Dave Peterson of Warren County read our recounting of the Crisciones — the family that struggled to get a modification on their second mortgage.

Peterson had a story, and a question, of his own.

Working in sales, Peterson earns as much as 50 percent of his salary from commission. In this economy, he’s watched his income drop. In March, Peterson’s wife lost her job. She’s since found work, but the couple still had great concerns about meeting financial obligations.

Back in February, the Petersons requested a modification from their lender, Chase Home Financial. They filled out forms and wrote a hardship letter. After many follow-up calls, faxes and e-mails, they were offered a modification that would significantly reduce their mortgage payment.

The couple were thrilled. Then they asked the $64,000 question: what would happen to their credit scores?

“Considering our predicament, we figured that a slight hit to our score was worth it in return for the lower payment,” Peterson said.

They had concerns because their daughter would finish high school in two years, and then, they were planning to downsize. They’d need to maintain their high credit scores — in the 700s — for favorable terms on a new mortgage.

“We wanted, in fact demanded, that before we took this modification any further, that Chase explain what were the potential short- and long-term ramifications to our credit scores,” Peterson said.

No one at Chase could tell them, so they withdrew their application.

THE IMPACT OF THE MOD SQUAD

There is no clear answer to Peterson’s question.

There are guidelines by the Consumer Data Industry Association, a credit reporting trade group. These recommend lenders report modifications as “partial payments.” Not good for credit scores.

John Ulzheimer of Credit.com called the guidelines “horribly premature’’ because no studies have indicated people who modify are actually higher credit risks than those who don’t.

“They sentenced hundreds of thousands, maybe millions, of consumers to lower scores. And, scared others out of taking advantage of the loan mod programs,” Ulzheimer said.

To confuse consumers even more, not all lenders follow the guidelines.

That may change on November 1, when lenders can use a new code to report them as a “loan modification under government program.” The code will clarify which borrowers have taken modifications, but because the modification process itself is not streamlined, it won’t be the only worm squiggling out of the can.

The bigger impact on credit scores may depend on how the loan was modified.

A loan can be refinanced through the same lender with the same account number, said Jennifer Costello, a spokeswoman for the credit bureau Equifax. The updated account status, including the new loan amount and any term changes, would be reported to the file. (Probably a negative credit mark.) Or a lender may close the original account to refinance the loan, Costello said.

“Sometimes the decision is made to close the original account in order to refinance the loan,” she said.

Costello said in this case, the credit file would reflect two loans: the original account number showing the account has been closed, and a new account number for the new mortgage.

If the old account is closed and the lender doesn’t report it as a modification, it may appear on a credit report like a traditional refinance — not a bad mark at all.

It makes sense for credit scores to take a hit after a modification, said Tom Kelly, a spokesman for Chase, Peterson’s lender.

Because of privacy concerns, Kelly couldn’t specifically discuss the Petersons, but he offered this story: Say two borrowers purchase homes on South Main Street on the same day, for the same amount, with the same mortgages. The borrower at 2 S. Main St. pays his mortgage every month, but the borrower at 6 S. Main St. is having a financial hardship. He gets a modification lowering his monthly payment by $600 a month, or $7,200 a year, or $72,000 over 10 years.

“The family at 2 S. Main St., in fairness to them, they should have a better credit score than the family at 6 S. Main St.,” Kelly said.

But no one can say exactly how your score would be affected. It seems even the credit-scoring companies aren’t sure.

“Whether a loan modification affects the borrower’s FICO score depends on whether and how the lender chooses to report the event to the credit bureau, as well as on the person’s overall credit profile,’’ said Tom Quinn, vice president of global scoring for FICO.

Like every modification, every borrower is different. Some may have scores in the 700s, like Peterson, while others may have less-than-desirable credit from the get-go. Because scoring companies like FICO treat scoring formulas as a trade secret — think KFC’s special recipe — lenders can’t simply plug in a few numbers and tell a borrower what impact a modification would have on their score.

TO MODIFY OR NOT TO MODIFY?

Credit score concerns are valid because future scores will have an impact on your future borrowing abilities. A lower score will mean higher borrowing costs on loans of all kinds.

