Mortgage payment reductions often not enough

The administration’s mortgage modification program is a little over one-year old.  It has helped roughly 228,000 people get five-year reductions in mortgage payments, and another 781,000 are in the trial period.  The goal is to help four million borrowers by the end of 2012.

The program is designed to lower mortgage payments to 31% of income, and that is often achieved.  The typical (median) family applying to the program has a payment that hits almost 45% of their income, according to the Wall Street Journal, and gets that reduced to 31%.

Unfortunately, this may not be enough because many people also have other debt, including credit card debt.  If you take total debt, the typical mortgage modification applicant pays an astounding 77.5% of their pre-tax income to cover their debts.  Even after the loan is modified, their debts chew up 61% of income.   That is simply too much.  Your total debt payments shouldn’t exceed 50% of income, and even that is high.

The solution to this problem is to get your other creditors to reduce their demands.  In the case of unsecured debt, like credit card debt, bankruptcy courts can dictate a reduction or elimination of unsecured debt.   You may not need to go to court.  You can often work with the creditors to get debts lowered.

Elsewhere on this site, I recommend Consumer Credit Counseling Services.   The WSJ has an example of what agencies like CCCS can do (in the case they cite it was Springboard, Inc in Riverside CA).

The Journal reports on a couple who started out with debt payments that took 71% of their income.  The agency negotiated a mortgage modification and lower interest rates on their credit cards.  It convinced them to give up one car (eliminating that loan payment) and got them food stamps.  Their debt load is now 41%.

Comments are closed.