Market update April 20, 2009.

There have been more announcements in the news about the Federal loan modification plan, not to be confused with for profit or not for profit firms who works with borrowers to modify their mortgages in distress. As some of you know the government also has announced their intent to prosecute some companies who are charging a fee to homeowners in distress to help them get loan modifications because some of these firms have been deemed as fraudulent operations.

The Federal loan modification plan identified six major banks who agreed to participate, and by participating will receive some federal subsidies over time. The stated goal of the plan is to prevent foreclosures, and loan modification is a better alternative than foreclosure for all parties involved.

I will share with you some of the feedback from my customers about their attempts for loan modification. The most common comment is you have to wait a long time for someone to respond to your loan modification request, if ever. And if you are making payments on time you should not expect anything you couldn’t get by refinancing. For the distressed homeowners, by that I mean borrowers who has missed a few payments, loan modification has a wide range of possibilities. I have heard rates as low as 2% and in some instances of reduction in principal. I will have to admit that I have not seen any of the paperwork, only second hand anecdotes.

I did see one loan modification agreement issued by a major bank. It did reduce the monthly payment substantially for a borrower who has missed several payments. The payment was reduced by a half, but the terms were very vague on how long this reduction would be (on paper it was for only two months). What was very clear was that an accounting of all the missed payments, penalties, and legal costs is totaled up. The borrower accepting the payment reduction will have to acknowledge the liability for those penalties, missed payments, and accept that any payments made going forward will be paying off the delinquent accounts first. There was no specific language on the new interest rate; in fact it appears that the document served more of as a restatement of charges in arrears and promises to repay them.

It is hard to turn down a payment reduction of 50% when you are having financial trouble. The borrower is grateful for the reduction but it is hard to see on paper the real savings of the loan modification or it is just a mechanism to defer the payments of the loan. Whether this borrower chooses to accept these terms or continues to negotiate is not known to me. But I do think if you are current on your mortgage, your best chance to reduce your payment is by refinancing.