Mortgage loan modification

Over the past couple of weeks we’ve been talking about the likelihood that Tony’s unemployment compensation will end next month. He was laid off a year and a half ago, and with a combination of his severance, my salary, his unemployment, and savings, plus cutbacks on non-necessities, we’ve been able to keep up with everything so far. But it’s not sustainable for the long term, because we’ve blown through our savings, and our credit card minimums and interest rates are rising. Without Tony’s unemployment income, it will be impossible.

We are looking at other ways to reduce our debt and monthly payments, and the next step is finding out whether we can modify our mortgage. This week, we received notification that for the second year in a row, our monthly mortgage payments are going up by $50 due to an increase in PMI. WTF? Our credit scores are better than they have ever been, we have not missed or been late on any payments – they are just charging us more because they can. It’s time to reverse this trend. We love where we live, and do not want to end up a foreclosure statistic, so we figure it’s worth a try.

There are several mortgage modification programs out there, including the US government’s Making Home Affordable and lender-specific plans. We are not eligible for the “Obama” MHA plan due to my income, and I am not optimistic that we’ll be able to get a lender plan — but the mortgage accounts for nearly 50% of my take-home pay, so I don’t want to rule it out.

Modifications can include principal reduction (cutting the balance to a new, lower appraised home value), interest rate reduction, forbearance (delay in payments), extended terms (going 40 years instead of 30), elimination of PMI, or deed-in-lieu of foreclosure (legally giving the house to the bank). Any of these would help, so Tony and I sat down this morning and applied for modification through our lender. Word on the street is that it may take several months to get a response because the lenders are so backlogged with requests, and they may not even look at it unless we are 60 days past due, but we will see what happens.

Mortgage modification is a calculated risk – we don’t know whether it will change enough to be affordable for us on just one income. But the larger issue is the longterm investment — like so many other people, property values have fallen more than 20% in our area. According to research I’ve done (we have not had the house re-appraised), not only do we have zero equity, but our mortgage is probably about $60k underwater. If we can’t modify the mortgage and have to sell our home, it would need to be a short sale, and these are very difficult to have approved. If we lose the house in foreclosure (a last resort), we could end up with a deficiency judgment against us for the negative equity. Is it worthwhile to struggle to pay the mortgage, only to end up $60k more in the hole?

So…one of the other things we’ve been considering is bankruptcy. We are responsible adults and do not want to do this, but if Tony doesn’t find work in the next six months or so, we may have no other options. If we give up the house in bankruptcy, we wouldn’t have any trouble finding a home to rent in our area for half what we’re paying now, and it would at least leave us a little emergency fund.



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