Mortgage Modification: Too Little, Too Late

Even as the U.S. Treasury was patting itself on the back for stimulating 500,000 trial mortgage modifications for financially-troubled homeowners, one of its top officials was telling Congress that "more than six million Americans are at risk of foreclosure in the next three years."

Keeping those troubled people out of foreclosure is the objective of the Obama Administration, which ear-marked $75 billion of financial-rescue funds in March 2009 to pay incentives to mortgage servicers who agree to modifications.

The Feds, as well as individual mortgage holders seeking solutions, have not been pleased with the progress of the initiative until now.

The 47 national loan servicers that have signed on for the Home Affordable Modification Program (HAMP) that was launched in February 2009 appear to be dragging their feet in its implementation. Treasury reports that 21 of the servicers had modified less than 5 percent of eligible troubled loans on a trial basis and several had not modified any as of October 2009.

Furthermore, the operative word here is "trial," meaning nobody is sure that the modifications will provide a permanent solution. Trial modifications do not become permanent until the borrower is able to meet three reduced monthly mortgage payments in a row. There is concern that unemployment, which is still on the rise in many places,will push people back into trouble on their mortgages. The indication is that one in three borrowers whose monthly payments were reduced by 20 percent or more had fallen behind again, according to federal findings.

The servicers also are overwhelmed by the volume of applications for modification, leading to all sorts of delays and problems, including what many borrowers consider unjust denial of their petitions for mortgage relief.

Treasury has initiated a monthly report card that "shames and names" mortgage servicing institutions to get them to be more efficient and act more quickly in granting mortgage modifications.

Of Course, that doesn't help the American homeowners who have the sheriff knocking on their door.

And, that's that.

Reverse Mortgage is Best Kept Secret of Relief for Aging Homeowners

While homeowners in financial difficulty are beating themselves over the head to modify their existing mortgages to get relief, many maturing folks, age 62 and older, are not being told about the reverse mortgage alternative.

The reverse mortgage, or Home Equity Conversion Mortgage (HECM) as it is known officially by its designation from the U.S. Department of Housing and Urban Development (HUD), is the best kept secret of the big bank mortgage bailout fiasco.

The best mortgage modification can offer is lowering the interest rate, extending the term of the loan and/or delaying repayment of a portion of the mortgage principal until the end of the loan term. Furthermore, currently these remedies are only offered on a trail basis. If the homeowner falls behind in mortgage payments again under the modification all bets are off.

A better idea for aging homeowners, it seems to me, is the reverse mortgage, but the major banks for some reason are not promoting that alternative, perhaps because it’s only available to a limited segment of the market. Even without major advertising exposure, seniors are learning about this financial lifeline. More than 112,000 loans were taken in 2008 and reverse mortgage sales are on pace to set a record this year, according to HUD data.

Here’s how they work:

The Federal Housing Administration (FHA), which insures the reverse mortgage, establishes a formula to determine the allowable loan amount based on the age of the borrowers, the current interest rate and the appraised value of the home.

The borrower and spouse must be 62 years old or older to qualify. The older the borrower, the lower the interest rate, because the risk to FHA is reduced. Why?

Because, except for origination fees and loan insurance payments, which are substantial and paid up front, the reverse mortgage does not get paid off until the last surviving mortgage holder dies.

Meantime, if the borrower has considerable equity in the home, the value being much higher than the outstanding existing mortgage, a reverse mortgage can generate a payout for the reverse mortgage holder as well, besides satisfying any outstanding debt on the property and eliminating monthly mortgage payments for the life of the loan. Moreover, the credit standing of the borrower does not matter and the home cannot be foreclosed on so long as the borrower is current on payment of property taxes, homeowner’s insurance and homeowner’s maintenance dues.

Want to know more about reverse mortgages? AARP.org offers an online reverse mortgage calculator to get started by plugging in your age and estimated value of your home to come up with a ball park figure of how much you can expect to get out of a reverse mortgage. ReverseMortgageGuides.org provides chapter and verse on every aspect of the reverse mortgage. And, finally, HUD requires every prospective reverse mortgage taker to go through an hour-long financial guidance session with an accredited counselor before a reverse mortgage is entered into. As with any major financial decision, it’s wise to get as much information as possible before making a commitment.

No question, the reverse mortgage is not for everyone, but it certainly beats the mortgage modification alternatives that the major banks are now offering.

That's That...