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I am trying to help out one of my friends that is in a financial bind.

Several years ago he purchased a house because he could build up more value then if he kept renting. At the time it looked like a great idea but then the market collapsed. Now he owes more on the mortgage then the house is worth and the mortgage payment amount is more than he can comfortably pay. He did refinance, but that didn't change the value of the mortgage.

He doesn't want a bad credit rating so he has been paying the full mortgage payment each month. Unfortunately this means to meet the costs for his family he has been carrying high consumer debt on credit cards. He is trying to gradually pay it off but sometimes when he needs emergency funds he has to put more on it. He has played all the games with moving his debt onto 0% intro rate cards, etc.

The core of his predicament is the mortgage.

He heard about the US government programs to help people that got hurt by the housing crisis and looked into what he could do. What he found was that unless he defaults on the mortgage there is nothing out there. More specifically he had mortgage lenders tell him that he would have to stop paying his mortgage for several months and start failing on his mortgage. He doesn't want to do this because he doesn't want to hurt his credit score which is very solid.

Does anyone know of any government programs to help people that have mortgages that are under water but that are still barely getting by with their financial obligations?

  • Just to let you know, your friend's mortgage being underwater and him not being able to pay are two different, and very unrelated things. I'm not sure how you or your friend think the mortgage being underwater hurt him. – iheanyi Mar 1 '17 at 23:42
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To provide a more thorough answer, I'll cover 3 areas: (i) problems with people being told to skip payments, (2) some of the available government programs, and (3) an unofficial source I provide for the math

Skipping payments. A number of US government agencies [such as: OCC; FDIC; SIGTARP ] now warn borrowers against stopping their payments. The Federal Trade Commission has enacted rules requiring certain "professionals" who advise a borrower to stop making their payments to also explain the consequences. Basically, a borrower who stops making payments will likely lose the house and damage their credit report.

"Dual Tracking" is the practice of starting foreclosure proceedings while the borrower is also trying to obtain a loan modification. To get the loan mod, and the foreclosure proceedings "that don't mean anything because we are doing a loan mod" [lie] going, there are anecdotal reports on YouTube that borrowers have been told to skip a payment [search Youtube for "loan mod hell"].

According to this realtor's blog, Dual Tracking will be illegal in California starting 2013.

Government Programs See makinghomeaffordable.gov for toll free numbers, FAQs, etc.

  1. HAMP Reduces interest rates, lengthens the loan, and adds principal forgiveness or a balloon payment for borrowers in imminent danger of default. That criteria sounds good, but is actually rather vague. HAMP has had execution problems (see Youtube again: "loan mod hell") and has become more complicated over time (with/without Principal reduction, Tier 1/Tier 2). I'll say a bit more on the math of HAMP below.
  2. HARP refinances "underwater" loans, within limits. Underwater means more is owed than the home is currently worth. Imminent danger of default is not required. The borrower must be current on payments. I believe Fannie and Freddie mention this program outperforming HAMP.
  3. HAFA is a foreclosure alternative. A "cash for keys" type of program for people who want to walk away from their house.
  4. There are some new programs for the unemployed.

The Math of HAMP The government's web site at makinghomeaffordable.gov provides a quick two input calculator for HAMP. Basically it will show you that the HAMP target payment for the borrower is 31% of gross income, and how much could be saved. This neglects many details of the program. There is a sequence of steps called a "waterfall" that provides the suggested HAMP modification. Because this suggested modification can be overly generous, there is a NPV test that acts as a veto over the suggested modification. These are detailed in public documents such as the MHA Handbook and earlier, in Treasury directives. I have created a free Unofficial HAMP Loan Modification Calculator that allows visitors to explore the HAMP math, obtaining immediate calculations for the waterfall portion. No email address or personal info is required, and source code to the calculator is also provided (GPLv3). So far it does Tier 1, with/without Principal Reduction, and with/without Lender's Alternative Waterfall for Prinicpal Reduction, based on the MHA Handbook. I hope to add Tier 2 some time in the future. Feedback is appreciated.

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google "loan modification" or "Mortgage modification". This seems to be some government website: Making Home Affordable.

I find it very hard to believe that he has to start missing payments. What investor would be interested in that?

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