But given the choice between a hit to your credit score or losing your home — which will also hurt your score — it makes sense to keep your home at all costs.

Ask your lender how it plans to report the modification, said Steven Katz, spokesman for the credit bureau TransUnion.

But don’t be surprised if the lender can’t tell you, just like Chase couldn’t tell the Petersons. It’s not that they were keeping a secret. They simply don’t know the answer.

UPDATE ON THE CRISCIONE FAMILY

There’s more to report on our first frustrated modification family, the Crisciones. Bamboozled helped nudge CitiMortgage to refocus on the Somerset family’s request for a modification on their second mortgage, and they got a deal lowering their monthly payment from $1,268 to $518 a month..

The couple said they had similar problems with modification requests on their first mortgage, so Bamboozled contacted their lender, Wells Fargo. Wells Fargo said it lacked a document or two, and once those papers were in, within two weeks, the Crisciones had a deal: the mortgage balance will be reamortized into a 39-year fixed-rate loan at 4.25 percent, reducing payments from $2,728 to $1,979.

“We think this is great,” said John Criscione. “Between the two, Citi and Wells, we’ve reduced monthly payments by $1,498 per month or an average of 37.4 percent between the two loans.”

John Criscione doesn’t know what will happen to his credit score in the wake of two modifications.

“Realistically, it’s the price to pay for survival,” he said. “In time, credit scores are repaired. It’s always give and take; should I have abandoned property and assets or ended up homeless for a good credit score? I don’t think so.”

Source:  New Jersey Business News

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Even thought the new Obama Making Home Affordable Modification Plan may appear overwhelming at first glance, it is important to understand the process and guidelines of how your lender / servicer will need to lower your monthly mortgage payments to get an approval for a loan modification.

There are several key components of the Home Modification Program that are all focused on one simple goal: to reduce monthly mortgage payments to sustainable levels for the purpose of stabilizing communities, preventing foreclosures, and slow the downward pressure on property values.

To accomplish this goal, the Treasury Department has allocated $75 Billion in a partnership with financial institutions and investors to basically help lower homeowners’ monthly mortgage payments to 31% of their verifiable gross monthly income.

How do I calculate a 31% Debt-to-Income Ratio?

This means that if your monthly income is $1000, then your total principal, interest, taxes, insurance (including homeowners insurance and hazard and flood), and homeowners association fees cannot be higher than $310.

*Mortgage insurance premiums and second mortgage payments are excluded from that ratio and applied to the total monthly Debt-to-Income (DTI) ratio, which needs to be lower than 55% without having to speak with a HUD-Approved counseling agency first.

*The total DTI ratio is a factor for a home loan modification approval which takes into account all other monthly expenses and liabilities included on the financial worksheet submitted with the complete application package.

To get your monthly payment down to the 31% Front-End target under the Making Home Affordable plan, lenders have the following options:

1. Interest rates can be reduced as low as 2%

2. Lenders can extend the term of the loan up to a max 40 years

3. Forbear principle at no interest

The modification program goes through an initial 90 day trial period and then the modified payments will be kept in place for five years where the loan rate will be capped for the life of the loan. After the five years, the interest rate can be gradually stepped-up by 1% per year to the conforming loan survey rate in place at the time of the modification

Keep these things in mind when negotiating for a home modification loan:

• Borrowers can only qualify for the Making Home Affordable Modification Plan one time, which is why understanding your negotiation position is vital to ensure you get the best deal for your future financial goals and expectations.

• Pay close attention to your current and expected budget when filling out the financial worksheet.

• Make sure to analyze the difference between getting a lower interest rate with a shorter term vs taking a higher rate at a 40 year payoff plan.

• If a Forbearance is needed to qualify, make sure you are prepared to payoff the remaining balance if your home value does not increase by the time you are ready to sell.

• It is important to budget for the increase in interest rates after the five year modification term.

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BENEFICIARY - The beneficiary in a foreclosure context is generally the mortgage lender. Frequently referred to as the “Benny”.

CREDIT COUNSELING – Under the new bankruptcy law which took effect in October of 2005, those wishing to file bankruptcy must complete an approved credit counseling course within the six (6) months prior to filing.

