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Even more complicated and delicate is the situation involving a current or potential default on a mortgage.  Not only does this have financial consequences, there are also legal consequences.  If a person is not paying their mortgage, this needs to be managed so that the client understands the implications, credit and otherwise and there is direct and clear communication with the bank to prevent or at least monitor a completed foreclosure action.  Those that are obtaining debt forgiveness need the advice of a qualified CPA or tax attorney.

From what I am hearing from clients and others referred to me, many people are being advised to stop paying their mortgage.  While there are circumstances in which this may be necessary, it is a decision that must be informed. 

I have now attained several years of direct experience in the areas of loan modifications and short sales. I can confidently inform you that policies and ways of doing business change constantly.  The banks are still trying to figure out the best approach to solve their problems, and the consumer is left with relatively little or no understanding of what this all means. 

My perspective is that most of the banks (certainly the larger ones) are qualifying people for the Making Home Affordable (“MHA”) program.  This is clearly the first choice of most banks, since there is a nominal incentive for the banks to do so.  This program is commonly referred to as the Obama program.  This is not a government-mandated program.  That is, it is an option that the bank may utilize to grant people a “workable” solution to their mortgage problem.  Qualifying for a loan modification is at your servicer’s discretion. 

Another criteria for the Obama program is that the borrower must have suffered a “financial hardship”.  Such as, as reduction of income, loss of income, death, divorce, etc.  Individuals relying on unemployment will most likely not qualify for a loan modification, since it is not permanent.  Under most circumstances, individuals relying on unemployment must sell their homes, and will likely qualify for a short sale. 

It is apparent to me that most banks are resisting modifying loans unless the borrower(s) is delinquent.  If you are paying your mortgage, the banks perspective is that you must be getting money from somewhere.  This obviously falls outside of the “guidelines” that have been set forth for the program. 

You will not qualify for a loan modification if you have other debts that are interfering with your ability to pay your mortgage.  That is, if, based on the formula provided under the loan modification guidelines, your mortgage payment (principal, interest, taxes and insurance on first mortgage, only) is already within a certain range of the 31%-38% of gross income, your lender is not likely going to modify your mortgage.  You may have other debt interfering with your ability to pay your mortgage, and that is not a reason for them to acquiesce to a lower payment to help you meet your other obligations.

I am seeing a trend towards more approvals for short sales.  I believe that the government incentives to settle the debt upon the sale of the home is more cost effective then attempting to keep the loan at a reduced profit while continuing to administrate payments.  There has also been a high rate of re-defaults on loans that have been modified.  Having said that, let there be no mistake, short sales are getting tougher. 

Each situation is unique and must be evaluated and considered on its own merits.  Homeowners need to be wary of arbitrary solicitations that are disguised as legitimate.  There are answers to certain situations, but none of them is “easy”.

November 10, 2009