Loan Modification Plan and “Cram-Down”

The Stimulus package to help troubled homeowners with $75 billion will begin March 4, 2009.

If banks want bailout money, they will need to start helping the homeowners with loan modifications. The guidelines would require no more than 38% of the homeowner’s income. And bring down the mortgage payments to 31% of their income.

This may be a bit of a problem for most of California, Florida, Nevada and Arizona where loan to value is as high as 105%.

Those with higher debt to income will be able to qualify but must enter a HUD-certified consumer debt counseling program.

Furthermore, it has been a proven fact that loan modifications have not worked with homeowners ending up in Foreclosure 6 months after obtaining a loan modification.

There is a very simple reason for this, in my opinion…mortgage loan balances were not reduced to home value. Unless and until this occurs, I do not think that loan modification is a viable solution to our housing crisis that effects our nation in each neighborhood.

For some that still have equity but less than 20%,  they will be able to refinance through Freddie Mac and Fannie Mae.

Not sure how many that will help here in California.

What is called a “cram-down” is also part of the package but requires an Act of Congress to change the bankruptcy laws in order for bankruptcy Judges to reduce mortgage loan amounts.  If passed this will not use any of the monies set aside by the government.

Apparently, Bankruptcy Judges have always had the authority to reduce the terms of an investment property or vacation home but not the principal residence of a homeowner.

In my opinion, again reducing the loan mortgage amount is the only way to stop the downward spiral.

Here is a simple example of the problem:

• Mortgage amount of house: $400,00
• Value of house today: $250,000
• House for Sale as Short Sale: $250,000 (bank doesn’t respond)
• House for Sale as Foreclosure: $230,000 (house sells for $235,000)

Now, tell me why the banks won’t just lower the mortgage amount of this house to $250,000 and let the homeowner/borrower stay in their home?

If you are interested in understanding more about the Homeowner Affordability and Stability Plan be sure to read the FACT Sheet and Summary.

What are your thoughts about how to solve this National problem? Do you think loan modification will solve the current problem of Foreclosures or do you think it only puts off the inevitable?

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