DEED IN LIEU OF FORECLOSURE – The voluntary surrender of property by an owner/borrower to a lien holder that eliminates the need to continue foreclosure action by the lien holder. The lien holder can refuse to accept the Deed in Lieu and file a Notice of Non Acceptance with the County Recorder.

DISCOUNTED PAYOFF – The payoff of a mortgage loan where the lender accepts an amount less that the actual amount owed to payoff the loan.

EQUITY DEFICIENT- A property is Equity Deficient when, if sold, sale proceeds would not fully pay off existing mortgage debt.

FORBEARANCE AGREEMENT – An agreement between a mortgage holder and a borrower that lays out a specific loan payment plan and often puts a stop on the foreclosure action so long as the borrower meets the terms of the agreement. The payment plan includes provisions for repayment to the mortgage holder of all delinquent interest and fees and could include extending the life of the mortgage beyond the original terms. A Forbearance Agreement is a tool that allows the borrower to keep the property.

JUDICIAL FORECLOSURE – A foreclosure action conducted through the courts instead of through a foreclosure trustee. Judicial Foreclosures are very uncommon in California, particularly on residential properties. Should a lender elect to pursue a deficiency judgment, it would be through a Judicial Foreclosure.

JUNIOR LIENS – A lien, usually a mortgage loan, that is subordinate to a Senior Lien, usually a first mortgage. Lien priority is generally established by recordation. NOTE: if you refinance a 1st mortgage on a property with a 2nd mortgage already in place the new 1st mortgage holder will require a subordination agreement from the Junior Lien holders to legally establish the new mortgage holder as 1st or Senior Lien holder.

LIBOR (London Interbank Offered Rate) – The interest rate charged among banks for short-term Eurodollars loans – LIBOR is a very common index for adjustable rate mortgages (ARM).

LOAN MODIFICATION – An adjustment to the terms of a mortgage, usually to assist a homeowner who has gone delinquent on the mortgage, or one for whom mortgage difficulty appears unavoidable. Among the most common modifications are adjustment to payment terms, adjustment to the interest rate or shifting of delinquent amounts for repayment later in the loan term.

LOSS MITIGATION – Home mortgage lenders look to limit losses on delinquent mortgages by working out solutions with borrowers through their Loss Mitigation Department.

NOD – Short for Notice of Default

NOTICE OF TRUSTEE SALE – An official notice that is posted, mailed, published/advertised and recorded by Trustee at the direction of lender indicating lender’s intention to sell the property at public auction. The notice typically includes a specific date, time and location.

POSTPONEMENT – Trustee Sales may be postponed by the Trustee at the direction of the lien holder. Notice may be given in advance or at the time and location specified for the intended sale.

PRIVATE MORTGAGE INSURANCE (PMI) – A policy of insurance paid for by the borrower to protect the lender in the event the borrower defaults on the mortgage. Typically PMI is required by the mortgage holder when the down payment is less than 20% of the purchase price.

REO - Short for Real Estate Owned. When a mortgage lender acquires a property, typically through foreclosure, it becomes real estate owned or REO.

SHORT SALE – The sale of a home which is completed through negotiation with the existing lender(s) in which the lender(s) agrees to accept less than the full amount owed to satisfy the debt allowing the debt to be “paid off” short.

TRUSTEE (Foreclosure Trustee) – A Foreclosure Trustee is appointed by the mortgage company when a mortgage reaches default status for the purpose of processing the foreclosure.

TRUSTEES DEED – The deed given to the highest bidder at auction or to the foreclosing lender upon completion of the foreclosure.

TRUSTEE SALE – Conducted by the Trustee. The property is sold at auction to the highest bidder or taken back by a foreclosing lender.

A loan modification is simply an agreement between a homeowner and a lender to renegotiate the original terms of the mortgage loan.

Generally structured as a long-term solution for a borrower whom is unable to continue making their mortgage payments on a personal, investment or commercial property, a loan modification can include the following.

