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    About Mortgage Modifications

    Mortgage Modifications are a change to a bank loan contract between the loan provider and the property owner. The whole purpose is to adjust the terms of the contract so that the mortgage is affordable for the borrower. Bank loan Modifications have changed in the last couple years due to the housing crisis. Previously they existed only in the form of an interest rate reduction for a period of time when a delinquent borrower was suffering from a specific type of hardship, as a divorce, illness or a work loss.  Now bank loan adjustments are provided for a wider set of situations and normally change the terms of the mortgage permanently.
    A key factor that makes a house owner qualified for a mortgage loan modification is the existence of a valid hardship.  A borrower must make sure they could prove the hardship and that it is approved for these individuals to apply for a modification.
    These are examples of hardship that give you a good probability of getting approved: Arms, adjustable rate Home loan reset payment shock, illness of a close family member dependent on you, loss of work (as long as there is proof you will probably manage to meet the altered payments), reduced earnings, death for the borrower , death of spouse or co-borrower, military duty, medical bills, damage to your residence, not being able to sell or rent the house.
    These 3 points are the keys to a of successful mortgage adjustments:
    a) It’s essential to manage to pay for the payments of a reasonable home loan modification.
    b) You will need to be experiencing some kind of valid hardship.
    c) You have to manage to prove it.


    This does have tax consequences

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    The Internal Revenue Service is offering guidance on property finance loan principal reductions in the federal government’s program for property finance loan alterations for borrowers who have fallen behind on their payments.
    The guidance in Revenue Procedure 2013-16 is designed to help borrowers, mortgage loan home loan holders and home loan servicers that are contributing in the Principal Reduction Alternative offered by means of the Treasury Department’s and Department of Housing and Urban Development’s House Affordable Modification Program, also known as HAMP-PRA.
    To guidance financially distressed house owners lower their monthly mortgage payments, the Treasury Department and Department of Housing and Urban Development developed HAMP, which is described at www.makinghomeaffordable.gov.  Below HAMP-PRA, the principal for the borrower’s mortgage loan may be reduced by a predetermined total called the PRA Forbearance Total if the borrower satisfies certain conditions during a trial time period. The principal reduction occurs more than several years.
    Less than this program, should the mortgage is in good standing on the 1st, second and third gross annual anniversaries on the effective date for the trial time frame, the mortgage loan servicing company cuts down the unpaid principal balance due for the mortgage loan by one-third of the initial PRA Forbearance Total amount on each anniversary date.
    The following means that should the borrower continues to make timely payments on the home loan for three years, the entire PRA Forbearance Total is forgiven. To encourage mortgage mortgage loan holders to participate in HAMP-PRA, the HAMP program administrator may make an incentive compensation to the home loan holder, known as a PRA investor incentive disbursement, for each of the 3 years in which the bank loan principal debt is lowered.
    The guidance issued Thursday night by the IRS offers that PRA investor incentive payments made by the HAMP program administrator to house loan loan holders are treated as payments on the mortgage loans by the United States federal government on behalf for the borrowers. These payments are normally not taxable to the borrowers under the general welfare doctrine.
    In the event the principal amount of a property finance loan home loan is lowered by an total that exceeds the overall amount for the PRA investor incentive payments made to the property finance loan home loan holder, the borrower might be required to include the excess amount in gross earnings as income in the discharge of indebtedness. However, many borrowers could are eligible for an exclusion from gross income.
    For instance, a borrower might be eligible to exclude the discharge of indebtedness income from gross income if (1) the discharge of indebtedness occurs (in other words, the mortgage loan is changed) prior to Jan. 1, 2014, and the house loan mortgage is qualified principal address indebtedness, or (2) the discharge of indebtedness occurs when the borrower is insolvent. To get more exclusions that might apply, see Publication 4681, Canceled Debts, Real estate foreclosures, Repossessions, and Abandonments (for Individuals).
    Borrowers receiving assist less than the HAMP-PRA program could document just about any discharge of indebtedness income-whether it is included in, or excluded from, gross income-either in the yr on the permanent modification for the house loan home loan or ratably greater than the 3 years in which the home loan home loan principal is lowered on the servicer’s books. Borrowers who exclude the discharge of indebtedness earnings should report both the total amount for the income and any kind of resulting lowering of basis or tax attributes on Form 982 Decrease in Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).
    The guidance issued Thursday explains that home finance loan mortgage loan holders are needed to apply a Form 1099-C with respect to a borrower who realizes discharge of indebtedness income of $600 or more for the yr in which the permanent modification on the home finance loan mortgage occurs. This kind of rule applies regardless of when the borrower chooses to document the income (that is, in the yr for the permanent modification or one-third each year to be the home loan loan principal is reduced) and irrespective of whether the borrower excludes some or all for the total amount from gross income.
    Penalty relief is provided for home finance loan home loan holders that fail to file and furnish the requested Forms 1099-C on a timely basis, as long as certain requirements described in the guidance are satisfied.

    underwatermortgageWriting the ‘Hardship Letter’

    One of the items your Bank or  lender will  require  from you  during the loan modification process is a hardship letter. A hardship letter is typically a written reason as to what  happened that  has caused you to fall behind on your mortgage and it is a key item  in helping you stop foreclosure or modify your mortgage agreement.

