Federal Mortgage Relief....what is it going to relieve?

The Federal Mortgage Relief Program has just came into effect yesterday. The idea between the plan is to help keep homeowners in their homes by allowing their lenders to 'swap' their currently deficient mortgage for a new one that would allow them to stay in the home with a lower monthly payment.... It is said to hopefully keep 400,000 homeowners IN their home and not become a new foreclosure... The government even put $300 BILLION aside for this 3 year plan... SOUNDS AMAZING DOESN'T IT?...

What does it take to have my lender modify MY loan? Well... you would need to be spending at least 31% of your income on your mortgage payment and your home's market value must be lower than what you owe on the home... okay... so that doesn't sound too bad!

Most people are in that category... so what's the catch? Is there a catch? Or does everyone simply get to have their loan adjusted so that they 1) pay less monthly and 2) owe less on their home? .... GET REAL.... that is NOT what this is going to do...

I forgot to mention the last piece to the puzzle... just a little one... the person responsible for deciding if the mortgage is modified isn't the borrower... it's the lender who decides if they want to participate in the program.... ahhh... so there's some more insights. So what would it take for the lender to allow you to modify the loan and stay in the home you ask?

What would the lender have to 'give up' or 'agree to' in order to make this work?....

"It can't be that bad or the government wouldn't even waste their time making the policy right?"

Well here is what the lender would have to agree to....

1) Write down the principal to 90% of the current market value...

That means that if you bought your home in 2006 for $1,000,000 to use easy numbers let's use the market value of today as being 30% of what is was in 2006. So... the market value today is $750,000 ($250,000 LESS than owed). NOW.... the bank needs to lower the principal to 90% of market value... which is $675,000. IF the bank will do this THEN the borrower is allowed to stay in the home and the bank will then modify the loan. Seems like the bank would JUMP at the idea of doing huh?

OWED $1,000,000 + INTEREST

Market Value $750,000

90% of Market Value $675,000

= $325,000 Difference

So... if the bank agrees to INSTANTLY LOSE $325,000 you can stay in your home!!

...DON'T HOLD YOUR BREATH...

The government is thinking in the right direction yet they are asking banks to completely write off all this debt for the borrower with no recourse for the borrower. If this plan had a way for the principal to be turned into a 2nd mortgage where it could be paid starting in 5-7 years depending on what the politicians decide PLUS the interest that it would accrue throughout the term then this plan MIGHT have a chance of actually helping people. That way the banks will simply have an outstanding debt that WILL be paid or the home can be sold since there is equity once the market turns. The borrower is fine with the 2nd mortgage because in 5-7 years they can either sell the home for a profit or simply start paying what they are forced to pay today. If you had this plan with that small tweak it would do 3 things....

1) The banks would be getting paid what they are owed in the long run... BANK IS HAPPY...

2) Borrowers stay in the home with a much lower payment... BORROWER IS HAPPY...

3) More people in their own homes with less foreclosures... Real Estate Market is HAPPY...

So in conclusion... when you hear your neighbor scream "Have you heard about the new law that just passed? I am gonna stay in my home and will only have to pay HALF what I pay now! .... AND my loan is going to be on $300,000 less than I owe.... this is AMAZING!!!"

Just look at them and say "wow that's great... have you talked to your lender about that yet? ... if you haven't... maybe you should talk to them BEFORE you get too excited."

This plan is flawed... the intention is great to help people stay in their homes yet when you don't think through it actually panning out in real life it helps no one.

If you are reading this and wishing that this could work for you then contact the holder of your mortgage and ask what they would consider... please don't take my word for it. I just wanted you to see how absolutely ridiculous this offer sounds to a lender...