Mortgage modification - what income is needed ... is it hopeless?

[progree]

Last edited Mon Jun 27, 2016, 07:43 PM - Edit history (3)

A close friend of mine is in the process of trying again to get a mortgage modification (mortgagostomy).

It seems like if you earn too much money (relative to your debt payments), then you don't need a modification. If you make too little, even if you've been paying on time for over 9 years (as she has), they deem you too far gone to be helped. So there is some magic window. Any idea what that magic window is?

Later: I now know from reading online that a ratio of 31% and below is "too rich" to need help. But I have no idea of where the too-poor-to-be-helped threshold is. And that for those with ratios above 31%, they either create a mortgage payment (PITI) of 31% of income, or turn them down as too poor (i.e. they won't create a payment that say drops one from 45% to 35%)

The last time she tried, in 2010, they told her that: (some paraphrasing for brevity)

"... The Hamp Affordable Modification Program (HAMP) requires a calculation of the NPV of a modification using a formula developed by the Department of the Treasury. ... the model estimates the cash flow the Owner of your Loan is likely to receive if the Loan is modified and the Owner's cash flow if the loan is not modified. ... Based on the Net Present Value (NPV) results, the Owner of your Loan has not approved a modification."

... "We are unable to offer you a Home Affordable Modification because we are unable to create an affordable payment equal to 31% of your reported monthly gross income without changing the terms of your Loan beyond the requirements of the program" {emphasis added by Progree}

In other words, as I interpret it, they figure that, more likely than not, they'd lose more by trying to help her out than to let things play out the way things are now.

The owner of the loan is Wells Fargo; and her mortgage servicer and contact for mortgage modifications is Chase.

Well, that was then, back in 2010.

Today, her mortgage payment is about $900/mo (that's "ITI" - Interest, Taxes, and Insurance) -- she has an "interest only" mortgage for 10 years, so no principal payments yet.

If her income is say $1,800/mo, that means her "payment to income" ratio is 900/1800 = 50%, and they'd probably say they are unable to modify her loan in some way to bring the payment down to 31% of $1,800 or $558/mo. Am I understanding that right?

Her income is now more like $3,200/mo, so her payment to income ratio is 900/3200 = 28%. Hmmm, does that mean she doesn't need help? Too wealthy? (About 1/3 of her income is rent from her housemates). LATER: from what I read, yes, a payment to income ratio at or below 31% is considered too rich.

So, the sweet spot for providing help is a payment to income ratio somewhere between 31% and X%, whatever X% is.

(And shouldn't that range also depend on income, i.e. someone with a big income can afford a 50% or more payment/income ratio, while someone with a $10,000 annual income can't afford $3,100/yr on shelter, leaving $6,900/yr for everything else).

Fly in ointment #1: early next year begins "year 10" when she will have to begin making principal payments, which will raise her payment by about $600/mo.

Fly in ointment #2: it’s a 6-month ARM, meaning every 6 months the interest rate adjusts to 2.25% plus the current 6 month LIBOR rate. Currently (as of the last reset) that all comes to 2.875%. But one can expect that to go up (it's already rising), with a big impact on her payment.

Combining the two factors above, I calculated her monthly mortgage payment, including property tax and insurance as follows:

Monthly mortgage payments

Today (interest only): $879

With Principal:
At today's 6-mo. LIBOR: $1477 (this would consume 46% of her income)
LIBOR at 2%: $1615 (50% of her income)
LIBOR at 4%: $1831 (57% of her income)
LIBOR at 6%: $2066 (65% of her income)

Certainly a dismal situation.

And considering that the 6 month LIBOR was nearly 6% in 2006 and 2007, for example, and certainly has a history of being at and above those levels for long periods in the past 30 years {1}

{1} Historic 6-month LIBOR: https://research.stlouisfed.org/fred2/series/USD6MTD156N
(click the "Max" link just above the date range near the top right)

I presume they look out into the future and consider future interest rate projections when they do their "Net Present Value" calculation.

Other considerations:

# I think they figure she's a bit "under water" on the mortgage. Possibly she might be a little above water, but after considering selling costs, probably somewhat below

# She also has about $20,000 balance on a Home Equity Line of Credit. Currently it only costs her about $70/month to service (interest only), but early next year is "year 10" on that too when they will require principal payments (I have no idea what they will require per month on that).