• Reduction in interest rates
• Principle reduction
• Longer loan term
• Payment holidays
• Changing an adjustable rate to a fixed-rate mortgage
• Elimination of late fees and penalties
• Elimination of past due balances
• Stopping foreclosure proceedings

With the rapid decrease in property values, loss of jobs and other factors which have resulted in 1 in 8 home owners being behind on their payments, many mortgage lenders and servicers are taking into consideration the option to modify loans vs following through with a foreclosure.

Keeping in mind that a lender / servicer has a fiduciary responsibility to protect their investors’ best interests when negotiating new loan payment terms through a mortgage modification, a successful loan workout may involve a Net Present Value test, borrower hardship letter, and a properly submitted request package.

However, one of the key components in a Loan Modification is that a borrower has to demonstrate that they will be able to make their mortgage payments on time going forward if the terms of the mortgage loan are changed.

With the Treasury Department has reporting that some some lenders are receiving upwards of 8,000 to 10,000 calls a day, communication obviously becomes one of the main challenges for homeowners in need of fast results and clear instructions.

Loan Modification Process

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• Required Documents For A Loan Modification
• Writing A Loan Modification Hardship Letter

The main purpose of a loan modification hardship letter is to convince your lender that you will be able to pay your monthly mortgage payment on time in the future if they modify your loan.

Basically, your lender has to make a calculated decision based on your current financial and employment status to determine if you will be a good candidate for a loan modification.

While the “Hardships” that may have contributed to your unique scenario are important to include in this letter, it is essential to focus on the positive aspects that will secure a mutually beneficial relationship between you and your lender.

_________________________

This outline will help you structure an acceptable hardship letter:

Lender
Address
Phone

Homeowner Info
Mailing Address
Contact Numbers
Loan Numbers

RE: Subject property address

Intro -

Describe the type of outcome you are seeking from the lender and why it is important for you to keep your home.

Reason for the Hardship -

A brief explanation about the circumstances that lead to your decision to seek a loan modification. Whether it is an increase in rate or payment due to an ARM, a reduced income, illness or death in the family, or a combination of factors, just lay out the facts.

This is not an attempt to gain sympathy, it is simply meant to communicate with the lender so that they have a better understanding of your story.

*Depending on your specific scenario, it may be acceptable to include proof of any blatant lender violations that ultimately contributed to your hardship.

Transitioning into the income and employment portion of the letter, explain to the lender your game plan for paying a desire mortgage payment on time.

Income / Employment -

Verifiable income, employment stability and current monthly liabilities are the main things a lender analyzes in the loan modification process.

As a general rule of thumb, lenders like to see your new mortgage payment at 31% of the total gross monthly income that can be verified on paper.

* EX:  How To Determine 31% DTI

An explanation about your work history, expected earnings, and expected job security always helps.

Monthly Budget -

Another important factor to pay close attention to is your monthly budget.

If your lender sees that certain luxuries such as cable, entertainment, non-work related travel, or dining out expenses have not already been eliminated from your life, then they may feel that you are not serious about saving money.

Highlight any details of the attached budget worksheet that the lender may question. For example, special schooling, child care, medical bills, employment related expenses, travel…

Representation -

Include the contact information and release giving permission to your loan modification team to speak to your lender on your behalf.

*Remember, your lender is a debt collection company and may use anything you say or do in a manner that strengthens their position against you.

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• Do I Qualify For The Obama Making Home Affordable Modification?
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Even though the foreclosure process may vary from state to state, there is still a similar time line of events that take place prior to a final sale of a home in foreclosure auction.

The Home Affordable Modification Program has extended this process out a little by allowing homeowners the opportunity to have enough time to work out an affordable solution with their current lender so that everyone can avoid a costly foreclosure.

I’ve written this article as a quick reference for the person who is potentially facing being in foreclosure.

Please keep in mind that this article is just a reference and you should seek the counsel of an attorney affiliated modification company for specific instructions on how to avoid foreclosure.

Foreclosure Process Time lines

Even though foreclosure proceedings technically can start after the first payment is missed, most banks will allow a grace period of up to 29 days before they report your payment history to the credit bureaus and start escalating things to the next level.

At 90 days behind, the bank will start the actual foreclosure process by either a judicial sale sale power of sale. The main difference is that a judicial sale involves the courts and the power of sale can be handled directly by the mortgage holder.

