Say the words “loan modification” in a room full of income property investors and watch ears perk up expectantly as silence settles over the room. Think they’re interested much? You bet they are. Is there anything in it for them, in this historical intrusion into the banking industry? President Obama’s new bailout plan for troubled borrowers might be a giant step toward re-naming our country the Socialist Republic of America but you don’t punish anyone but yourself by not taking advantage of the situation.
The actual purpose of Obama’s plan to save the galactic housing market is meant to restructure stressed mortgages in order to keep ‘upside down’ borrowers in their homes and establish some sort of floor beneath plummeting property values. If history is our guide, let’s pause and reflect on the recent statement made by a top banking regulator that 53% of modified loans in the first quarter of 2008 went bad within six months.
Ouch. Hope it works better this time around. Talk about throwing good money after bad.
But maybe your money isn’t bad. Maybe you’re not under water with your investment properties. Keep this in mind. Even in socialist countries, there are rich and poor people. Now would be a good time to take steps to insure you fall into the former category.
Here are 7 things you should remember about the current federal loan modification plan when you start calling your lenders to ask for restructuring.
1. Payments are king: The plan assumes that struggling borrowers will stay in their homes no matter how far the values decline, as long as they can still afford the monthly mortgage payment. Warren Buffet, the Wizard of Omaha himself, agrees with this concept, stating that “…most foreclosures do not occur because a house is worth less than its mortgage (so-called upside down loans). Rather, foreclosures take place because borrowers can’t pay the monthly payment…”
2. The magic number: The administration’s plan wants loan servicers to reduce loan payments to no more than 38% of a borrower’s gross monthly income. This would be accomplished by first lowering interest rates to as low as 2%, then next extending loan terms to as long as 40 years. If more radical action is needed, the servicer would forebear loan principal at no interest. Then the government would step with money to reduce it even further, down to 31%.
3. Cash: Get your free cash here: How will lenders be encouraged to get with the program? How about good old cash? They will be paid $1,000 by the government (taxpayers) for each loan modification and an additional $1,000 per year for three years as long as borrowers stay current on payments. Borrowers get a ticket to the cash party too. They can have $1,000 removed from the loan’s principal for up to five years if they keep making payments on time.
4. Technically not for speculators: The Obama plan is supposed to apply only to owner-occupied, primary residences with principal balances of up to about $730,000. They intend to verify occupancy status through documents, etc. This would seem to put the big kibosh on multiple property investors. Not so fast. Our own Jason Hartman received an unsolicited offer in the mail from one of his lenders to modify several loans he holds on income investment properties. What this means is that it might be worth your while to approach lenders and ask what they can do for you. In this climate of financial panic, you could end up with a reduced interest rate outside of the government plan, just because you asked. You can see a sample loan modification request inside the ‘member’s area’ at www.JasonHartman.com. It’s easy and completely free to join.
5. Net present value: Here’s where the lender waves a magic formula wand to determine if cash flow would increase for them (mortgage holder) when a particular loan was modified. If it would increase, then the servicer is supposed to restructure the loan. This approach is intended to encourage the lender to act out of self interest.
6. Second liens begone: Obama also wants second liens like home equity loans or lines of credit to go away via incentives. How exactly to accomplish this is still unclear.
7. The final analysis: Will it work? Some experts think that by focusing primarily on homeowners, the Obama plan could lead to a spike in foreclosures in other groups of real estate owners, like speculators, for instance. We shall see.
Hopefully, you’ve been following Empowered Investor Network advice and used prudent leverage and proper diversification to keep yourself out of upside down mortgage situations. But even if your cash flow on income properties is still good, it’s not your civic duty to step aside out of a misplaced sense of altruism. Call up that lender and see if he can help you out.
Flickr / @MSG
