Refinance or modify while it's still possible

As income and property values change, so do your chances to qualify

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jan. 23, 2012

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Borrowers who have suffered income declines to the point where the ratio of housing expense to income is viewed as excessively high will have their refinance applications rejected. However, an income decline of this magnitude will not necessarily prevent a loan modification.

On the contrary, an income decline that weakens the ability of the borrower to continue current payments but still enables the borrower to afford lower payments is the major problem loan modifications are designed to meet.

Borrowers can check on whether they qualify for a refinance using the new qualification calculator on my website.

The HARP exception

The earlier statement that borrowers with negative equity cannot refinance has a major exception: If their loan is owned by Fannie Mae or Freddie Mac, they are eligible for refinancing under the Home Affordable Refinance Program (HARP). This program was recently extended and liberalized.

The previous negative equity ceiling of 25 percent was eliminated for fixed-rate mortgages; fees were reduced; the requirement for a new appraisal was eliminated in some cases; and incentives were provided to the lenders servicing the loans to refinance them.

Qualifying for a modification

Determining whether a borrower is eligible for a modification is a complicated exercise on which the rules are anything but clear. The government-supported program, which differs from the strictly private programs, requires that the borrower's income be large enough to afford a reduced payment but it cannot exceed 3.23 times the current mortgage payment. Further, the borrower cannot have "sufficient liquid assets" to make the payments, whatever that means.

In addition, the owner of the loan must be better off with the modification than without it, which is determined by a complicated algorithm that is available to servicers but not to borrowers or to me. The servicer has the final say.

More on navigating the modification maze next week.

(Special thanks to Igor Roitburg.)

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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