current as I possibly can.  You may also look at my media library on this website you are now on. 


If you need my help I can spend some time with your case to ‘run the numbers’ and ‘side check’ your work.  For this there is no charge.  If you need more help that this, perhaps I can refer you to a trained advocate or attorney who can help you.  I have found that it’s truly best if you learn this yourself and be your own advocate and when you are, Lenders will cooperate more with you than they will with a 3rd party advocate. 


Meanwhile if you do find that you are not qualified for a loan modification, I also advise you get your property listed as soon as possible for a Short Sale.   We list properties and have contingencies to help protect you from credit dings & deficiency claims.  Most Realtors don’t put enough wording into the listing and purchase contracts to assure this.  So by all means call me if you can use Short Sale Assistance.  Also call me if any of my data has become outdated or if you are having trouble understanding or applying the data online which is there to assist you in getting through the loan modification process. 





If, however, you find your first mortgage loan is over 125% of the value of your property and you have a current hardship with paying your mortgage payment, here is a summary of calculations used to determine if one qualifies for a loan modification.  


Here’s a general outline of what to do.  Much more data exists on the website below:


           Go to http://foreclosurefreedomnetwork.com/FFN-Blog/?p=943 & Put this package together.  When completed you should see for yourself if you qualify!

i.                    Fill out financial form and note your Bottom Line, if plus or minus and how much. 

ii.                  If it’s minus first analyze your credit cards and determine if this debt is too high.  If so, you can often get this handled by contact with a Credit Advisor agency (more info on the website) to lower payments to 4% or less to reduce your minimum and make one payment for much lower amount. 

iii.                Take another look after you have handled this debt and see again your Bottom Line. If it’s still minus and you’ve removed frivolous expenses, then use the mortgage calculator to decrease interest bit by bit until you get to a mortgage payment figure that allows you to have about $300 in ‘discretionary funds’.  Bottom line is ideal at $200-$300 after all frivolity deleted from form and non secured debt handled. 

iv.               See the following link for a simple mortgage calculator.     http://www.mortgage-calc.com/mortgage/simple.html

v.                 After modifying the first (if one’s first mortgage loan is paying both principal and interest) it’s often easy to get the Second Mortgagee to reduce their interest to 1% for the first five years and then according to the first mortgage workout.  It is also typical and expected for the second to modify the length or term of the loan to match that of the first. Keep this in mind, as first lender will be anticipating this will be done when looking at your bottom line.

vi.               Review Bank Statements and Pay Stubs to ensure the totals put on Financial Form are accurate.

vii.             Calculate Front End Debt to Income (DTI)as follows:

·        31% Loan Mod figure if income less than 5K.

·        36% figure if income 5K or greater.

viii.           Compare your Front End DTI to your existing and proposed modified payments to evaluate consistency with allowed ranges.  This is Mortgage Principal, Interest, Taxes, Insurance and HOA fees DIVIDED BY Gross monthly Income for your current loan as compared to Mortgage Principal, Interest, Taxes, Insurance and HOA fees DIVIDED BY Gross monthly Income as modified. 

ix.               Does this improve Bottom Line?

x.                  Take a look at your Back End DTI and see if it is 55% of your Gross Income or less.  This is Column 2 of Monthly Household Expenses/Debt from Hamp2 of the above link – less any additional non debt household expenses put in under ‘other’ on attachment A, as described earlier.  If higher you may need special permission or simply need to reduce some debt.

xi.               Take a look at www.zillow.com  to get a general estimate of the current value of your home and compare this to your first mortgage loan.  If your first mortgage loan is under 125% of your homes value, and your credit s still good, you may be able to qualify for a normal refinance and get your interest reduced to about 4.5% or so.  If this handles your troubles it would likely be the best solution for you.  To be referred to a loan officer who can easily determine if you are qualified call Foreclosure Freedom Network (877) 333-4506

xii.             Evaluate all you have discovered with this and ensure you can live with this payment (in place of current Principal, Interest, Taxes, Insurance, Homeowners Association).

xiii.           If you cannot do these calculations, please call (877) 333-4506 for assistance. 

xiv.           Now, as long as you actually know what you’re looking for, you are ready to proceed and call your lender for assistance!  On this website page there are lender Hotline numbers for most lenders, or just look at your latest statements or your lenders web site, where this information should be prominent.


