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Bob and Mary Keenan need a break on their mortgage. A series of reversals has left them strapped and incapable of paying all their bills, the largest of which is the loan on their newly built home.
Mortgage workout programs are all over the news and sound like nirvana to financially troubled homeowners like the Keenans. But they're often not what they seem.
We'll lead Bob and Mary through the home loan "modification" gantlet. In the process, we'll help illustrate who qualifies for mortgage help, what it consists of and how to boost your chance of qualifying.
The big mortgage problemAs the mortgage market has soured and left millions of Americans in -- or at risk of -- foreclosure, banks have launched increasingly aggressive programs to work with troubled borrowers. A group of banks represented by the Hope Now Alliance, for example, brags that it has helped keep more than 2 million troubled borrowers in their homes by changing the terms of their loans.
To hear the banks tell it, the modification programs can slash payments by reducing interest rates to zero -- or by even wiping out a portion of the borrower's principal balance. (That's a big change from the earliest loan-workout efforts, which usually just moved payments to the end of the loan. Half of borrowers with those early modifications are defaulting again six months later, bank regulators said in early December.)
But it's not easy to qualify for these more aggressive programs, and borrowers can battle paperwork for months before they know whether they'll get help. The reason the process is so difficult? The lenders who made the loans often don't call the shots, said Evan Wagner, a spokesman for IndyMac Bank, which wrote the Keenans' mortgage.
Why? Once written, most mortgage loans are sold to investors. The banks simply "service" the loans -- collecting the payments and answering borrowers' questions. IndyMac, for example, services 650,000 loans but owns only about 7% of them. The rest are owned by investors, ranging from individuals to pension funds.
Complicated contracts spell out what the bank can and cannot do to accommodate borrowers without getting sued by the investors who bought their loans. As a result, workouts traditionally are laborious processes. The bank examines a borrower's situation, reviews the contract to see whether modifications are possible and then approaches the investors to make sure the specific change requested would be tolerated.
This creates real headaches for people such as the Keenans, who started calling IndyMac weeks ago but couldn't get a straight answer about whether they qualified for help until they contacted MSN Money.
"As a consumer, you rarely know who is calling the shots and why," Wagner acknowledged. "The customer deals with us; we deal with a company that bought the loans and resold them to other investors; they deal with all the other owners. It can be fairly painful."
The big mortgage solutionThat said, over the past year, lenders have come up with something of a formula to speed up loan workouts. People who fit the standards in the formula can get relatively quick help; those who don't must go through the traditional case-by-case process.
Conveniently, IndyMac has become the industry standard-bearer, setting guidelines for expedited loan workouts under the aegis of the Federal Deposit Insurance Corp., which took control of the Pasadena lender earlier this year.
What are the rules?
- Your loan must be at least 60 days past due. (A few banks require that payments be at least 90 days late.)
- You must establish that you can't afford your current payment. In other words, your expenses exceed your income.
- The workout options that the bank has available must make your payment affordable on a long-term basis. That means the modified payment cannot exceed 38% of your monthly income, and that lowered monthly payment must make your expenses and income balance.
- You cannot be in bankruptcy or a party to a lawsuit against the bank.
- The bank must be convinced that a workout is preferable (to investors, not you) to other options, such as a sale of the home.
- The bank must have a reasonable expectation that you won't default again.
Workout optionsFor those who qualify, the modification options generally boil down to three, Wagner said. The bank could:
- Permanently reduce the interest rate on your loan to the going market rate -- roughly 5.1%, on average, at midweek.
- Temporarily reduce the interest to below-market rate, as low as 3%, for three to five years.
- Stretch payments out over a longer period, such as 40 years, to reduce the current monthly cost of the loan.