Mortgage Relief

July 25, 2009 Update: The Obama administration has improved the Making Home Affordable program to give homeowners who are not yet in foreclosure an expanded opportunity to refinance. If you've been current on your monthly payments for the past year, you may now be able to refinance even if you are as much as 125% underwater on your mortgage (the earlier standard was not more than 105% underwater). This is a significant improvement over the original program. For more details, see http://blogger.uncleleosden.com/2009/07/more-mortgage-relief.html.

Original Blog: The Obama administration has launched a housing affordability initiative called "Making Home Affordable" (www.makinghomeaffordable.gov). It provides two alternatives for homeowners having problems paying their mortgages. Both alternatives are sponsored by the government, so you may get a better deal going through this program than you would if you tried to negotiate on your own. This program is aimed at forestalling foreclosures by helping homeowners who haven't yet defaulted but anticipate problems making their payments. (People who are way deep in default would probably have to pursue other options.)

The first alternative is to refinance. You should try for a mortgage offering a low, fixed rate, to make your housing costs predictable. You may qualify for a refinancing if the amount of the mortgage (plus any refinancing costs) does not exceed 105% of the value of the house. If there is a home equity loan or second mortgage on the house, the second lender will have to agree to the refinancing. (If refinancing would lower the payments on the first mortgage, you could point out to the second lender that these lower payments would increase your ability to pay the second loan.) You also need to be current on your mortgage, and not have been more than 30 days late in making a payment during the last 12 months. Your loan must be owned or guaranteed by Fannie Mae or Freddie Mac (which means larger loans might not qualify). Refinancing will not reduce the amount of the mortgage. But if you can lock in a low, fixed rate mortgage, having predictable monthly payments will reduce your sleep deficit.

The second alternative is to modify the mortgage to lower your payments for a five-year period to not more than 31% of your gross (i.e., pretax) monthly income. People who have been re-assigned from full-time to part-time work, or who no longer get overtime may benefit from this alternative. So may two-income couples when one member is laid off and the combined household income drops. The loan must not exceed $729,750 and the home must be your primary residence. The government offers incentives to loan processors to reduce your interest rate to as low as 2% in order to get your monthly payment to the 31% level. If you stay current on the reduced payments for 5 years, the government will pay down a small part of the principal balance of your mortgage. After 5 years, the government will have reduced your principal balance by $5,000, so it's important to stay current. Also after 5 years, the payments on your mortgage can increase one percentage point a year until they reach the market rate for mortgages on the day when your loan is modified.

The second alternative could involve extending your mortgage to 40 years, or deferring repayment of part of the principal balance of the loan. The latter step might result in a balloon payment at the end of your mortgage, something that you should thoroughly understand before agreeing to the deal. Either you'll have to save up enough cash for the balloon payment, get more financing, or sell the house. The lender also has the option of forgiving part of the principal balance. But that's voluntary on the part of the lender and you shouldn't hold your breath hoping for it. (Our guess is that lottery tickets would be an easier way of reducing your principal balance than expecting voluntary principal reductions from lenders.)

To explore options under the Making Home Affordable program, contact your loan servicer or lender. You may also get free counseling by calling the Hope Now Alliance at 1-888-995-HOPE (4673) and speaking to counsellors approved by the Department of Housing and Urban Development. Beware of people claiming to offer mortgage relief for a fee. There are a lot of mortgage scams, now that numerous borrowers are in trouble.

If you don't qualify for assistance under the Making Home Affordable program, consider seeking help from nonprofit housing organizations. See http://blogger.uncleleosden.com/2007/12/how-to-handle-mortgage-default.html for more information. Good luck.