xv.             It’s important for you to know that you are generally qualified for assistance.  This will help you in your quest.  If your lender denies you for a loan modification or tells you it will take more than two weeks to tell you if you are qualified, there is another way to get immediate help.  Call the HOPE Line: (888) 995-HOPE.  The HOPE line is open after and before normal business hours as well and you can get assistance and they can get into the back lines of the lender negotiators right away!  So it’s definitely best to have your financial information at hand and be ready to negotiate this on your own behalf when you call.  The good news on this is that one phone call can get you immediate help, that day and get you into a work out that will allow you to save your home right away without the need to WAIT!  If their answer is NO, they can be asked to give you a transcript of the values they submitted into their system on your behalf so that you can review this against your records.  You can also request a number to a local Non Profit HUD certified counselor who also can appeal to your lender with the workout you feel should be OK by reasonable standards.

xvi.           If your lender denies you your loan modification it’s now time for you to review Civil Code 2923.6.  To be able to calculate your Net Present Value (NPV), you will need to look below and study up on this.  From there you should be able to ask questions of your lender about their NPV test done and what system they used.  You should also be able to ask them to tell you what they found out the NPV comparison was on your loan modification compared to foreclosure and see if they can tell you this.  If you do this, take careful notes.  Tape the call if they let you.  Then it may be helpful to get a good attorney to help you with this.  CAUSE, Inc. is collecting names of both potential claimants and good attorneys who know these laws and the general lender guidelines enough to be able to effectively confront them with a complaint on lenders failure to modify when then both could and should. http://foreclosurefreedomnetwork.com/FFN-Blog/?page_id=956

xvii.         When all else fails, you can call CAUSE, Inc. CAUSE, Inc. is a non profit corporation with a goal to help get justice for those Californian’s denied loan modifications in violation of California Civil Codes and Senate Bill 1137. Their number is (818) 352-0125.  If your complaint qualifies they may be able to get you linked up with an attorney who can go to bat for you – for no charge to you.  This would be on a class or mass action basis and may not end up preceding your having to either Short Sell or Walk Away if the lender will not modify and should. 

xviii.       If your lender finds you to be not qualified for a loan modification according to your underlying investors’ guidelines, you can help to restore your credit by doing a Short Sale on your property in great preference to Foreclosure or Bankruptcy.   







Do above General Outline research and calculations then refer to this for more detail.


1. Property Debt (Mortgage Principal, Interest, Taxes, Insurance and HOA fees) cannot be less than 31% of your gross income and most often cannot be greater than 45%.  38%-45% is likely qualified.

a.      Multiply your income by 31%.

b.     Add up your First Mortgage (Principal, Interest, Taxes, Ins & HOA)

c.     Subtract b from a.  If the result is positive, you don’t qualify.



2. The total of all debt (such as mortgages, credit cards, auto loans, dental loans, Home Equity lines of credit, private loans and other) can not be more than 55% of your gross income and in some cases 50%, without special permission from lender, which is unlikely.   

a.      Multiply your income by 55%.

b.     Add up all of your debt (listed above).

c.     Subtract b from a.  If the result is negative, you don’t qualify. 


3.  Fill out a financial form.  Be sure this is accurate.  You may use the one found at this URL: http://foreclosurefreedomnetwork.com/FFN-Blog/?page_id=962

The amount of the loan modification needed cannot be less than 6% of the mortgage payment, or it is often considered too small.

a.      Multiply your mortgage payment by 6%.

b.     Minus workout amount needed to bring bottom line to positive $200 no frills. 

c.     If result is positive, you don’t qualify.


4. A Net Present Value (NPV) test compares the value of the current loan (i.e. going into Foreclosure…) to a modified loan.  Will the investors make more money by keeping you in the home than they would if they sold this today in the Current Market at Foreclosure or Short Sale?


a.      Look up on http://www.zillow.com

b.     Look in a half mile radius to see if any comparable homes foreclosed in the recent past.  If so and similar size and specifications, note this value. 

c.     Deduct 20% from value of b for FC costs to get a rough Net Present Value for your property when Foreclosed.

d.     Find out from your lender what ‘discount rate’ and what ‘rate of inflation’ is used in the Net Present Value calculations for your investor.  Average Discount Rate is 5% - 6% – let’s put down 6% Discount Rate if you cannot get this exact rate from your lender.  (Discount rate is a combination of calculations related to inflation, likelihood of future default, cost of servicing, a deduction for monies not now available for other investment opportunity.) (Projected rate of inflation for the next year is a bit under 2%.  The longer time interval the more discrepancy and guesswork is involved with this.)


