Saturday, December 8

Mortgage 'Rate-Freeze' Does Not Delay Loan Resets

It is already out that the mortgage agreement may bring about some gaming of the system, such as intentionally lowering your FICA score by not paying other bills in order to have a FICO score lower than the qualifying limit score of 620. Well here is another area that the agreement can be gamed; Don't sign any mortgage adjustment agreement. By not signing, your rate will still be frozen; Keeping it from going up, but it will still be possible to go down if interest rates drop, because they never got you to sign in agreement with the change:
We recognize that servicers will not be able to make confirmed contact with all borrowers, particularly those in Segment 2 who meet the FICO test and for whom detailed analysis is not required. ASF is of the view that borrowers who fall within the eligibility criteria for a fast track loan modification should not fail to receive a modification solely due to the servicer’s inability to obtain a signed agreement. Generally, it would appear reasonable for a servicer to deem a borrower to have consented to the terms of the modification, if notice of the modification has been sent to the borrower, and the borrower has made two monthly payments under the loan as modified after receiving notice of the modified terms in accordance with the modification.

Where the borrower has not signed an agreement evidencing the modification, there may be a question during periods when the fixed rate under the modification is greater than the adjusted rate that would have applied under the original mortgage note. If appropriate, the servicer may determine that the rate that should be charged during such periods should be the lower adjustable rate. - Mortgage Agreement (PDF Document, page 8)
This scheme keeps getting better all the time. But it is not all good news for these 'distressed' borrowers as this rate freeze will not extend the interest-only time period of the loan. So while their interest rates will be frozen, the amount that they pay will not as the loan reset will happen as originally scheduled:
For loans that require payment of interest only prior to the initial reset, followed by amortizing payments, the rate would be kept at the current rate during the modification term, but the borrower would be required to make an amortizing payment beginning after the reset date. - Mortgage Agreement (PDF Document, page 9)
This is probably one reason why the agreed-upon mortgage relief is going to help so few homeowners, because very few of them can afford to pay off what they owe, even at a reduced interest rate.



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Forrest Cutler said...

Any updates with new loan modification programs now they seem to be really rolling out?

It's still possible to find very low mortgage rates...even in this market. Keep yourself out of the modification bunch if you can!

Fred Fry said...

I have not heard anything.

I wonder if there is still somewhat of a wait and see attitude with these. After all, if half the people default on their mortgages, that means the portfolio is still worth at least 50%, coming from those repaying their loans, PLUS the value of the foreclosed on properties from the loans not being repaid. Lets say that adds another 10% to the value of the portfolio (Making the house worth 20% of the mortgage). You now have a portfolio worth 60% its original value. So, where is the incentive to sell the mortgages for less than 60%? For the Government the trick is to get them at a huge discount, say 20-30%, they then write down the mortgages, in effect reducing the value of the portfolio, but still coming out ahead since they underpaid.

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