    This letter acts much like an outline or biography of your current issues that are affecting your ability to meet your financial obligations, and by this we mean not being able to afford your mortgage.  Lenders do look for what is known as a hardship letter when a borrower applies for a loan modification. Such a letter is a requirement for modification applications under the government’s Making Home Affordable program.

    A hardship letter is not the basis for modification approval that depends on the borrower’s financial situation and the red tape of the various government and Bank programs. Rather, the purpose of the hardship letter is to explain upfront, in simple language, why borrowers missed payments, and what they propose as a solution.
    less is more when it comes to writing a hardship letter,giving them exactly what they need and nothing more
    The lenders’ loss mitigators, faced with mountains of modification requests, are unlikely to spend time reading more than the first few lines of each letter.
    And there is always the risk that borrowers who go on at length could unknowingly trip themselves up with unnecessary details that raise red flags for a mitigator.

    When the housing bubble burst, home values dropped, and millions of homeowners who did the right and responsible thing—shopped for a home, secured a mortgage, and made their payments on time each month—were left with houses worth less than they paid for them and mortgages worth more than their homes. Today, many of these homeowners are locked out of refinancing because they are underwater.

    The hardship letter should open with a succinct explanation of why the borrower stopped paying the mortgage. The letter should cite a reasonable specific hardship, like a lost job, illness or reduced income.
    Next, the letter should briefly cite any steps the borrowers took to avoid defaulting on their loan, like cutting household expenses or tapping into savings.
    If their financial situation has since improved, or is likely to, borrowers should mention that as evidence that their hardship was temporary and won’t hamper their ability to make payments on a modified loan.
    Finally, the letter should state exactly what borrowers are applying for. Is their proposed solution a lower interest rate, for example, or a principal reduction?
    Borrowers who are underwater that is, owe more on their mortgage than their property is worth may ask their lender to consider a short sale, in which the house is sold to another buyer for less than the amount owed. Its widely  advised that homeowners considering a short sale apply to the bank before putting their house on the market.
    The fact that a home has lost considerable value should not be cited as the sole hardship. The borrower might include that information in the hardship letter, but he or she must also explain the inability to pay the mortgage

    In the case of a short sale, the hardship might be the borrower’s need to sell right away because of a job transfer or long-awaited employment opportunity elsewhere.
    One of the items your lender or servicer will ask for during the loan modification process is a hardship letter. A hardship letter is a written explanation as to what “event” has caused you to fall behind on your mortgage and it vital in helping you stop foreclosure.

    This letter acts much like an outline or biography of your current “life” issues that are affecting your ability to meet your financial obligations.

    Wells Fargo Mortgage Help

    It’s no secret that the economy has hit many people hard.  Families who used to be able to pay their bills on time are falling behind on mortgage payments; some are even facing the loss of their homes through foreclosure.  There is hope, however, for those who have their mortgages through Wells Fargo.  Wells Fargo offers several programs to help those who have fallen behind on their mortgage.

    Wells Fargo, founded in 1852 in San Francisco, is estimated to have insurance, mortgage, and investment dealings in one out of every three households.  Wells Fargo’s commitment to help its customers succeed financially has allowed the company to offer the following mortgage relief programs.

    1. Debt consolidation: Debt consolidation allows a homeowner to combine many higher interest credit card payments and loans into one lower payment.  While not eliminating your debt, it makes payments more manageable.  A debt consolidation loan will free up more money to bring a mortgage current and maintain timely payments on it.  Wells Fargo will study a homeowner’s payment history, credit history and ability to pay before extending this form of mortgage help to homeowners.

    2. Refinancing:  Refinancing a mortgage can allow a homeowner to lower monthly payments, get longer term loans, and change mortgage types.  Wells Fargo cautions that there may be origination charges, including processing and application fees, as well as discount point that can be used to further lower interest rates.

    3.   Repayment plan: It may be possible through Wells Fargo to redistribute back payments and repay them in future loan payments.