On average the foreclosure process takes around 6 months to complete. After a property owner has officially defaulted on a loan, the foreclosure process can be as brief as two months in states following nonjudicial foreclosure processes, or more than a year in states utilizing judicial foreclosure methods.

For a detailed list of foreclosure laws by state, check out ForeclosureLaw.org.

Pre-Foreclosure

After one or two missed mortgage payments (30 to 60 days), a property is considered to be in pre-foreclosure. Lenders may issue a Demand Letter and request complete and immediate payment of the loan, plus late charges, penalties, and legal fees. If the homeowner doesn’t pay the debt in full within 30 days, the foreclosure process moves forward in earnest.

Notice of Default

Once the mortgage payments have gone a total of 90 days late, the bank, an attorney, or sheriff will issue a Notice of Default(NOD) in the form of a certified letter to the homeowner. The NOD outlines the terms of the homeowner’s responsibility to repay the debt as well as offering any possible solutions for reinstatement of the loan.

At that same time, a notice of foreclosure is recorded with a local government agency, the debt is publicly announced in a local newspaper, and a date selected for a foreclosure auction. Issuance of the NOD also triggers opportunities for investors and homeowners to negotiate short sales, which is why the mail, phone, and door solicitations start rolling in.

The Auction

The goal of this part of the foreclosure process is simple: recover the lender’s losses. The opening bid is named by the lender initiating the foreclosure process. After bidding is complete, a purchase contract is issued to the highest bidder. If no bids are received higher than the opening bid, the lender purchases the property and puts it back on the market as bank owned real estate (REO).

We receive several questions about how a loan modification may effect credit scores.

Even though we have heard many horror stories about lenders requiring a homeowner to be 90 days late on a mortgage before the bank will consider negotiating a fair loan modification solution, there is new hope to save your credit with the Obama Administration’s Making Home Affordable Program.

While “proof” of imminent delinquency may be best acknowledged by a bank in the form of a homeowner missing several payments, the threat of a job loss, adjusting payment terms or other hardships may be all a lender needs to be presented with in order to consider an approval for a mortgage modification.

Unfortunately, when lenders steer homeowners down the path of missing payments will end up damaging their credit scores. Late payments that result in a Notice of Default after 90 days have a significant negative impact on credit, and will create challenges in the future for mortgage purchase or refinance approvals, rental applications, as well as limit available funds on current credit cards.

If you have been tricked into going late on your mortgage payments just to save your home, a good attorney backed Loan Modification Company could influence your lender to erase their negative reports to the credit bureaus with the threat of litigation.

Since, a successful loan modification does not require a homeowner to be late on their mortgage for approval, there is hope to preserve your credit score. A loan modification is simply a re-negotiation of the terms of your mortgage with your current lender.

Whether it is a reduced interest rate, longer term, or a principle forbearance, the main objective of a loan modification is to create an affordable mortgage payment that fits the borrower’s current life scenario.

Establishing a timely mortgage payment history may actually help improve credit scores, especially if it makes things easier to pay other monthly credit obligations.

With regards to the 90 day trial period for the Making Home Affordable Program, it is important to make sure that your lender/servicer does not report your mortgage payments late while they review your case for approval.

This can be taken care of by having the lender/servicer sign a notarized document stating that they will continue to report your monthly mortgage payment “As Agreed” while you are going through the loan modification negotiation process.

Even though a short sale, foreclosure, or short refinance may have a negative effect on your credit score, a well negotiated loan modification will actually help to improve your credit standing over time.

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The Net Present Value (NPV) is one of the main components in obtaining an approved loan modification.

Whether a homeowner is looking at a traditional loan workout or fits the criteria for the Obama Making Home Affordable Loan Modification Program, the servicer / investor has to determine the best course of action that will benefit their bottom line financially.

While a properly written hardship letter, complete loan modification package, and an overall loan analysis do play a major role in a homeowner’s eligibility for new mortgage terms, the final decision may depend on simple math.

Basically, the servicer / lender is acting as a debt-collector when negotiating a future loan modification workout scenario, and their primary objective is to protect the investors who have backed the mortgage debt that is potentially facing a default scenario.

