But know that fix is only short-term
February 12, 2008
BY SUSAN TOMPOR
FREE PRESS COLUMNIST
On paper, Ann Todd is one strapped homeowner who took on the challenge of the credit crunch -- and won. But we don't know whether hers is a short-term victory or a long-term solution.
Todd, 31, began hounding her lenders this summer before her adjustable rate mortgage payment was set to spiral out of control. She was one of the lucky homeowners who actually convinced a lender to agree to a loan modification. Now, she and her husband, Mike, pay about $1,300 a month -- instead of what would have been $1,700 a month -- on their Shelby Township home.
But there is a catch that could snag hundreds of thousands of homeowners who are lucky enough to get a break on loan terms. Some homeowners who get deals will only be buying more time for the housing market to get better. And, depending on the negotiations, the fix might only be for two or five years.
"I worry that Michigan isn't going to recover -- or at least recover enough so people won't be back to square one," said Todd, who got a two-year deal from her lender and owes more on the house than it's worth.
Michigan has been hit with a triple whammy -- declining home values, a high jobless rate that has contributed to high foreclosures and adjustable rate mortgages that are set to go up in 2008 and 2009.
Economists predict that foreclosures are likely to continue to go up this year in Michigan and nationwide.
When home prices were rising at a fast clip, homeowners easily built more equity in the house. Then, even borrowers with bad credit could refinance to fixed rates to avoid high resets for adjustable rate mortgages.
Now, many homeowners in Michigan and elsewhere have little or no equity in the house and cannot refinance to a traditional fixed rate.
Some homeowners are starting to get some relief.
Interest rates have fallen dramatically, so adjustable rate mortgages that reset this year won't skyrocket as much. Some payments might go up $100 a month instead of what would have been $350 or more a month.
Avoiding foreclosure
Lower rates can keep some people in their homes.
"The majority of foreclosures and loan modifications taking place started out with adjustable rate resets that blindsided the homeowner with an unaffordable payment increase," said Greg McBride, senior financial analyst for Bankrate.com.
Yet lower rates won't fix all the problems.
Some troubled borrowers already have seen their mortgage payments go up and they've missed payments. Others lost jobs or income. Or they had bad credit when they first got that mortgage.
Mark Zandi, chief economist and cofounder of Moody's Economy.com Inc., said a weaker job market and continued falling home prices mean that foreclosures will continue to go higher in 2008.
That's why we're seeing the mortgage industry -- and government -- work to craft plans to help troubled borrowers.
All efforts attempt to buy some homeowners some time for the housing market to recover.
"You're kind of hoping that things will rebound or stabilize," said Keith Leggett, senior economist at the American Bankers Association in Washington, D.C.
The Todds' lender agreed to a loan modification that involved freezing the mortgage rate at 6.375% for two years.
Come 2010, though, they're going to have to refinance that mortgage. And how well this works will depend on whether housing values in Michigan actually go up and whether the Todds shore up their own financial foundation. The couple plan to put extra money toward the mortgage.
Declining values pose problems
The Todds paid $166,900 for the 1,500-square-foot house in Shelby Township in 2005. They owed $163,000 on the house. But the house was appraised at $153,000 this fall.
The couple had no equity in the home. They would have needed about $15,000 or more -- considering closing costs, fees and the fallen home value -- to refinance to a fixed rate.
"Nobody would do the loan," said Todd, a social worker for Macomb County. She began researching options in July, months before the rate would reset in December.
Audrey Acquisti, president of the Michigan Mortgage Brokers Association, said as recently as November she had trouble working with lenders to get some homeowners a loan modification.
Now, she said lenders are more willing to try to help avoid foreclosures.
Modification might help
Under a loan modification, a lender might agree to offer a homeowner a low rate for a set time. Or the mortgage could be modified so that the payments are stretched over more years.
A modification can be used by somebody who wouldn't qualify for a refinancing for some reason, such as if the value of the home has fallen and the homeowner has little or no equity.
The fees also are lower with a modification than a refinancing.
Clearly, all homeowners will not be helped by a loan modification.
"Does a loan modification really benefit somebody if the value of the property has fallen so sharply in relation to the loan?" Leggett asked.
The answer is probably not if the property isn't likely to ever be worth as much as somebody owes on it.
In other cases, some homeowners would not be able to keep up the payments even if the interest rate is frozen for a short time.
Tracy Morgan, vice president of communications and business development for the nonprofit Homeownership Preservation Foundation in Minneapolis, said homeowners should not automatically assume that they cannot avoid a foreclosure.
Based on her group's counseling statistics, about 25% of the homeowners the group had counseled during the fourth quarter were viewed as good candidates for workouts. Another 24% of homeowners counseled might be good candidates if they improved their financial situation.
Carmen Fernandez, foreclosure counselor for the nonprofit group Southwest Housing Solutions in Detroit, said lenders are more willing to do loan modifications for clients who can sustain their home financially -- and consistently pay the monthly mortgage at the renegotiated terms and beyond.
Todd says don't stop when someone says no.
"No isn't a good answer for me," she said.
