federal reserve

Answering reader e-mail

Thursday Jan. 7, 2010
Posted 3 p.m. Eastern

Today's post answers a couple of recent reader e-mails. The first question concerns the mortgage modification aspect of the government's Making Home Affordable program.

"I applied for MHA and was turned down. Our mortgage is 51 percent of our income but we've never been late. Their answer was to sell my home. If I can scrape by and make payments, don't I of all people deserve some relief?"

The reader didn't provide further specifics than what you see above, so I will address not to this one individual but for the multitudes of others in a similar situation. On the surface, many appear eligible when there could be an underlying reason they are not.

There is a progression that lenders must follow under the Home Affordable Modification Plan, or HAMP. This "waterfall" process is designed to reduce mortgage payments to 31 percent of household income. It begins by reducing the mortgage rate to as low as 2 percent. If that is not enough to reduce the payments to the desired 31 percent threshold, the next step would be to amortize the loan over an extended period of up to 40 years. Next on the list would be forbearing principal, essentially tacking it on to the end of the term and calculating the payment on a reduced principal amount. The final step is to actually reduce principal.

To enter into a modification agreement, the homeowner must submit required financial documentation such as tax returns, paystubs, and account statements, similar to obtaining a mortgage. Finally, the borrower must sign an affidavit of financial hardship.

It's this last component that can be a sticking point. Not only are 70 percent of borrowers that apply for a modification failing to submit the required paperwork, but they must have a documented financial hardship that has surfaced since the loan was initiated. This wasn't intended to be a financial handout -- though the government seems intent on pressuring lenders into making it just that -- which doesn't help anyone.

Many borrowers have experienced a lender that is either uncooperative or disorganized, so such an instance is certainly possible in this reader's case. Or perhaps upon assessing the borrower's situation through the prescribed waterfall, the lender determined they couldn't get the borrower close enough to 31 percent of monthly income without forgiving more principal that they'd lose in a short sale.

The second reader question is about savings.

"Please let me know where we can get a 4 (percent)to 5 percent interest rate for saving. At least enough so that it's more than keeping it in your mattress."

To get that type of return in a federally insured deposit account right now, you'll have to look at reward checking accounts. While yields of 4 percent or more are available, they come with some significant strings attached.

Typically, you'll need to sign up for online statements and have a regular direct deposit into the account. Okay, easy enough. But you'll need to use the debit card linked to the account at least 10 times per month, with some institutions requiring more. Fall short of that mark -- even by one transaction -- for any given month and your yield plummets to 0.5 percent or something similar.

Is this a fit for your financial lifestyle? If yes, then it's a slam dunk. But if not, you may expend some mental effort to train yourself at using the debit card often enough to score the higher yield, only to spend more months than not at the lower yield for failing to reach the critical debit card transaction threshold.


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