    4.  Attorney General’s Settlement:  Wells Fargo entered an agreement with the Attorney General’s office that permits them to help homeowners with their mortgage woes.  It allows the expansion of first or second loan modifications.  For homeowners with no equity in their home can qualify for an n extended first lien program.  The extended first lien program will not lower the principal, but it can help to lower interest rates for struggling homeowners.

    In order to qualify for the Attorney General’s settlement, homeowners must:

    In addition, the Attorney General’s agreement will allow a modified short sale of the home if necessary, with debt forgiveness to qualified homeowners.

    5.  Independent Foreclosure Review: IF the homeowner was involved in a foreclosure during 2009-2010, Wells Fargo promotes the Independent Foreclosure Review that will help to determine if the foreclosure was a legally valid one.

    Wells Fargo at https://www.wellsfargo.com/ offers many types of relief to a struggling homeowner.  They have a team of experts ready to answer any and all questions regarding any of the above options and can guide a homeowner in the direction of the relief program most appropriate to their circumstances.

    Making Home Affordable Act Eligibility and You

    March of 2010 saw an expansion of the Making Home Affordable Act, the Federal Housing Administration’s refinance program, which will give responsible homeowners the chance to remain in their homes despite financial hardships and duress.

    The Treasury Department and HUD, the Department of Housing and Urban Development, created these expansions to allow homeowners a chance to renegotiate their mortgages despite being upside down in their mortgage, a term used to mean owing more on the house than the property is worth.  These owners can now qualify for a reduced rate FHA loan.


    Because so many homeowners are taking advantage of the government –sponsored Home Affordable Refinance Program known as HARP there is a problem for many large financial institutions as regards keeping up with the applications backlog. In order to move things along more quickly some borrowers are using brokerages as well as community banks that are not servicing HARP loans.

    Michael Fratantoni who is vice president for research and economics for the Mortgage Bankers Association said that they had heard of waiting periods of 60 to 90 days for those asking for loans at larger banks running at full capacity.

    The weekly survey by the Mortgage Bankers Association released on Wednesday reported that almost 80 percent of the applications were for refinancing. About a quarter of transactions were HARP -related according to previous surveys. The purpose of HARP was to make refinancing easier for those who had mortgages either owned or guaranteed by Fannie Mae and Freddie Mac and who were looking for better loan terms. This program has since been expanded as HARP 2.0.  Mr.Fratantoni explained that  many who wish to refinance do so with the bank that they used for their first loan because they feel that things will go more smoothly and the bank has all the information to carry out the transaction. However the application process is more difficult now that the lending standards are tighter because of the mortgage crisis.

    A real estate lawyer in Astoria , Queens,  Andrew Latos, has represented  homeowners in transactions with big banks and he says that he now charges more for closings  due to the fact that they take much longer to do. He explained that what were two –hour closures are now more in the region of five or six-hour closures.

    Those who would like to speed up the refinancing process are increasingly taking their business to mortgage brokers who claim to have direct contact with the banks and can keep better track of what is happening with their client`s file. Vanessa Thatcher, a senior officer with Atlantic Home Capital in Ronkonkoma N.Y. says that a file has to pass through many hands in a large financial institution .She charges the clients 1 to 2 percent of the amount of the loan.

    Sometimes a broker can be a financial consultant at the same time .It often happens that Mark Yecies, who is the president of SunQuest Funding in Cranford N.J  tells his clients not refinance as he did recently in the case of a borrower who had been told that he was suitable for a refinance. After checking the numbers Mr.Yecies  saw that most of his client`s payment was principal so a refinance didn`t make sense.

    Community banks don`t process HARP loans and normally can do a refinance within 30 days are finding that it now takes longer due to the increased volume of loans.

    The big banks have had to increase staff to deal with the workload but can`t seem to refinance in less than 90 days.

    Want an AAA+ Investment? Pay Off Your Mortgage? Last year rating agencies reduced the U.S. credit rating and now it is AA rather than AAA even though the U.S. government has the means to print money legally. Investors these days would rather hold on to their money than pay to keep it in the vaults. Investing in a 10- year Treasury bond with the present inflation rate of 2·3 % means losing more than 60 basic points or 0·60% which is not a winning proposition. This does not mean that a AA-rated bond is not a good investment because even BBB could be considered investment worthy. However the investors are looking for more than such small Treasury returns in order to compensate for the higher credit risk involved. The problem is that carefree investing is hard to find and there is no real substitute for AAA-rated government bonds to be found at the present time. Some investment-grade corporates can return nearly 8% over 10 years, but these are in the category of BBB and certainly not AAA. The best returns for AAA 10-year corporate are in the region of 2% which is a negative real return because the inflation rate is 2·3% as of April 2012.

