(Part 2)
L ast week we discussed Part 1 of the Homeowner Affordability and Stability Plan or HASP which hopes to fix the mortgage meltdown by enabling qualifying homeowners to refinance or modify their mortgages. This will be accomplished by relaxing lending standards making it easier for borrowers to qualify for new loans and by rewarding lenders who provide those loans. The plan addresses two types of homeowners. The first type is homeowners who have good credit who want to refinance their houses to take advantage of current low rates of interest but cannot do so because the value of their houses have dropped too low, wiping out any equity. The administration estimates that the number of homeowners in this category is between 7 million to 9 million families. Here, HASP will allow loans to be made up of 105 percent of the property’s value. For example, client who filed bankruptcy 10 years ago, now has a perfect credit score, and comes to see me to get a loan modification to reduce his mortgage payment.
His house is currently worth $300,000. Balance of his mortgage is $380,000. There is no second mortgage. The mortgage is fixed for 30 years at 6 percent. Since client has good credit, under HASP, client will qualify for a refinance loan of $315,000 at the prevailing low 30-year fixed rate interest of 4.5 percent. If the lender will allow the refinance, lender will reduce the loan balance from $380,000 to $315,000, forgiving $65,000. Client’s mortgage payment will go down for two reasons: a) the mortgage balance is now $315,000 instead of $380,000 and b) the fixed rate interest is now 4.5 percent instead of 6 percent. Does client need a lawyer for this transaction? No. Client has good credit so all he has to do is go to a mortgage lender to see if he can get a refinance at $315,000 at 4.5 percent.
If client is not able to get a refinance at 105 percent of the property value despite his good credit, then he would need a lawyer to get the loan modified if he still wants lower mortgage payments and to bring the loan balance down to the current fair market value of the property. Lawyer will then try to get the loan modified under the HASP program.
The other types of homeowners covered by HASP are those who cannot afford their mortgage payments and cannot sell their homes, and have bad credit. HASP has allocated $75 billion to help them modify their mortgages to establish an affordable monthly payment. Homeowners with high debt to income ratio or mortgage balance in excess of their property’s value will qualify under the stability initiative.
If a lender is interested in participating in the HASP program, they must reduce mortgage interest rate or reduce the principal of the debt, or both, so that the borrower’s monthly mortgage payment is not greater than 38 percent of income. The government will then match further reductions in the interest rate dollar for dollar in order to bring the borrower’s debt to income ratio to 31 percent. Thus, if debtor’s income is $3,000, the mortgage payment should be reduced to $1,140. This seems to be a really good deal for the borrower. Thus, homeowners in this category should try to have their loans modified.
Loan modifications in this category are not permanent. Modified loan terms will remain in place for five years. Thereafter, interest rate will be gradually returned to the contract rate.
If lenders do not cooperate with borrower’s requests for loan modifications, the solution will be to file a Chapter 13 when the proposed amendment allowing bankruptcy judges to cram down the loan to the current fair market value of the house becomes law. By that amendment, bankruptcy judges will be empowered to modify the terms of a mortgage to benefit debtor by reducing the balance, reducing mortgage interest and payment. Congress passed the cram down bill two weeks ago, but it is not yet law right now.
If you need debt relief, contact my office. I will analyze your case personally.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803. (Advertising Supplement)
( Published on March 28, 2009 in Asian Journal Los Angeles p. C4 )
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