mortgage
The best moves in mortgages in 2009

Most prime adjustables during the 2004-2006 period were 3/1 and 5/1 ARMs. These loans had introductory rates that lasted for three or five years; after that the rates adjust (or "reset") annually. The date of that first rate reset peaked in the summer of 2008, but about half a million prime borrowers will see their first reset in 2009.

Prime ARM resets by month, number of loans

2009 smart moves: Modify the mortgage

One of the big questions of 2009 -- politically, economically and financially -- will be: How do we mass-modify mortgages to avoid foreclosures? Coming up with an answer won't be easy.

A mortgage modification is an alteration of the details of the existing home loan. Usually, but not always, a modification is done after the borrower has fallen behind on the payments by 90 days or more. In a modification, the borrower keeps the loan -- in other words, it's not a refinance. Modifications usually are done when the house is worth less than the mortgage balance.

There are several ways to modify a mortgage. Sometimes the term is extended -- for example, a 30-year mortgage is turned into a 40-year loan. In other cases, the rate is reduced. Or interest is charged on only some of the loan balance. Occasionally, in what's called a "principal reduction," the lender forgives some of the debt, so the borrower no longer owes more than the house is worth.

Modifications traditionally have been done one at a time, case by case. But skyrocketing demand for mortgage modifications will require companies to apply rules that apply to large swaths of borrowers. The rules will determine who gets a modification and who doesn't. Controversy will result when "deserving" people don't qualify for modifications, while some "undeserving" people do qualify.

When the government took over IndyMac, one of the country's largest mortgage servicers, the Federal Deposit Insurance Corp. set up rules designed to encourage mortgage modifications. Since then, the government has required lenders, such as Citigroup, to adopt the FDIC's mortgage modification rules as a condition for receiving federal aid.

It's too early to know how successful the FDIC's mortgage modification plan has been. Overall, modifications haven't been all that successful. According to the Comptroller of the Currency, more than half of loans modified in the first three months of 2008 had fallen behind on their payments within six months.

FDIC Chairman Sheila Bair questioned the comptroller's data, saying that it failed to distinguish "sustainable modifications versus cosmetic modifications."

2009 smart moves: home equity

Because of declining home values, lenders became reluctant in 2008 to underwrite new home equity loans and home equity lines of credit. That trend is likely to continue through 2009.

In areas where home prices are falling fastest, lenders have been reducing the limits on home equity lines of credit, or even canceling the credit lines outright. The best advice on home equity debt is the most basic: Keep paying the monthly bills if you can.

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