    Your home mortgage may be the best investment. Better than even the AAA-rated Treasuries in times past. The value of the credit rating you already have is possibly the best there is. Your mortgage is in fact an opportunity for investment with an exceptionally good credit rating so we are calling it AAA+. The only possible risk in repaying a debt is if there is a prepayment penalty, and we are assuming that this is not the case , so anyone with a mortgage is in control of their investment. This can be considered riskless as you don`t depend on the credit rating of the other party as you do when you invest in bonds. Mortgage rates are better than those of any other investment which means that your best investment is to call in your mortgage.

    In the situation where the borrower has taken out a 30-year mortgage for $300,000 at 3·75% the principal and interest payment is $1,389 per month. The present balance on the loan is $250.000 and the borrower is in the 33% marginal tax bracket making $250,000 a year. The question is whether it is better to invest the lump sum or to pay off the mortgage?

    First it is important to find an investment with a credit rating as good as the mortgage which we have given a AAA+ rating. There is nothing comparable but the best available would be a government guaranteed investment perhaps a Treasury bond. Calculating the after tax returns on a 10-year bond and comparing that with paying off the mortgage shows a 1·17% higher rate of return if you chose to repay the debt.

    Underwater mortgages create a huge problem for homeowners and lenders alike. When your home is worth much less than the balance on its mortgage it takes away much of the incentive for paying your monthly payments because most of us view our home as an investment not an expense.

    The government is trying to give homeowners an additional incentive to keep their homes by offering loan modifications and refinancing that improve the terms of their mortgages. There are four main ways to improve your mortgage’s terms: reducing your interest rate, changing from a variable rate to fixed rate, extending the term of your mortgage and reducing the amount you owe your lender.

    Needless to say lenders are not in love with any of these options with the possible exception of extending the term of the mortgage, which reduces your mortgage payments but can increase the overall cost of your mortgage. However, the less popular mortgage rescue method for lenders is without a doubt the reduction of the mortgage balance. However, research shows that reducing the balance of a mortgage is the most effective way of reducing delinquent borrowers, which is good for both lenders and borrowers. For this reason the government is trying to get Freddie Mac and Fannie Mae to pressure lenders into reducing the mortgage balance of their underwater clients. Fannie Mae and Freddie Mac hold or insure 60 percent of all mortgages in the United States and therefore has the leverage with the large mortgage providers.

    Edward J. DeMarco, the regulator of Fannie Mae and Freddie Mac, does not believe write-downs are the panacea their supporters present them as. "There’s no free lunch" he is often quoted as saying when asked why he doesn’t support he Obama administration’s efforts to incentivize mortgage write-downs.

    Although DeMarco does not support write-downs he is planning to provide lenders with incentives such as increasing financial aid for those willing to improve the conditions of underwater mortgages. Learn more about these incentives in our next post.

    Regardless of which loan modification program you choose to apply for, there is one document you will need to read and understand well: your mortgage statement. Unfortunately, most mortgage providers do not make an effort to make this documents particularly reader-friendly. They invariable use terms and expressions which you will probably never hear unless you are in the mortgage business. However, loan modification applications require borrowers to provide information they can only find in their mortgage statement.

    This article will describe the typical sections and terms used in mortgage statements. Although there are many mortgage servicers and they all use slightly different formats in their mortgage statements, they are similar enough for a general summary to be useful regardless of which mortgage servicer you are dealing with.

    Mortgage Servicer Contact Information

    This is found at the top right of the statement. It includes the company’s address, name, phone number and in some cases it will even specify the loan officer who processed your loan. This information is important because this is the address you will need to send loan modification application.

    Loan Number

    Mortgage servicing companies have thousands of clients. It may sound harsh but for them you are just a number, whatever their adverts say. You need your loan number as a reference so your mortgage servicer can identify you and your loan modification application. This number is usually at the top right of the statement, directly below or above the mortgage servicer’s contact details.

    Interest Rate

    You cannot know if a mortgage modification is a good deal for you unless you know what rate you are paying now. It is surprising how many homeowners do not know what their current interest rate is, even though this rate is the main factor—together with your mortgage balance—that determines the cost of your mortgage payments. The interest rate of your mortgage will be in the Summary section of your statement.

    Taxes Paid

    One of the quickest ways of losing your home is to stop paying property taxes. Your mortgage statement provides you with the total amount paid toward property tax for the year and how much is left in the escrow account to cover these expenses. More on what an escrow account is below. You can usually find the total taxes paid and the balance of your escrow account in the Summary section below the interest rate and the interest paid to date totals.

