The Restructuring of Problematic Mortgage Loans

The White House just revealed certain details of a plan to restructure mortgage loans intending to assist four million citizens to save their homes and avoid foreclosure.  The program is comprised of seven essential elements.  First of all, the plan is based on the premise that the mortgage debtor needs help with the monthly payments.  Even though the majority of the debtors are concerned by the possible loss of their home, the great majority would prefer a permanent reduction in the monthly payment more than a reduction of the principal. 

Even though the loss of value of the homes is disconcerting, homeowners  must realize that the current values are based on existing and comparative sales.  The majority of the experts acknowledge that because the construction of new housing has been reduced substantially, the inventory of available housing will be reduced substantially.  Upon reduction of the inventory, the values will eventually return to a reasonable level.  Because one’s  principal residence is a long term investment, the temporary loss of value should not be the only criteria applied in considering the terms of a loan modification proposal. 

The plan requires that the participating institutions reduce monthly payments to a sum that does not exceed thirty eight percent (38%) of the gross monthly income of the mortgage debtor.  The government then makes a contribution intended to reduce the payment to a level not to exceed thirty one percent (31%) of the debtor’s monthly income.  This can be accomplished by reducing the interest rate to 2%.  If the reduction in interest rate does not achieve the 31% goal, then it can proceed to extend the terms of the loan to forty years.  If the increase in the terms of the loan does not achieve thirty one percent, the plan authorizes partial and temporary moratorium on the totality of the loan. 

The plan does not require, however, that the participating bank reduce the principal amount owed even though this option is available under special circumstances.  The government is offering economic incentives to the participating institutions who will receive the sum of $1,000.00 for each loan modified and an additional $1,000.00 for every year that the modified agreement remains in effect up to a maximum of three years.  This program only applies to property that constitutes the  principal residence with mortgages that do not exceed $729,750.00.  The participating debtor, must also show that his economic circumstances justify affording these remedies via a hardship letter.

In conclusion, the criteria that the bank must apply in determining whether a mortgage is modifiable is identified as the present net value test.  This analysis requires a comparison of the income that would be generated by the modified loan with the income generated without modification.  If the modified loan generates more income, the restructuring of the loan may proceed because it is consistent with the best interest of the debtor and the mortgage investor.

Luis A. González
Attorney and Mediator
L. A. González Law Offices, P.A

(407) 649 - 8389