February 12, 2008
BY SUSAN TOMPOR
FREE PRESS COLUMNIST
On paper, Ann Todd is one strapped homeowner who took on the challenge of the credit crunch -- and won. But we don't know whether hers is a short-term victory or a long-term solution.
Todd, 31, began hounding her lenders this summer before her adjustable rate mortgage payment was set to spiral out of control. She was one of the lucky homeowners who actually convinced a lender to agree to a loan modification. Now, she and her husband, Mike, pay about $1,300 a month -- instead of what would have been $1,700 a month -- on their Shelby Township home.
But there is a catch that could snag hundreds of thousands of homeowners who are lucky enough to get a break on loan terms. Some homeowners who get deals will only be buying more time for the housing market to get better. And, depending on the negotiations, the fix might only be for two or five years.
"I worry that Michigan isn't going to recover -- or at least recover enough so people won't be back to square one," said Todd, who got a two-year deal from her lender and owes more on the house than it's worth.
Michigan has been hit with a triple whammy -- declining home values, a high jobless rate that has contributed to high foreclosures and adjustable rate mortgages that are set to go up in 2008 and 2009.
Economists predict that foreclosures are likely to continue to go up this year in Michigan and nationwide.
When home prices were rising at a fast clip, homeowners easily built more equity in the house. Then, even borrowers with bad credit could refinance to fixed rates to avoid high resets for adjustable rate mortgages.
Now, many homeowners in Michigan and elsewhere have little or no equity in the house and cannot refinance to a traditional fixed rate.
Some homeowners are starting to get some relief.
Interest rates have fallen dramatically, so adjustable rate mortgages that reset this year won't skyrocket as much. Some payments might go up $100 a month instead of what would have been $350 or more a month.
Avoiding foreclosure
Lower rates can keep some people in their homes.
"The majority of foreclosures and loan modifications taking place started out with adjustable rate resets that blindsided the homeowner with an unaffordable payment increase," said Greg McBride, senior financial analyst for Bankrate.com.
Yet lower rates won't fix all the problems.
Some troubled borrowers already have seen their mortgage payments go up and they've missed payments. Others lost jobs or income. Or they had bad credit when they first got that mortgage.
Mark Zandi, chief economist and cofounder of Moody's Economy.com Inc., said a weaker job market and continued falling home prices mean that foreclosures will continue to go higher in 2008.
That's why we're seeing the mortgage industry -- and government -- work to craft plans to help troubled borrowers.
All efforts attempt to buy some homeowners some time for the housing market to recover.
"You're kind of hoping that things will rebound or stabilize," said Keith Leggett, senior economist at the American Bankers Association in Washington, D.C.
The Todds' lender agreed to a loan modification that involved freezing the mortgage rate at 6.375% for two years.
Come 2010, though, they're going to have to refinance that mortgage. And how well this works will depend on whether housing values in Michigan actually go up and whether the Todds shore up their own financial foundation. The couple plan to put extra money toward the mortgage.
Declining values pose problems
The Todds paid $166,900 for the 1,500-square-foot house in Shelby Township in 2005. They owed $163,000 on the house. But the house was appraised at $153,000 this fall.
The couple had no equity in the home. They would have needed about $15,000 or more -- considering closing costs, fees and the fallen home value -- to refinance to a fixed rate.
"Nobody would do the loan," said Todd, a social worker for Macomb County. She began researching options in July, months before the rate would reset in December.
Audrey Acquisti, president of the Michigan Mortgage Brokers Association, said as recently as November she had trouble working with lenders to get some homeowners a loan modification.
Now, she said lenders are more willing to try to help avoid foreclosures.
Modification might help
Under a loan modification, a lender might agree to offer a homeowner a low rate for a set time. Or the mortgage could be modified so that the payments are stretched over more years.
A modification can be used by somebody who wouldn't qualify for a refinancing for some reason, such as if the value of the home has fallen and the homeowner has little or no equity.
The fees also are lower with a modification than a refinancing.
Clearly, all homeowners will not be helped by a loan modification.
"Does a loan modification really benefit somebody if the value of the property has fallen so sharply in relation to the loan?" Leggett asked.
The answer is probably not if the property isn't likely to ever be worth as much as somebody owes on it.
In other cases, some homeowners would not be able to keep up the payments even if the interest rate is frozen for a short time.
Tracy Morgan, vice president of communications and business development for the nonprofit Homeownership Preservation Foundation in Minneapolis, said homeowners should not automatically assume that they cannot avoid a foreclosure.
Based on her group's counseling statistics, about 25% of the homeowners the group had counseled during the fourth quarter were viewed as good candidates for workouts. Another 24% of homeowners counseled might be good candidates if they improved their financial situation.
Carmen Fernandez, foreclosure counselor for the nonprofit group Southwest Housing Solutions in Detroit, said lenders are more willing to do loan modifications for clients who can sustain their home financially -- and consistently pay the monthly mortgage at the renegotiated terms and beyond.
Todd says don't stop when someone says no.
"No isn't a good answer for me," she said.
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