    Total Monthly Payment

    Government mortgage aid programs focus on the affordability of a loan modification and how much better off a borrower will be after the modification. These is mostly determined by the total monthly payment you have before and after the mortgage modification. The total monthly payment includes all types of payments related to the mortgage, such as insurance, taxes and interest as well as the payment of the mortgage principal. This figure is usually the last line on the Summary section of the statement.


    Borrowers can choose to send money every month to a special account as part of their monthly payment. This account is used to pay for additional expenses related to the mortgage, such as taxes and insurance. Mortgage statements include the monthly amount sent to the escrow account as an item in the “Activity since your last statement” section, which is usually at the bottom of the page below the Summary section.

    The government’s Home Affordable Modification Program is a powerful tool for homeowners who cannot afford their current mortgage payments, but can avoid foreclosure if only their mortgage provider is willing to modify their terms. The program does this by either extending the term of the loan—that is the amount of years you have to pay it—reducing the interest rate, forgiving a chunk of the loan (as you might have guessed this is not so common), by taking a portion of the loan out of the loan and postponing payment till the end of the mortgage term (also known as a balloon payment) or a combination of all the above.

    However, as useful as this program is, it is not for everyone. To qualify you must be able to meet the eligibility requirements of the program, which is designed to filter out homeowners who simply cannot afford a reasonable mortgage payment and help those who do have the financial circumstances to take care of a modified loan. Of course, many people who are able to pay for reasonable priced monthly mortgage payments fall through the cracks of the program because they do not do their homework and provide their mortgage servicers with the information they need to approve their loan modification application. This is often because the homeowner does not understand what is required or the meaning of some of the technical terms used in the literature provided by the HAMP program and the lender. This series aims to bring some clarity to the more complicated terms and processes included in the Home Affordable Modification Program.

    What is Your Net Present Value, or NPV?

    The net present value model is an important tool in the Home Affordable Modification Program. It is an equation (see formula above) that computes the reliability of future cash investments and is used widely in business to determine the profitability of an investment. In the mortgage setting the NPV assesses the likelihood of mortgage lenders profiting from a loan modification.

    Your net present value can be seen as a test which you can either pass or fail depending on if it is positive or negative. Your NPV is positive when the total discounted value of the expected cash flows for your proposed modified loan is higher than the total discounted value of expected cash flows without a loan modification. Wow, that was a mouthful. Put more simply, the NPV test determines whether modifying your loan is beneficial for the lender. If your NPV is negative it generally means your lender is better off not modifying your loan. Borrowers who score a positive NPV are viewed as a good investment to lenders because they are more likely to pay their mortgage and increase the returns on the lender’s investment with a loan modification than without.

    The Home Affordable Modification Program provides borrowers with the chance of permanently modifying their mortgage to a monthly payment they can afford. Not only that, the program can also help borrowers change their mortgage from a high-risk variable rate loan to a stable fixed-rate loan. However, for you to qualify for a Home Affordable Modification Program you must first complete successfully the program’s Trial Period Plan.

    Many borrowers get confused about the requirements of the Trial Period Plan, fail the trial and lose the chance of saving their mortgage from foreclosure. This article provides information on how to meet the Trial Period Plan requirements. The article is based on information provided by the Departments of the Treasury and Housing and Urban Development through their MakingHomeAffordable.gov website.

    Step 1: Fill in the three documents in the Home Affordable Modification Program Initial Package: 1) Request for Mortgage Assistance Form, 2) Tax Form 4506T-EZ (or Form 4506-T) and 3) the Verification of Income form. These documents can be downloaded by clicking here. Print two copies of each document, one for your mortgage servicer and one for your records.

    If you have trouble understanding the documents and you are not sure how to complete them, call 1-888-995-4673 and request to talk with a housing counselor. This service is free.

    Step 2: Send the documents to your mortgage servicer. You can find the address of your mortgage servicer by visiting this website. This service is provided by the MakingHomeAffordable website and includes all the mortgage providers who are enrolled in the HAMP program. The list of mortgage providers is organized alphabetically and provides the name, phone, address, fax number of all participating mortgage providers.

    Step 3: Check your mortgage provider has received all the forms and documents they need to confirm your eligibility for the HAMP program. Do this as soon as possible because if you are missing a form or have made a mistake in filling the forms you will need to correct the mistake or send the missing document before your trial period ends.

    Step 4: Make all your mortgage payments. This is crucial. Once of the main purposes of the trial period is to check the modified loan is suitable for you. In other words, your mortgage provider and the government want to know if you can afford the new mortgage payments. If you do not pay your monthly mortgage payments regularly during the trial period, you will not be granted a permanent loan modification.

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