# She's not eligible for HARP because Fannie or Freddie has to hold or back the loan or somesuch -- I forget but I looked into it in the past.

Thanks for reading and for any insights (other than "it's hopeless&quot .

[font color = red]On Edit 3/24/16: I just posted a version of this in the DU Lounge, in case anyone is interested in this subject:
http://www.democraticunderground.com/1018851198 [/font]

[hr]

[font color = blue]UPDATE - On May 31 she received a rejection letter from Chase[/font]. It turned out they didn't count as income the rent she received from her boarders (total $1000/mo) nor the $300/mo she has been receiving in child support from her daughter's father.

The reason given by the Chase representative is that there is no rental agreement and no proof that income was received since it was all on a cash basis (Actually some is paid by check). Despite both renters having written letters saying they were paying $500/month each in rent. So Chase is calling 3 people liars.

The reason given for rejecting the child support is that there is no court order requiring it, and no proof given of it being received. Despite the child support payer having written a letter saying he has been paying it every month for years. So basically Chase is calling 2 people liars. (Actually those payments are all paid by check, so there should be a paper trail available)

That's about half her income thrown out! Her remaining income leaves her too poor to qualify for help, according to HAMP guidelines (presumably because she is hopelessly poor and couldn't possibly afford even a reduced payment that still fit the HAMP guidelines. Despite making all her payments on-time in nearly 2 decades of home ownership).

Various HAMP program options were considered, and the reasons given were these --

{a} "We're not able to create an affordable payment equal to the required percentage of your reported monthly gross income without changing the terms of your mortgage beyond the modification program's requirements

{b} There is more equity in the property, which is the difference between what the home is worth and the amount owed, than the program allows

{c} We're not able to reduce your principal and interest payment by at least 10%.

{d} We're not able to calculate a proposed post-modification debt-to-income ratio that is within the range of 10% to 42%. Your debt-to-income ratio is your monthly housing expense, divided by your gross monthly income. Your monthly housing expense includes your mortgage principal and interest payment, plus any property taxes, hazard insurance, and homeowner's dues.

As for equity in her property - it is theoretically, per a from-the-street external appraisal, worth more than the mortgage (about $11,000 positive equity). But selling costs and fix-up costs to take care of issues that one doesn't see from the street would certainly put it back under water.

The only option she was given is to do a short sale, which would kill her almost perfect credit rating.

Another update is that her monthly payment goes up from $879 to $939 on August 1, primarily because of a rise in the 6-month LIBOR interest rate. That's a $60/month increase.

And as noted before, on February 1 her payment goes up by another $600/mo due to the interest-only period ending.

I also questioned Chase why they have not notified her of the huge $600/mo increase yet? The Chase representative checked and found they give no special notification for that, just the same 2-3 month advance notice as for any other upcoming payment amount change. (Actually she has been getting 1 1/2 month advance notifications of payment changes as measured by the due date. 2 months if one includes the 16 day grace period after the due date.)

I let them know how I felt about such inconsiderate heartlessness in giving her such a short notice of such a massive payment increase.

[Hoyt]

1. I'd get a couple of real estate agents to appraise what it might reasonably go for on the market.

Home prices have increased recently in most places. I hate to say it, but the best solution - financially anyway - may be to sell it and get out from under that mortgage, if it cannot be refinanced.

I think there are some agencies that might help with determining options. There are also some scams that appear to offer help, but don't.

Sorry she's in that situation. I remember trying to figure out my options a few years ago how frustrating it is getting decent information. There is so much inaccurate and misleading info out there.

[progree]

2. Thanks for the ideas

She's recently contacted a real estate agent, but based on a quick look and some comparables, its not too good. I left out the garage needs serious structural repair, which wasn't factored in.

She's been working with Habitat For Humanity for years, which is sanctioned by some state agency (in Minnesota) for helping distressed homeowners, but they aren't much help.

There is no way she'll deal with a for-profit radio-advertising type of mortgage rescue organization, thankfully.

She really wants to stay in the home. Right now its a sweet deal because the renting housemates pay the mortgage payment and then some. But that will change.