A few days ago while checking out the web site of my local newspaper, I came across a story titled “Gov’t watchdogs: mortgage program is not working.” As a bankruptcy attorney, this was not exactly shocking news, I think everyone has been able to tell that based on falling home prices and rising rates of foreclosure and bankruptcy.

It turns out that there are many reasons why the government mortgage programs aren’t helping very many people, but as a former mortgage industry insider turned bankruptcy lawyer, one reason in particular sticks out like a sore thumb. These programs don’t consider the homeowner’s back-end debt to income (DTI) ratio at all.

For those of you who don’t memorize mortgage industry jargon as a hobby, let me explain. A borrower’s back-end DTI is the sum of all the borrower’s monthly bills (mortgage, car payment, credit card minimum payments, etc.) divided by the borrower’s monthly income. Even back in the Wild West days of mortgage lending (from around 2006 to mid-2008), I never heard of an approved loan that had a back-end DTI higher than 46%. From what I’ve heard from other bankruptcy attorneys, some government mortgage modifications are being approved with a back-end DTI of up to 90%.

Such a number was simply unbelievable to me at first, until I remembered that at its core, the HAMP is a political creation. It turns out that since its inception, HAMP has been under tremendous pressure to get as many mortgages as possible modified, regardless of whether the modification provides a long term solution to the homeowner.

But getting back to the main topic, it’s a good thing for the borrower if the underwriting standards are really easy, right? Wrong. What winds up happening is that borrowers put a considerable amount of time and effort into obtaining these modifications and within a couple months they are right back where they started, with a monthly debt servicing load they can’t possibly sustain. All the worries and anxieties they had before come back except this time they have even fewer options because now they are even further extended out on their credit cards, loans from relatives, etc.

These people would have been better off if they hadn’t wasted their time and resources on a loan modification that couldn’t possibly be a long-term solution. The advice I have for most people is that once bankruptcy even becomes a possibility in your mind, start making a plan for it right away. The earlier you contact a bankruptcy attorney the more options you will have. The time to start preparing your financial lifeboat is while your ship is still upright, not after it has capsized.

Another piece of advice is to work with a bankruptcy attorney who will take a holistic view of your situation. You want a bankruptcy attorney who will help you create a viable financial plan for short, medium and long-term, not just someone who shows up in court for you and fills out forms. I’ll be expanding on that topic more in upcoming posts. Rest assured though, with adequate preparation you can make it through the financial storm in good shape.

Author Bio: John Fox is a consumer bankruptcy attorney and the founder of The Fox Law Office. The Fox Law Office focuses on representing consumers facing bankruptcy because of unreasonable real estate debt.

Category: Legal
Keywords: bankruptcy, bankruptcy attorney, bankruptcy lawyer, filing bankruptcy