by Tobi Elliott

Current Housing Climate

Mortgage analysts don’t know what to make of the current housing climate. An article in the New York Times Thursday this week carried this warning from Jay Brinkmann, the chief economist of the Mortgage Bankers Association.  “We may be at a point where the market is changing for the better, but we can’t be sure because of the confounding effect of seasonal differences,’ said Brinkmann. The mortgage bankers said they did not know whether the optimistic or pessimistic sequence was more accurate.

Uncertainty may yet hang about as to whether the market is headed for brighter or darker days, but one thing remains sure: homeowners in danger of defaulting on their mortgage are looking for ways to keep their home.

One trend that’s emerged in this mortgage shakedown is loan modification, an arrangement the government makes with lenders to modify qualifying mortgages to a more manageable payment rate. While in theory this is a great idea – who wouldn’t want to pay less? Especially when it means the difference between keeping your home and losing it? – the practice has left some homeowners twisting in the wind, worse off than before. Let me explain.

HAMP Program

Let’s say you heard about the Obama government’s Home Affordable Modification Program, or HAMP, around the time it was announced, in February 2009. The government was prepared to provide around $50 billion to banks and lenders to ease the burden on borrowers.  You talked to your lender, who handed you some paperwork to apply for the modification program. No one asked you if you knew if you qualified for the program or not – you just assumed your bank or savings and loan agency would tell you that.

While you where waiting…

You wait, all the while paying your monthly mortgage payments as best as you can. Months go by. Despite calls to your mortgage broker, you don’t hear anything about your application. They tell you there’s a backlog and they’ll get to you when they get to you.

You keep making monthly payments and watch your savings dwindle. A year goes by. Finally, you hear back from the bank: you’re approved for a three-month trial on the HAMP program. Deliriously happy, you pay a reduced rate on your mortgage for three months. Then, bad news: turns out they made a mistake. The bank tells you you’re not approved after all because the bank’s investor that holds your mortgage isn’t actually participating in the HAMP program. You have to go back to your regular payments while you wait  – along with hundreds of other anxious borrowers – to hear whether a loan modification will yet be possible.

Some apply for loan modifications as a device to delay the inevitable –  eviction – placing a further load on the overburdened system. Many borrowers unable to make their payments go into delinquency, waiting for eviction. But because of the backlog and processing time, they won’t be evicted for months, or even years.

In the meantime, those who have made their regular payments, waiting for a loan modification that may never come, have lost thousands of dollars in savings. There is a slim chance that you will, in fact, be approved. According to their own data, the government’s loan modification program has helped about 300,000 defaulting households get permanent new loans. But that leaves about 1.4 million homes left to go that the government estimates actually qualify for the program, out of an estimated four million in danger of foreclosure. (The New York Times) That’s some pretty stiff competition.

At the moment, most banks are clogged with applicants, and are under pressure from the government to offer lower payments in an effort to avert foreclosures. The assessment of each individual case as to whether they qualify can take many months longer than usual if the government is mandating more steps and checks. Banks will now take six months, a year, or even longer to determine whether an applicant is eligible, and the waiting game continues.

Experts are saying it’s better to walk away from a loss earlier than later, go through the pain, so you can set about rebuilding a financial plan.

According to Anthony Sanders, a professor of real-estate finance at George Mason University, delaying the foreclosure process is “definitely a bad thing. You want to recognize losses, get over the pain, move on as quickly as possible.” (The Wall Street Journal)

An independent housing economist in Leesburg, Va., Tom Lawler, said “the delays haven’t been entirely bad, because banks needed time to figure out which homeowners could be helped in a way that served the interests of both lenders and borrowers. The delays also avoided swamping the housing market with too many foreclosed homes all at once.”

“But Mr. Lawler said banks now need to become more efficient at foreclosing in cases where borrowers clearly can’t afford their homes.” (The Wall Street Journal)

If you’re one of those who can’t afford their home, you’re going to have to face the music sooner rather than later. If you don’t qualify for a loan modification, wouldn’t you rather know that now? The decision to move on is going to be painful no matter when it comes, but leaving when you still have some savings so that you can rebuild or refinance, would be the smartest thing you can do for yourself.  Get a hold of your lender today and get them to level with you, because it’s your money on the line, not theirs.

** Opinions expressed are those of the writer and do not necessarily reflect the opinions of CompareSmart or any of its affiliates.**