Recently we ran across this article; which was published on MSN Money on Monday. The article provides some great information on the current state of the lending world, and given the current state of affairs, why lenders may be more apt to forgive consumer debts. It also provides some insight into current and future plans of lenders such as Bank of America, Countrywide, JP Chase Morgan, Fannie Mae, and Freddie Mac. The article sites that “2.2 million American Homeowners are more than 60 days late on their mortgage payments, according to the alliance of lenders and credit counselors, and one in six homeowners owes more on a home than it’s worth.”

If you’re considering loan modification or debt settlement, make sure to take a look!

Why lenders might forgive your debt

There was a time when lenders didn’t want to work with you if you couldn’t pay. Now they want to avoid foreclosure, lawsuits or repossession almost as much as you do.

By Liz Pulliam Weston

People who overdosed on debt in recent years learned the paradox of easy credit: While lenders were willing to let you borrow copious amounts, they weren’t particularly interested in helping you work out a solution if you fell behind on repayment.

Lately, however, lender perspectives have changed. Soaring default rates, a weakening economy and the credit crunch have rewritten the rules.

• Credit card lenders charged off 5.47% of the total amounts owed on cards as bad debt in the second quarter, according to the Federal Reserve. A year ago, the charge-off rate was 3.85%.
• Consumer bankruptcy filings in October topped 100,000, a 40% increase from a year earlier and the highest level since the federal bankruptcy reform law took effect in October 2005, according to the American Bankruptcy Institute.
• More than 2.2 million homeowners are more than 60 days late on their mortgage payments, according to the Hope Now alliance of lenders and credit counselors, and one in six homeowners owes more on a home than it’s worth.
• With home prices plummeting, every foreclosure now represents a loss of 44% of the original loan amount, up from 29% a year ago, according to data from LPS Applied Analytics.

That’s why lenders are now looking for ways to keep people paying their bills, even if it means forgiving some of their debt. Now the paradox is that in order to qualify, you must be struggling, but not so much that a change in terms wouldn’t help you.

How the new programs work

The most sweeping new program was announced Nov. 11. Freddie Mac and Fannie Mae, the government agencies that guarantee 31 million U.S. mortgages, will begin paying the mortgage service companies that maintain the loans $800 for every loan they modify. Borrowers would get help in several ways: Interest rates would be reduced so that borrowers would not pay more than 38% of their gross income on housing expenses. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount to be deferred interest-free. (You can find more details here.)

The same day, Citigroup announced it would halt foreclosures for borrowers who live in their own homes, have decent incomes and stand a good chance of making lowered mortgage payments. Ultimately, it plans to modify the repayment terms on up to $20 billion in loans.

Late last month, JPMorgan Chase expanded its mortgage modification program to an estimated $70 billion in loans, which could aid as many as 400,000 homeowners. The modifications were to include reducing amounts owed or the loans’ interest rates, and replacing so-called “pay option” loans that typically resulted in mortgages growing over time.

Bank of America, meanwhile, has said that starting Dec. 1, it will modify an estimated 400,000 loans held by newly acquired Countrywide Financial as part of an $8.4 billion legal settlement reached with 11 states in early October.

Loan forgiveness is a key part of the Hope for Homeowners program. This is the foreclosure prevention program that Congress created as part of the $700 billion Economic and Housing Recovery Act of 2008. Lenders that want to participate typically must agree to reduce borrowers’ principal to 90% of their homes’ current value.

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Tags: bailout, Bank of America, Countrywide, Fannie Mae, Freddie Mac, JP Chase Morgan, Loan Modification

This entry was posted on Tuesday, November 18th, 2008 at 5:17 pm and is filed under Finance News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.