A RECENT article in USA Today revealed that tens of thousands who have modified their mortgage loans are actually winding up with higher monthly payments. Why is this so? Isn’t reducing your payments to make them more affordable the whole purpose behind doing a loan modification?
At this point, it is not clear whether the above is likely to continue under Obama’s $75 billion initiative to get lenders to reduce monthly payments for homeowners in trouble. The article goes on to say that currently, there are approximately 360,000 mortgage modifications in a 3-month trial period and of course, there is no telling how many of these mortgage modifications will ultimately be successful. If you have applied for loan modification and you are currently in this 3-month trial period, your modified payment will be more or less the same as the "trial period" amount. If you can’t even pay this amount, your mortgage modification may be a failure from the start because chances are that you will default again in the near future. In other words, the modification may have helped a bit but it hasn’t really solved your problem because you still can’t afford the modified payments.
Unless banks are willing to reduce the principal balance, a lot of people realize that there is no way for them to keep their home. Unfortunately, principal reductions are rare. If you are filing for Chapter 13 bankruptcy, however, it may be possible to convert your 2nd mortgage (if you have one) into an unsecured debt and do what’s called a "lien strip." For example: If you owe $450,000 on your first mortgage and another $100,000 on your second mortgage, it may be possible to "strip off" your second mortgage if the property value is below the amount of the first mortgage, let’s say only $400,000, in this example. The rationale behind a "strip off" is that although technically, your second mortgage is a "secured" debt, it is in reality an "unsecured" loan because there is no equity in the property to secure it with. A bankruptcy attorney experienced in handling Chapter 13 bankruptcy cases will be able to explain this to you in more detail so that you can get a full explanation of how it works. My point is that if the only way you can keep your house is to reduce the principal and it is not possible to do it with a loan modification, Chapter 13 may be what you need if you have the above scenario.
A loan modification can take several forms. If you have an ARM (adjustable rate mortgage), your loan may be converted to a fixed-rate loan. However, if all you’ve been paying is "interest only" on your original loan, your monthly payments will increase (not decrease) once your loan is modified and the balance amortized over 30-40 years with principal plus interest payments. Some people are OK with this because eventually, they know that their payments will increase anyway once their ARM re-sets. If your loan is already a fixed-rate loan, a rate reduction is probably all you can get since, as I mentioned above, reducing principal is the modification of last resort for a lot of lenders. If you are seriously delinquent, in either case, all your late payments are included in the restructured loan. One thing to remember when doing a loan modification is to have an end result in mind before even contacting your lender. Most homeowners are so confused about the whole process and a lot of them, I find, don’t even understand the terms of their current loan. If you are one of these people, you need professional help.
In some cases, loan modification may help you save your home but in others, it may be nothing more than a temporary solution. Bankruptcy can also be your best option if nothing else works. For a free consultation, call Toll-Free 1-866-477-7772 and we can help you explore all possibilities. We have offices in Glendale, Cerritos and West Covina.
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None of the information herein is intended to give legal advice for any specific situation. Atty. Ray Bulaon has successfully helped over 4,000 clients in getting out of debt. For a free attorney evaluation of your situation, please call Ray Bulaon Law Offices at TOLL FREE 1-866-477-7772.
( Published on September 23, 2009 in Asian Journal Los Angeles p. B2 )
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