Homeowners who can't afford their mortgage payments can get a better deal from their lender. But the process is complicated and potentially onerous, and concessions are offered only to borrowers who earn neither too much nor too little income to meet the lender's guidelines.
"If they can afford to pay, they should pay. If they can't afford to pay, we need to make sure they have a fighting chance to make the new payments and pay back the loan over the long term," says Thomas Kelly, a spokesman for J.P. Morgan Chase, which also owns the Washington Mutual, or WaMu, and EMC brands.
See details of the mortgage modification policies for each institution:
Payment must be affordable, but also pay off loanAn "affordable" payment typically is defined as a targeted percentage of the borrower's monthly gross income. Thirty-eight percent is common, though some lenders use a lower or higher figure, usually between 31 percent and 41 percent. The new payment must be sufficient to pay off the loan, sometimes with the term extended to 40 years or some of the principal deferred until the loan is refinanced or the home is sold.
Some lenders also require proof that the borrower has suffered a severe financial hardship, such as a prolonged illness, disability, temporary unemployment, divorce or death of a spouse. Borrowers may be required to write and sign a "hardship letter" that explains their situation, explains Jumana Bauwens, a representative of Bank of America, which acquired Countrywide Home Loans earlier this year.
Loan modifications generally aim to achieve two specific and potentially contradictory goals, which are to:
- Create a payment that's affordable for the borrower.
- Collect all or as much as possible of the original loan amount.
The types of modifications that may be on offer vary from one lender to the next, but the most common are:
- A temporary or permanent interest rate reduction.
- An extended payback period (usually 40 years).
- A deferral of principal (usually at zero interest).
Though many homeowners may want their lender to write off part of their mortgage, especially if their home has declined in value, this type of modification, known as "principal reduction" or "forgiveness of debt," is offered rarely, if at all. That's because lenders:
- Are naturally loath to forgo money that's owed to them.
- May be restricted by contractual obligations to investors who own mortgage-backed securities.
- Don't want to trigger a stampede of borrowers who demand a loan modification because they owe more than their home is worth.
"The reality is that loan modification programs are about preventing unnecessary foreclosures. They are not about creating great investment opportunities. In most cases, in helping someone to stay in their home, we are worsening that house as an investment opportunity," explains Evan Wagner, a spokesman for IndyMac Federal Bank in Pasadena, Calif.
How the loan modification process worksThe best way to get started on a loan modification is to pick up the telephone and call the number on your monthly mortgage statement. Some lenders also accept requests via e-mail or through an online application, though the telephone is usually the preferred means of contact.