Mortgage modifications are now in the spotlight due to it being the only clear exit from the nation’s default and foreclosure crisis. The government and banks need to employ rules and use them to correct all of the financial damage from the easy mortgage loan approvals for borrowers over the past six years.
Before you accept a pre-packaged government or bank proposed mortgage modification that may not be the best offer you can get, you need to get a second opinion. There are established loan modifications companies who follow the law, are endorsed by the Better Business Bureau who will give you a free consultation on your case, so it is worthwhile to seek such companies out.
I am on the side of the fence that believes the only way out of this crisis is to re-underwrite each loan originated from 2003-2007, especially mortgages that are not fully-documented 30-year fixed. Officials claim there are approximately $7 trillion in loans made during that period from 2003 to 2007. So, borrowers should be re-underwritten to the standard 28/36 debt to income ratio back when loan defaults were less common.
To make matters worse, borrowers who have excellent credit scores over 750 who came in with 20% down and have 30-year fixed loans are walking away because of super flexible guidelines back then, and negative equity. Home values have dropped up to 75% in some of the worse hit areas in the certain states.
By re-underwriting and doing principal loan balance reductions based on what a borrowers actually makes corrects the past five years. Using the 28/36 ratio, the homeowner’s has lower monthly debt payments, and is able to keep a normal lifestyle, as well as save some money. This ratio has been proven over time. Moreover, if home values drop homeowners will be less likely to say sayonara due to them not being over leveraged to their home.
There are millions of ‘Prime’ borrowers in the nation and in a town near you, fully leveraged and not saving a penny as all of their after tax income and more is going out to pay down loans on depreciating assets.
Millions of homeowners are over leveraged. This concept worked well in when their home increased by $70,000 or more annually. However, when their home values drop like a meteor, the quickest way is to get rid of the largest expense, which is the upside down house.
The banks and loan servicers are beginning to comprehend this as it has is experienced from people with low credit scores to "A" credit people. A pro-active approach is the best solution. However, there is a large opposition with banks when it comes to principal balance reductions due to it involving the bank accepting an immediate credit hit.
The fact is unless banks re-underwrite each loan to a strict guidelines of 28/36 debt-to-income ratios the programs will not work. If the bank simply offers you a 5-year interest only teaser rate which is the most popular loan modification, they are merely setting the borrower up for disaster later than now. A longer term fixed rate and/or principal reduction is the answer.
