For homeowners that find they would like to keep their home but need to restructure their loan, the government has offered new programs for loan modification and refinance.

The program offered by HARP is designed to allow for a refinance at normal market interest rates for individuals who fully qualify for a loan but whose home is upside down by up to 125% in value.  Normally, individuals would need approximately 20% equity in their property in order to get a lender to approve the refinance.  This program will allow you to refinance up to negative 25% equity.  This is a good step in the right direction.  Previously the program had capped out at 105% LTV or negative 5%.

In the Orange County real estate market, this is still a big problem as most homes purchased from 2004 to 2007 are upside down by 30% or more.  Those who find themselves in this situation and are suffering from a hardship may also be able to apply directly with their lender under TARP guidelines for Loan Modification.   The basics of this program is that you also have to qualify for the loan with sufficient fully documented income.  The program offers a stepped approach that includes lowering interest down to a floor of 2%, increasing loan amortization period up to 40 years, deferring principle for a time and lastly principle forgiveness (at the lenders discretion). The goal of the program is to reduce the total house payment including taxes and HOA to 31% of the borrowers total income.  Sounds pretty good right?

I agree.  But here is the catch.  First notice that you have to make enough money to qualify for the new loan.  Make too much and you won’t qualify, make too little and they will decline to work with you.  Second, your loan typically needs to be a freddie mac or fannie mae loan and the lender is only obligated to participate if they received TARP bail out money.  Sounds easy enough, but in reality a lot of loans are owned by investors and simply managed by the banks.  As a result, I have seen a good number of declines and less generous terms.  Third, you are not supposed to be required to be late in order to receive help.  But in reality, those that are not delinquent are put at the back of the line and it can take 6 months just to get a decline.

I have seen many loan modification successfully completed.   All of them were only temporary loan modifications, meaning that they are five-year deals with escalating payment schedules.  And most importantly, none of the packages included debt forgiveness.  In some severe cases, they removed principle and recalculated the loan payment but put the principle on the back end of the note as a balloon payment.  These packages will help people temporarily, but in the long run, I fear that they are just prolonging the agony that eventually, they may need to short sale their Orange County home.

Before you approach your lender to do a loan modification, I recommend you review the TARP guidelines for the Home affordable modification program.  Armed with this knowledge, I believe you will have the best chance at getting the terms you need.  However, if in the end you find that these terms do not serve your long term interest, we should discuss the possibility of a short sale.  With a short sale, fannie mae guidelines will let you rebuy in as little as two years.  In some cases, investors may even allow you to rent back your home after you sell to them.  This may give you time to get ready to go shopping for a new home with little or no debt and in a great buyers market.

Making Home Affordable ~~ Program Description (PDF)

Loan Modification Program Guidelines (PDF)