Let’s say for this example we have a loan at $100,000



     Calculate Future simple Value by going to this website and plugging in the values: Future Value Calculator

Get Net Present Value by doing following.

a.      Pull up Future Value calculator above and put in your current loan amount and your projected interest rate and term of the loan.  Then do the calculation. For this example $178669.52

b.       Less 6% Discount Rate Average [for Inflation (Let’s say 2%), failure Costs (Let’s say 4%)]

          (Lenders are going anywhere from 4%-10% as discount rate.)

(If your loan isn’t government sponsored – this is what you’re going to get).  This example shows Future Value at $178,669.52, for a 2% interest and Net Present Value of 23,245.84. This can be a little complex but do a few and you’ll get the hang of it.


[With HAMP and other Government sponsored loan modification solutions the equation is greatly assisted by Government assistance the Government splits the loss with the investor.  The government splits the difference with the lender (in their ‘waterfall’ calculations) of 38% debt to income and 31% debt to income.  So in essence the government for this will split the 7% variance, which is a gift to the investor of 3.5% of the income.  This is a complex split because this would essentially be doubled when considering debt loss assistance – because this 3.5% is of the person’s income, which is over 3x that of the debt in this case.  How does one account for this?  Lender/Investor must also cover the other half of this reduction and this may include some temporary reduction in the principal amount of the loan, usually deferred to the end of the loan term.  This is really too complex and must be compared exactly on a loan by loan individual scenario basis.  But I am assuming that this is part of what is put into lender calculations to come up with the 6% average discount rate, therefore I also assume that dividing this discount rate in half is the most reasonable way to come to the most likely solution.  So into the Net Present Value calculator, for Government Sponsored help, cut the discount rate in half.  This is $63496, which is a better rate than the Foreclosed Value of this same equation, [which would be your Current Market Value times 80%.  In the current market a conservative decline in value is 35%.  So one would multiply $100,000 times 35% = $65,000 times 80% = $52,000.]  = Foreclosed Value. So long as your investor doesn’t put a discount rate higher than 6% into this equation you should get an approved loan modification if government sponsored rate of return = 2%. 


Without government assistance would simply be impossible – based on Net Present Value calculations, as you can see in the above example.  Below is the Net Present Value Calculator, Above is the Future Value Calculator – if these can’t be pulled up directly, copy and paste into an internet browser. 




5. If the NPV of the modified loan is greater than Foreclosure value (NPV test is “positive”), the Servicer must proceed with a Trial Period Loan Modification.  There has been, however, no set standard for the NPV test – so the industry was ‘wide open’ for interpretation and certainly demanding the “Second Look” by Freddie Mac or going to a professional to assist


6. If the NPV of the modified value is less than the Foreclosed value (NPV test is “negative”), the Servicer may choose to proceed with the modification or proceed with Foreclosure – this is where negotiation skills can come in handy.  Civil code 2923.6 protects Californians from lenders who don’t want to do the above. 


7. “Second Look” process (MGIC stands for Mortgage Guarantee Insurance Company).  MGIC’s may provide some monetary to help with the loan modification.   This is called “Second Look” program.  If you have mortgage insurance and have been disqualified for a loan modification DO ASK THEM TO GIVE YOU THIS CHANCE.  MGIC’s “Second Look” will determine why the NPV test is negative, how much financial assistance is required to cause a positive NPV result and whether MGIC will make an “Advance Claim Payment” to your lender. If so, the loan will proceed to the next step and you will be allowed to get a ‘trial modification’.   


Lenders and Government Agencies have opted to make it more difficult for a 3rd party (unless they are a HUD approved Non Profit Agency) to represent you with your loan modification.  This was brought on by fraud in this arena, where lawyers and other loan modification consultants were taking up front fees and providing no service to consumers on a mass scale.  While we can and have represented many, it is truly in your best interest if you can grasp the rules of this for yourself and be your own advocate.  Some lenders will help you today, where they delay a third party advocates for 45 days, for instance, and then will mail the results to the borrower with no info to the advocate.  So the result of the ‘consumer protection’ has resulted in a ‘your on your own’ attitude where you must accept help from the lender or approved (but very busy) HUD Certified Non Profit agency or your loan modification efforts will be delayed at best.  For this reason I encourage THE SELF-HELP APPROACH! 


All the best! 

Connie Saunders

[Constance (Connie) Saunders is a licensed California Realtor 01841211 and the founder of Foreclosure Freedom Network (FFN).  FFN is a local company who has helped hundreds of people across the nation with their home loans to modify or Short Sell and has a weekly Radio Show every Thursday at 2PM on KCAA 1050 Radio]


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