Many homeowners are facing challenging choices if their home equity is at or below zero–especially if their mortgage rates are well above current rates. Too often the first choice for these homeowners has been to accept a strategic default or pursue a loan modification rather than using one of the mortgage tools freely available for a mortgage refinance. With the many voices of the Obama Administration, Fannie Mae, Freddie Mac and lenders all sounding off, it can get confusing as to the options available for stretched homeowners.
When considering your options, use a mortgage loan payment calculator to easily see how much lower your payment will be if your mortgage rate and/or mortgage payment is reduced.
Fannie Mae Targeting Strategic Defaults
Recent reports show that one in five foreclosures are strategic defaults. Strategic defaults occur when home owners who can afford their monthly mortgage payments walk away from their homes and mortgages simply because their mortgage balance exceeds their home’s value.
Fannie Mae has altered its policy to address the issue, publishing updated mortgage eligibility guidelines in early 2010 for mortgage applicants who had undergone a short-sale or foreclosure characterized as a strategic default. Fannie Mae has indicated they will pursue collection of owed balances in states where deficiency judgements are legal, and prevent anyone who they can prove executed a strategic default from obtaining another Fannie Mae loan for seven years.
Home Affordable Modification Program Setbacks
To help counter the public tendency toward strategic default, the Obama Administration has committed $75 billion to the Home Affordable Modification Program (HAMP). HAMP assists lenders and homeowners with loan modifications; over 1.24 million homeowners have entered HAMP since its inception.
However, many prospective loan modification clients have been challenged by the lengthy loan modification process of many lenders, who are simply overwhelmed with modification requests. Many lenders are informing borrowers that until they are behind in payments, they cannot assist them. Thus, homeowners may risk damaging their credit with late payments while seeking the mere chance of a successful modification.
Ultimately, more than one-third of those enrolled have dropped out of the process, either determining they could refinance their mortgage for a lower mortgage rate and payment, or giving up on the process and going to default or short-sale. Only about 27% of those who have enrolled in the program have completed a modification and are making payments on time–meaning 73% have not been able to complete a successful modification to date.
In fact, analysts believe that among those families successfully completing loan modifications, the re-default rate one year after modification will be approximately 70%. Thus it appears that most modifications may only delay defaults, but not actually help families to retain their homes permanently. This is presumably due to the fact that most modifications are given to those families who are already several months behind in payments or exhibit other financial difficulties, which presumably continue to compound.
Government Refinance Programs
If you or someone you know is considering a strategic default or struggling with a loan modification, instead look into a Making Home Affordable refinance (known within the industry as D/U Plus Refinance) through Fannie Mae or Freddie Mac, or a Streamline Refinance through FHA.
- Making Home Affordable refinance. If your mortgage is owned by Fannie Mae or Freddie Mac, you may be eligible for a Making Home Affordable refinance of up to 125% of the current value of your home, which also lets you take advantage of the low mortgage rates now available. Most owners of second mortgages, home equity loans and lines of credit are cooperating by re-subordinating their mortgages to the altered first mortgage, to allow you to keep your home at a lower payment.
- FHA Streamline Refinance. If you currently have an FHA mortgage, your home you may be eligible for a lower mortgage rate with a Streamline Refinance, which doesn’t require an appraisal. Note that if you do not have mortgage insurance on your current FHA mortgage, you will not need to have mortgage insurance on your new FHA refinance either.
If your home mortgage is not owned by Fannie Mae or Freddie Mac and you have at least 3.5% equity in your home, you may still be eligible for a standard FHA refinance. Although FHA requires mortgage insurance, your monthly payment may still end up lower due to the extremely low mortgage rates now available.
Before considering a loan modification, short-sale,, or even default due to high mortgage payments, seriously pursue all your other available options. Use a refinance loan amortization calculator to determine your potential savings with a government loan modification or refinance.
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years’ experience in the mortgage industry.
