I promised to talk about the mechanics of mortgage
modifications; here it is, after perusing the rules for a while, because they
are tricky!
Most homeowners who attempt to modify these mortgages on
their own do so at their peril because they definitely undershoot their income
and the bank sees that their income shows that they will be forever unable to
meet their principal + interest + tax + insurance (PITI) payments, no matter
how much the interest portion is lowered!
Mortgage insurance premiums are excluded
from the PITIA calculation, but HOA fees are included. We are only talking about the primary lien;
we are not calculating any payment associated with a second or junior
mortgage.
So here are the mechanics:
1) the bank must first believe that you are unable to pay
your PITI, so you must be by definition over 60 days delinquent in
payments. Otherwise, the bank thinks
that there is no reason to modify because there is no peril in the current
cash-flow of that mortgage they are holding.
That cash flow is called the net present value (NPV) of the mortgage and note. However, if you have not paid for a while,
that NPV is going to be a lot less because at this point, I bet that NPV for a
property that is foreclosed upon and then sold for a loss will be 60-70% of its
value!!
Caveat:
The home must be an owner
occupied, single family 1-4 unit property (including condominium, cooperative,
and manufactured home affixed to a foundation and treated as real property
under state law).
• The home must be a primary
residence (verified with tax return, credit report, and other documentation
such as a utility bill).
• The home may not be
investor-owned.
• Borrowers in active
litigation regarding the mortgage loan can qualify for a modification without
waiving their legal rights.
• First lien loans must have an
unpaid principal balance (prior to capitalization of arrearages) equal to or
less than: Unit: $729,750
2) Now determine your front-end debt to income ratio
(DTI). You do this by adding up your
monthly gross income and putting it on the numerator and dividing it by the
PITI. For you New
York folks, I bet the ratio is about 45 - 55%. You have been paying but guess what: you should only be paying 38% or less. Otherwise don’t pay. Making good money? Pay only 38% of that gross income on PITI for
your primary mortgage (first lien). And
it gets better; the Obama Plan pays the
bank to lower the DTI ratio to 31%.
What is monthly gross income?
“The borrower’s Monthly Gross Income is the amount before any payroll deductions
includes wages and salaries, overtime pay, commissions, fees, tips, bonuses,
housing allowances, other compensation for personal services, Social Security
payment, including Social Security received by adults on behalf of minors or by
minors intended for their own support, annuities, insurance polices, retirement
funds, pensions, disability or death benefits, unemployment benefits, rental
income and other income. Monthly net income can be used for preliminary
screening and qualification. If used, the servicer will need to multiply net
income by 1.25 to get to an estimate of Monthly Gross Income.”
Let me reiterate: the bank thinks that they have a
foreclosure on their hand and the NPV of the cashflow is reduced a great
deal. Now they deal with you because you
are screaming at them: modify my loan so that my DTI (gross income to PITI) is
38% or even 31%, or else, because I want to make a lot of money and
pay less!
The bank will do so by initially attempting to lower, in
little increments, the interest to get to that 38% and may lower it still more
because the feds are paying them to do so.
They may even extend the mortgage to 40 years. I don’t need to mention that any ARM
agreement that you made with the bank is out the window after a successful
modification. You, upper middle class
citizen, are minting money right there and then!!
Oh, those months of PITI you didn’t pay? The bank simply reamortizes this amount on
the back end, which raises the balance of the mortgage somewhat.
Don't list your gross income as being so low that it shows an 85% DTI. No amount of lowering of interest will cause the 38% target to be reached, and the bank will be uninterested in dealing with you at all.
3) OK, there is one more step.
The bank continues to be interested in the NPV of its note and
mortgage. If you were a bank, wouldn’t
you be? If you were a bank, would you be
interested in anything else? (not
likely)
Now the bank determines if
you, the borrower, will be able to pay the mortgage at the lower interest rate
pursuant to a suggested modification. It
determines a “Back-End DTI”. Bank-End
DTI “is the ratio of the borrower’s total monthly debt payments (such as
Front-End PITIA, any mortgage insurance premiums, payments on all installment
debts, monthly payments on all junior liens, alimony, car lease payments,
aggregate negative net rental income from all investment properties owned, and
monthly mortgage payments for second homes) to the borrower’s Monthly Gross
Income.” If you, the borrower, have a post-modification
Back-End DTI greater than or equal to 55%, you still don’t have to worry: you will
be provided with a letter stating that you are required to work with a
HUD-approved counselor and the modification will not take effect until you
provide a signed statement indicating that you will obtain counseling.
Wow, you live the high life
and spend money like water, and all you have to do is get a counselor? This beats AA or 12-step!!
4) you enter into a trial period with the bank; suck up and
say ‘yes I will pay in accordance with the trial period to prove to Bank that I
am not a deadbeat; now after 90 days, give me my modification!’
5) OK, it is not
rocket science. Don’t pay the out-of-work
mortgage broker 1% of your mortgage to do this; this is not 5K-6K of
work!! I would charge a lot less, but I
nevertheless don’t do charity work.
