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Mods: Pros/Cons?

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Posted On: 06/03/2009

Q: Because of recent job cutbacks we have less income and may face foreclosure. What are the pros and cons of loan modifications?

A: During the past few years the subject of mortgage modifications has become more and more pressing as the number of people facing foreclosure has soared.

For years the lending industry maintained that mortgages could not be modified. Columns written in the 1990s inevitably drew responses that said it was impossible to change loan terms.

The facts are different. Adjustable-rate mortgages are designed so that rates and monthly costs are routinely changed. During national disasters Fannie Mae and Freddie Mac have a series of generous and decent modifications they allow for impacted borrowers. Loan servicers under some "pooling and servicing" agreements have the authority to modify a certain percentage of loans. Foreclosure moratoriums passed by various states and recently announced by many lenders surely modify loan terms.

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But now we have a new situation. With millions of foreclosure actions each year many homeowners, especially those with option ARMs and interest-only financing, want desperately to have their loan terms changed. At the same time, a number of lenders and investors - but certainly not all - have come to see that modifications are much better than foreclosures. Why the change? Money. According to a study by the congressional Joint Economic Committee lenders lose $50,000 with a typical foreclosure. Multiply individual losses by millions of foreclosures and you're talking big numbers.

Modification programs sound great, but the reality is that most don't work over time. A study of loan modifications by the Office of the Comptroller of the Currency shows that nearly 60 percent of all private-sector loan modifications were again at least 30 days late after eight months.

So, what to do?

Call your lender. There is likely a contact number on your monthly payment form.

Don't wait. If you see that a payment will be late or not made, call the lender as much in advance as possible to see if something can be worked out.

Don't pay money. There are many free services out there. Good sources of info include:

• Your state attorney general - many work with lenders and can provide direct contacts and/or suggest state programs for distressed homeowners.

• HUD foreclosure avoidance counselors. There is no charge to use a HUD counselor.

• Your local bar association. Many bar associations can direct you to pro bono legal services. Another possible source of free legal help: local law schools.

• For background information, links and resources, I have posted a detailed guide to modifications at www.ourbroker.com/?p=2408.

Q: I'm a 76-year-old widow and want to refinance my home if/when the interest rate goes down to 4 percent; my current rate is 6 percent. I don't know what I should be aware of in the mortgage papers, other than that I want a fixed-rate of interest. What don't I want in a mortgage, and what should be included?

A: In today's world, what works best for most buyers are fixed-rate conventional loans with a term of 15 or 30 years, FHA financing or VA loans.

One reason to avoid adjustable-rate mortgages at this time is that fixed rates are low. A second reason concerns upside risk: The interest level will never increase.

It's possible that in your situation refinancing would be worthwhile with a rate above 4 percent. For instance, with a "no closing cost" loan the lender would pay most or all of your settlement fees in exchange for a somewhat above-market interest rate. Maybe you could get 5 percent or so with little up-front cost.

Given your age, would an FHA-insured reverse mortgage make any sense? There would be no monthly payments for principal and interest, but there are costs for such financing and the loan must be repaid if you move, sell or pass away. For details speak with an elder-law attorney.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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