Technically speakinng, the Net Present Value is defined as the total present value (PV) of a time series of cash flows. It is a standard method for using the time value of money to appraise long-term projects.

To translate NPV in a more comprehensive manner as it applies to a homeowner, it simply boils down to a mathimatical calculation based on which scenario will cost the bank less money in the long-run. In essence, NPV compares the value of a dollar today to the value of that same dollar in the future.

Controversy surrounding the Net Present Value test mainly deals with the various sets of investors in a pool of mortgage servicing agreements, and which outcome seems to be the most beneficial to the group as a whole.

Different classes of investors would benefit differently from a decision to foreclose and receive cash sooner vs others that would be better off modifying the mortgage term so that they could collect cash over time.

One of the primary objectives of The Making Home Affordable Program was to create a standard set of guidelines that servicers / investors could follow to help modify mortgages and keep homeowners in their properties.

Since the common theme with all of these loan workout plans seems to be finding the best possible outcome for the investors, it helps explain why homeowners feel frustrated when common sense decisions to lower monthly payments or forbear principle aren’t easily reached.

However, as property values continue to decline in many areas around the Country, servicers, investors, and the government are working hard to reach solutions that will help stabilize the economy.

Since we can’t necessarily control the actual results of a Net Present Value test, a successful loan modification still depends on submitting the proper documents and package to a servicer for approval.

A recent Wall Street Journal article – A Short Sale May Not Mean You’re Home Free, describes how homeowners are being sued by their banks after a short sale or foreclosure.

For homeowners who have been unsuccessful in negotiating a loan modification on their own, the two other options are generally a short sale or foreclosure.

Because a short sale involves negotiating with your bank to accept a payoff in an amount less than the current principal owed, some banks are requiring homeowners to sign a promissory note which gives the lender legal recourse to recover the difference in the unpaid amount.

According to Economy.com, the number of homes that will be lost in 2009 and 2010 due to borrowers not being able to make their mortgage payments is anticipated to rise to 3.8 million.

And more recently, the Congressional Oversight Committee announced that there could be upwards of 10-12 million foreclosures in the next 24 months.

One-Year Moratorium

HSBC Finance, part of the North America unit of HSBC Holdings PLC, has implemented a one-year moratorium on the collection of deficiency balances for short sales and foreclosures that occur after April 1, “given the current economic environment,” a company spokeswoman says.

Other mortgage servicers say their actions are often dictated by their contracts with investors or mortgage insurers. Bank of America Corp., for example, will “attempt to seek a promissory note whenever it is feasible” in a short sale “in the interest of protecting investors and shareholders from the losses,” a spokeswoman says. In the case of a foreclosure, the investor or insurer “is generally the one who pursues the deficiency, but we do ourselves on some-bank-owned assets,” she says.

Not every troubled borrower is hit with such a claim. Often, mortgage companies don’t go after borrowers for unpaid amounts either because state laws prohibit or limit such actions or the cost outweighs the potential return. Borrowers subject to a deficiency may also elect to file for bankruptcy in an effort to have the debt discharged.

How a borrower is treated can depend on mortgage company policy, the size of the unpaid debt, whether the borrower has a job or other assets, or whether the home was bought as an investment. “If there isn’t a financial hardship … that’s where the investor or mortgage insurer will go after the homeowner for more,” says David Knight, a senior vice president at Wells Fargo & Co.’s home-mortgage unit.

A PMI Group Inc. spokesman says the mortgage insurer “primarily target[s] borrowers who are not experiencing hardship — but those who simply elected to walk away from the property due to its decline in value.”

The Importance of a Hardship Letter

Based on the above comments from a few national lenders, it is obvious how important it is to clearly present a real hardship to your bank during the negotiation of your loan modification or short sale.

With real estate values continuing to decrease, more mortgage companies are starting to pursue former homeowners for unpaid mortgage debt.

Simply walking away out of frustration and letting your home go into foreclosure may not be the smartest move.

Make sure you read all documents carefully, and be very cautious what you say over the phone when contacting your bank directly. Keep in mind, banks are acting on behalf of their best interest and are recording every conversation, just like all debt collectors do.