Five myths about the US Government’s home loan modification “bailout”

Very few home owners in San Diego have access to the program

by Brian Flock

There are a number of myths in the market about US government programs intended to address the traumatic economic situation in housing market, including our local market in San Diego County. At least five common myths in the mind of the consumer public should be dispelled and addressed with action on the part of homeowners with burdensome home loans.

MYTH #1: “The government will save my home.”

FACT: The US government is fighting very hard to salvage the economic engine of the country and certainly housing factors into that as the largest single purchase of most peoples’ lives. Further, a home is the symbol of the American dream.

However, in the end, only the homeowner/borrower has the power to and can decide to save their home. The government simply provides a vehicle of lower interest and an extended payment term but no debt forgiveness.

There is no “free money” in the Government proposals for distressed homeowners.

MYTH #2: “The Making Home Affordable (MHA) modification program rewards my good credit history.”

FACT: Although the program does include extra incentives for participating lenders to help distressed borrowers with a good payment history, the program also provides incentives for borrowers who are well behind in their payments.

It is essential for home owners to understand that the Making Home Affordable program keeps borrowers in their homes only by lowering monthly payments.

The MHA does not lower the principle of the loan, even for those who have never been late on their loan.

Therefore the MHA is more akin to a pain reliever or band-aid than it is a solution to the financial dilemma of owing much more than the market value of a home.

MYTH #3: “Obama’s MHA program will eliminate my excess loan debt.”

FACT: As stated previously, the MHA program is simply intended to give certain qualifying people the opportunity to keep their home. However, the program itself does not forgive any debt or accrued penalties or fees.

What the program does is to lower monthly payments by applying a lower interest rate of 2% and an extended loan term of up to 40 years which does lower the monthly payment. However, the fact is that all principle and accrued interest or penalties must be paid back over time.

The following is an example of before and after an MHA modification:

Clearly the modification of this loan would result in a huge reduction in the monthly mortgage payment. Yet the loan balance and owner’s equity position are unimproved making the home unmarketable until housing prices recover.

MYTH #4: “All home loans are eligible for the MHA modification program.”

FACT: Most loans on homes in San Diego are not eligible for the Making Home Affordable modification program.

In order for a borrower to be eligible for the MHA modification program, all of the following must be true:

1.       The home must be the borrower’s primary residence

2.       The loan must be less than $729,750

3.       The loan balance can be no more than 25% higher than the market value of the home.

a.       Example: A $300,000 loan on a home that is now worth $200,000 would not qualify because the loan is 50% higher than the house.

4.       The borrower has a bona fide financial hardship

5.       The loan was received before 2009

6.       The current loan payment must be more than 31% of the borrower’s monthly gross income.

7.       The loan is a “conforming” Fannie Mae or Freddie Mac loan

Therefore, these qualifications exclude:

·         San Diego home owners whose loans exceed their home value by more  than 25%--possibly the majority the home owners who have purchase between 2002 and 2007

·         Borrowers who don’t have a bona fide hardship or who qualify for a regular refinance

·         Jumbo loans and other non-conforming loans

·         Investment properties

In these cases, homeowners are wise to proactively face their alternatives of refinancing, short sales, foreclosure, or even bankruptcy, thereby getting a fresh start from an incredibly difficult time in the economy.

MYTH #5: “All lenders that received Government bailout money are obligated to offer the program.”

FACT: The MHA modification program is a voluntary program whereby the Government tries to encourage lenders to perform modifications through modest financial incentives. In reality, the independent lenders are not highly motivated by the MHA incentives and many don’t actively participate.

Borrowers who don’t qualify for the MHA modification or whose lender doesn’t participate should consult with a licensed real estate and tax accounting professional to understand their options. They should also avoid predators who promise “clean solutions” yet charge exorbitant, up-front fees for what can be obtained for free or at low cost.