If your lender is given the option to modify your mortgage loan or foreclose, what will they choose to do? This is a question facing the millions of American families who have fallen behind on their loan payments and tried to negotiate a loan modification. Unfortunately for many, the answer has been that the lender will simply foreclose. However, the Making Home Affordable Program attempts to give loan servicers an incentive to successfully modify loans, and slow the recent rise in home foreclosures in the US.
The Costs of Loan Modification
Currently, mortgage servicers actually have a disincentive to modify loans, as the process can often result in higher overall costs to the them. Mortgage servicers are the independent companies hired by your lending institution to manage your loan and collect payments on them, and are often independent of the bank. Although foreclosures cost homeowners, the lending institutions and their shareholders more money (often as much as $50,000 per foreclosure), this loss can be recovered by the loan servicer; in fact, mortgage companies often stand to make money off of a foreclosure.
This is because the main sources of income for loan servicers are monthly fees that are tied to the principal amount of the loan, and so these companies are generally opposed to modifications that reduce the value of the principle. And while they risk the loss of fees during a foreclosure, the management expenses incurred by the mortgage servicer during a modification are often much more costly than simply foreclosing on a bad loan.
Making Home Affordable Plan
The Making Home Affordable Program attempts to give these institutions incentive to oversee successful loan modifications, and keep them from prematurely foreclosing. The $75 billion program has over 65 participating mortgage servicers who have agreed to the terms of the plan, and will receive incentivized funding for completing loan modifications.
To determine if you are eligible for the loan modifcation, you will have to answer the following questions:
Is your home your primary residence?
Is the amount you owe on your first mortgage loan equal to or less than $729,750?
Are you having trouble paying your mortgage? (For example, have you had a significant increase in reduction in your income since you got your current loan or have you suffered a hardship that has increased your expenses?)
Did you get your current mortgage before January 1, 2009?
Is your payment on your first mortgage (including principal, interest, taxes, insurance and homeowner’s association dues, if applicable) more than 31% of your current gross income?
If your answer to the above questions is “yes,” than you may be eligible for a Home Affordable loan modification. Contact your loan servicer for more information.
For an in depth look at the incentives for loan servicers, go here (PDF). More information on the Making Homes Affordable plan is available on the website, at www.makinghomeaffordable.gov.