LENDERS as I thought are more aggressively helping homeowners modify their mortgages. I have seen more loan balance forbearance lately. Another term for that is a loan modification with a Balloon payoff for the remaining balance. Lenders will structure this modification package with the homeowner paying a portion with full interest payment and another smaller portion with zero interest required. These terms will often be payable in about 20 yrs or so. It might work out well for borrowers who really wanted to keep their home and can afford the payments and will be able to pay off the balloon balance when it is due and payable.
The “Debt Relief Act of 2007” is due to expire end of this year. Therefore lenders are gearing up to figure out how they can start going after homeowners with deficiency balance starting next year.
Here are steps lenders take to analyze and decide on how to modify your loan.
Step 1: Capitalization
In the first step, the servicer capitalizes accrued interest; out-of-pocket escrow advances to third parties, and any required escrow advances that will be paid to third parties by the servicer during the TPP.
Step 2: Interest Rate Reduction
In the second step, the servicer reduces the starting interest rate in increments of 0.125 percent to get as close as possible to the target monthly mortgage payment ratio. The interest rate floor is 2.0 percent. The initial interest rate would be fixed for the first five years then increase by 1 percent in year 6 and another 1 percent in year 7. For the remainder of the term the rate will be fixed at the prime market rate at the inception of the permanent loan modification.
Step 3: Term extension
If necessary, in the third step the servicer extends the term and re-amortizes the mortgage loan by up to 480 months from the Modification Effective Date to achieve the target monthly mortgage payment ratio.
Step 4: Principal forbearance
If necessary, the servicer will provide for principal forbearance to achieve the target monthly mortgage payment ratio. The principal forbearance amount is non-interest bearing and non-amortizing.
The amount of principal forbearance will result in a balloon payment fully due and payable upon the earliest of the borrower’s transfer of the property, payoff of the interest bearing UPB, or at maturity of the mortgage loan.
There is no requirement to forgive principal under HAMP.
Best decisions are made with practicality and sensible financial calculation, a home use to be a house that you had just bought and turned into a home. If this home becomes a burden and a bundle of debt to you, it’s time to make it into a lost business opportunity and cut your losses. You can always get back on your feet and start over in a couple of years.
For those who can actually afford these upside down mortgages and wants to really keep their homes. You have to make sure you are looking at long term recovery, which is very vibrantly obvious nowadays.
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Thanks so much for your support and comments. Please call Ken Go of 1st Innovative Finance at (562) 697-7028 or write to [email protected].