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In Need of Re-Modification

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Posted On: 05/27/2009

Q:Last year our lender modified our loan and our new rate was set at 4.5 percent. This year my husband has been furloughed twice a month without pay while I have been furloughed four times a month. I called the lender and asked if we could again modify the loan, and they said they could not since there had already been a modification within the past few months. We paid $600,000 for a house that is now valued at $300,000. What can we do?

A: We're usually quick to blame lenders for not helping borrowers, but in this situation that's plainly not the case. Your lender lowered your interest rate to 4.5 percent, a rate that is well below residential financing generally available last year - if not decades. Unfortunately your income has declined because of downturns at work.

What more can the lender do? Your income has gone down but that's not the lender's fault any more than it's the fault of the supermarket where you buy. As to foreclosure, that's absolutely not in the lender's best interest, but what would you do in the lender's place?

Unfortunately, "redefaults" are common. In December, the Comptroller of the Currency reported that among those who received modified loans in the first quarter of 2008, "after three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent. The data is similar for mortgages modified in the second quarter: the re-default rate after three months was 39 percent, and after six months, 51 percent."

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A careful look at the government's figures raises several issues. First, being 30 days late is something most lenders deal with by assessing fees and charges. It's when loans are 60 and 90 days late that most lenders get really nervous and foreclosure notices start.

Second, changes in loan terms are generally described as "workouts." Workouts come in two forms: "modifications" and "payment plans." The government's redefault numbers concern only loan "modifications" and not "payment plans." Since a payment plan can often result in a higher monthly cost, it follows that redefault rates for payment plans may be even higher than for modifications. Translation: The redefault problem is being understated.

Your situation is simply not unique. The 2009 MetLife Study of the American Dream shows that "with the erosion of social and corporate safety nets, tightening credit and declining home equity, most Americans have little financial cushioning to survive a job loss. Without a steady paycheck, 50 percent of Americans say they could not meet their financial obligations for more than a month - and, of that, a disturbing 28 percent couldn't support themselves for more than two weeks of unemployment."

The MetLife figures make you wonder: Why have lenders made loans to borrowers with such woeful savings habits? No less important, why have borrowers accepted such financing?

You might ask your lender if you can get help under the federal government's just-announced $75 billion foreclosure prevention program. In essence, if the lender can reduce your total housing costs to 38 percent of your gross income, the government will subsidize the loan so that you're effectively paying 31 percent. A lender in such situations might reduce your interest rate or extend the loan term to as long as 40 years to reduce monthly payments.

There are a number of qualifications and requirements under the federal program, but ultimately even if your lender agrees to go ahead with a modification there remains the intractable problem of making monthly payments. The harsh reality is that if you don't make required payments you'll be foreclosed.

By any chance, can you get additional work, a better-paying job or cut expenses?

Meanwhile, you need to speak with an attorney who specializes in bankruptcies. There are discussions in Washington regarding changes to the bankruptcy system that may help if passed. In any case, you need to know your rights and you need to think about your likely needs in the next few weeks and months.

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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