Loan modification terms can be tough for those few who get them
FORT LAUDERDALE, Fla. – March 10, 2010 – For William and Lida Negron, their lender’s decision to modify their mortgage seemed to be the key to holding on to their home.
William Negron, in his mid-70s, lost his job in car sales two years ago. The possibility of losing their home put “so much stress on him,” said son Carlos Negron. “My mother has been to the hospital twice because of this.”
Relief turned to shock when the Negrons saw the new loan terms: the monthly payment fell to $1,280 from $2,000, but the loan would be extended to 40 years from 30, with a $25,000 balloon payment in 15 years. William Negron would turn 90 about the same time.
“That was a major slap in the face,” said Carlos Negron. The couple gave up their Orlando home.
The Negrons’ story is a sign that trouble in mortgage loan modifications is reaching a new stage.
For months, troubled borrowers have struggled to get mortgage modifications. Only 14.3 percent of South Floridians who get a temporary mortgage modification secure a permanent new loan. Now, a growing number of homeowners who are offered permanent mortgage modifications are finding the terms unacceptable.
Among the problems: surprising balloon payments – one-time lump-sum payments that cover any principal that may have been deferred – and interest rates that can rise again.
Many borrowers spend months in limbo, from the time a temporary loan modification is offered by their lender to when a permanent modification is made. Terms of the permanent loan may not be the same as the temporary modification.
“It’s been a long, tedious, painful time of uncertainty,” said Steven Carroll, a Lighthouse Point resident who has spent more than a year trying to modify his mortgage.
A brief period of unemployment for Carroll and his wife threw their finances into turmoil. Now they are both working and they have a temporary modification, but he doesn’t know what the terms of the permanent loan will be. “I’m hopeful that they’ll finally fulfill their end of the bargain,” he said. A Bank of America spokeswoman said the lender is working with Carroll.
A year ago, the Obama administration launched the Making Home Affordable program, putting $75 billion toward modifying mortgages and helping millions of borrowers through the worst housing crisis in decades.
So far, the results are slim. About 100,000 Florida loans have been modified on a trial basis. A spokeswoman for the Treasury Department says it is difficult to estimate how many borrowers are eligible.
Fewer than 15,000 trial loan modifications in Florida have become permanent. Nationwide, 116,297 modifications have become permanent out of almost 1.3 million trial modifications begun under the Obama program.
Despite the odds, thousands of South Floridians are trying to modify their loans in a desperate effort to save their homes. Recently, they jammed an event in West Palm Beach that promised face-to-face meetings with bank representatives and loan counselors. “Good news!” shouted homeowner Cleore Gauvin, of Wellington, when she learned, on the spot, that Bank of America would cut her interest rate in half to 3 percent for a trial modification.
Bankers point out that a mortgage modification is only a temporary break that gives borrowers an affordable payment while they stay in the home. Borrowers, they say, should make plans for the day when that period of lowered payments will end and decide whether they can really afford the house.
A cut in the interest rate, for example, could end in a few years, which would mean the monthly payments would increase and the loan potentially becomes unaffordable again.
Under the Making Home Affordable program, interest rates can be lowered for up to five years. Then they start rising again, 1 percentage point per year until the rate reaches the market rate at the time of the modification. Loans modified outside the federal program can have different provisions.
Another emerging issue is balloon payments, such as the one the Negrons faced.
Not all loan modifications have them. But some permanent loan modifications defer payment on a portion of the loan until years later.
When the mortgage’s term ends – in 30 or 40 years – or when the house is sold or the loan is refinanced, some borrowers will owe a one-time, lump-sum payment that could amount to tens of thousands of dollars. The balloon payment covers the portion of the principal that was deferred.
“There’s no question the principal-deferred balloon payment is, in fact, very, very common,” said David Berenbaum, of the National Community Reinvestment Coalition, a group of hundreds of lenders, loan servicers and community groups that offer foreclosure counseling. The organization wants banks to reduce or forgive some of the loan rather than to defer a portion of it.
The concept of deferring principal and having a balloon payment is widely misunderstood.
Says Alexander Fernandez, director of Homeownership Preservation for Neighborhood Housing Services of South Florida. “A lot of people have that confused. They think (the principal that they’re not paying) is going to be forgiven and it’s not.”
Homeowners may be unaware of the terms of their new deals – for a good reason. Terms such as balloon payments are not spelled out in their loan papers, said Terry Schmitz, senior underwriter at AmeriFirst in Fort Lauderdale.
“It doesn’t say you have to make a balloon payment [in the future]. Unless you know how to work a real estate calculator, you don’t know what you’re signing,” she said.
For borrowers trying to hold on to their homes the difficulties continue even after the new loan begins.
About 20 percent of modified loans, through last June, ended up in default only three months later, according to federal statistics.