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Ask Jill: Mortgage Modification


This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.


Health care is so early-last-week. By the end of the week, we had the new Bank of America mortgage modification plan and then on Friday, the government added a new twist to the old HAMP.

A foreclosure sign tops a sale sign outside a existing home in Denver, Wednesday, Aug. 29, 2007. AP

With all of the new plans swirling, here's a question that I received about mortgage modification from Rolf.

Jill,

You are still my goddess of expertise and so I come to the well again after reading this article.  Am I seeing this correctly, is there actually going to be a program to help those of us 'moralists' who are continuing to make our mortgage payments and stay in the homes even though we are well under water?  Please tell me my hopes may actually have legs to stand on...

Rolf, the recent announcement may make you smile! There are lots of new parts of the plan, as well as beefed up versions of old initiatives. We're finally seeing movement in the right direction on the modification front, as the plan is now targeting the 11 million underwater mortgage holders by lopping off principal. Here's how the new $50B "push" is supposed to work.

The Federal Housing Administration (FHA) will refinance some of those underwater loans and reduce the outstanding principal balance to qualified homeowners for their primary residences. To qualify, you must be:

  • current on your loan of up to $729,750 (depending on your local real estate market)
  • existing loan can't be an FHA loan
  • be able to document income
  • have a credit score of at least 500

The new FHA loan must be less than 31% of your gross monthly income and total household debt can't exceed more than 50% of income, unless you have a sterling credit history.

Before you start storming your lender, it's important to know that banks DON'T have to participate -- that's why some think the plan might not work. Although banks aren't required to modify these loans, they must consider writing down the principal by at least 10% for those borrowers whose debt is greater than 115% of the house's current market value. To encourage banks to play ball, the government is offering to pay them $0.10-.21 on each dollar of principal reduction and is encouraging second mortgage holders to participate.

Other measures include:

  • Temporary assistance for the unemployed: the government will allow unemployed borrowers to reduce or suspend mortgage payments for 3-6 months
  • Helping Homeowners Move to More Affordable Housing (HAFA): Encourage short sales and deed-in-lieu transactions as an alternative to foreclosures. The government will increase payments to mortgage service companies and second mortgage holders who agree to participate and will double relocation assistance payment for borrowers successfully completing foreclosure alternative to $3,000 from $1500.

One final note: the principal reductions will occur over a three-year period and it's unclear what the impact of these modifications will have on credit scores.


(CBS)
Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.