Archive for October, 2009
Loan Modifications vs. Traditional Mortgage Refinancing
There are many differences between loan modifications and refinancing. However the main difference stems from the financial opportunity provided; Refinancing relates to obtaining a whole new mortgage, whereas a loan modification is simply changing the essential terms of the homeowner’s present mortgage. When you refinance your mortgage you are paying off your existing mortgage with a new mortgage thereby change your payments for the life of the new loan. The two largest facts that come into play in determining if a homeowner will be approved to refinance is their credit rating and whether any equity exists in the home.
A loan modification generally is considered a temporary solution to a homeowner’s inability to comfortably pay the full mortgage, or to wait out an uncertain real estate market. According to Michael Hall in the Practicing Law Institute Corporate Law and Practice Course Handbook Series, March 2008, homeowners will be moved into a lower fixed interest rate, for five or more years. The most significant benefit of a loan modification is that credit scores do not come into play. Under many state laws, (for example M.G.L. c. 93A) if you want to get help negotiating a loan workout or modification, an attorney must negotiate with the bank on the homeowner’s behalf based upon your hardship. There are no closings needed in a loan modification. As such, there are no closing costs, no points being paid, no new title insurance fees, no application fees, or any other fees typically incurred in traditional mortgage transaction.
There are Federal loan modification programs such as the Home Affordable Modification Program (“HAMP”), however, traditional loan modifications are conducted by the bank under no specific program. Each lender has its own set of rules to determine whether a consumer can qualify for a modification. Some lenders will look at the homeowner’s other outstanding bills; if the homeowner is in financial distress and whether there is equity in the home. Some lenders will look to the amount of time the homeowner has gone without making a mortgage payment. Sometimes the modification will be as simple as moving from an ARM loan to a fixed mortgage rate, or if there is a FHA loan involved, the homeowner could qualify for a partial claim. A partial claim, according to Brian Heaton, in the Indiana Law Review of 2005, is when the loan is brought current and a lien is placed on the property for the outstanding balance until the property is sold or refinanced.
The benefit to a homeowner of conducting a loan modification is rather obvious, in many cases a very large reduction in monthly mortgage payments. Additionally, under the HAMP program, should the monthly payment be reduced by 6% or more, homeowners are eligible to receive $1,000 per year for up to five (5) years against their principal.
Should you wish to learn more about traditional loan modifications or those pursuant to the Federal Govenment, you should contact a local bankrutpcy or consumer debt lawyer in your area.
Ripple Effects of Bankruptcy
In our current economy, there is a lot of talk about how your personal finances can permeate into your personal and professional lives. When you file bankruptcy, it is well known that your credit report will be severely impacted and that negative information will last for years. Although you might hit a roadblock in terms of borrowing in the immediate aftermath of your bankruptcy, your life will not wait.
One of the most fundamental needs a person can have is housing and after bankruptcy or foreclosure is housing. Many companies or landlords from whom you may wish to rent will conduct background checks that will include a criminal and financial check. If you’ve filed for bankruptcy, especially if it was relatively recent in the last 2 or 3 years, you might have difficulty getting someone to rent to you. One way around this is to rent with individual landlords who are more likely to have the latitude to account for your individual story once they meet with your personally. Apartments managed by a company are more likely to impose their set standards and not rent to you or be unwilling to consider your personal circumstances. Lastly, when looking for your first rental post-bankruptcy, air on the side of fiscal conservativeness and look for a very affordable unit to start. Once you build a strong post-bankruptcy rental history, it will likely over time open more options for you with future landlords.
Another area that can be affected by filing bankruptcy are services that many take for granted including insurance, cell phones, and home data information including cable, phone and internet. Many of these service providers require credit checks before they begin to offer services and if your history is unsatisfactory based on their standards, you may find yourself seeking other avenues to secure these services. If you find yourself in this position, you can expect two distinct possibilities, paying larger deposits if you are allowed to contract for these services or having to prepay for the services. Many companies will require you to pay for the services before you receive them via these larger deposits or limits on your service like prepaid cell phone plans.
Employment is a crucial aspect of anyone’s livelihood and is especially important to discuss in terms of seeking post bankruptcy employment. Potential employers will often conduct credit checks especially if the position entails handling money or other valuables. The best solution to this is to just be aware of the possibility and be certain when applying for jobs.
A final major area to expect to be drastically affected after bankruptcy is clearly the ability to be issued credit either as loans, mortgages or credit cards. Anyone who does extend credit to you will likely impose very high interest rates and severe terms. Be cautious when attempting to borrow by borrowing conservatively and being sure to account for the interest rates when you consider repayment. With credit cards, a new product has recently entered the market in the form of prepaid credit cards. Although these prepaid credit cards have “Mastercard” or “Visa” on them, they are not credit cards and are not subject to credit checks or reports to a credit bureau. Furthermore, since they are nothing more than a debit card, if they’re lost or stolen you are subject to actual cash losses and they are harder to dispute. The issuers of prepaid cards also generally impose more strict rules regarding lost or stolen cards including a requirement to report it within 48 hours or you’ll begin to bear the burden of the monetary loss.
In Massachusetts, if you find yourself facing discrimination from an existing relationship (service provider, employer etc.) after you’ve filed bankruptcy you may be able to be protected under M.G.L. Ch. 151B § 4 §§ 4A that prohibits such retaliation. Bankruptcy is a constitutionally protected act and it is illegal to retaliate against such a protected act. In any aspect of your life post-bankruptcy, the best tool you can have is knowledge so that you are not caught off guard and always have multiple options left available to you so that in the end all of your needs can be met to provide for yourself and your family.
The foregoing article was drafted by Justine Medina, for the Law Office of Goldstein and Clegg, LLC
What is the Home Affordable Modification Program?
As many homeowners have found it increasingly difficult to make ends meat and afford their home mortgage payments, mortgage defaults and foreclosure proceedings have risen. These homeowners have several options that may put them in a position to bring their accounts current and allow them to make their subsequent mortgage payments. One such option if a homeowner qualifies is to take part in the United States Treasury Department’s Home Affordable Modification Program.
This program is a shared debt reduction program between your lender and the government. The first step is for your lender to reduce your monthly mortgage payments including (principal, interest, taxes, insurance and condo fees) to reflect no more then 38% of your gross income. Gross income is defined as your total salary, tips, dividends and other income prior to taxes. Once the lender or bank reduced your payments to 38% of your monthly gross income, the Treasury Department will then step in and match dollar for dollar any additional reduction that the lender provides down to 31% of your gross monthly income for up to five years.
The benefit to a homeowner is rather obvious, in many cases a very large reduction in monthly mortgage payments. Additionally, should the monthly payment be reduced by 6% or more, homeowners are eligible to receive $1,000 per year for up to five (5) years, payment that goes straight towards reducing the principal balance on the mortgage loan as long as the homeowner is current on their monthly payments.
In order to encourage lenders and banks to take part in the program, the lender also receives various significant financial benefits. First and foremost is their ability to avoid foreclosing on another house that likely has no equity. The lender shares the financial burden with the Treasury Department; additionally the lender or bank receives compensation from the Government in the amount of $1,000 for each loan modified pursuant to the program. The lender will also receive up to $1,000 per year for each year the homeowner remains in the program and stays current on their new mortgage obligation. Should the homeowner be current when entering into the modification, an additional benefit is a one-time incentive payments of $1,500 to lender will be provided.
Granted, this program sounds like a fantastic win-win situation for both a homeowner in financial distress and a lender uncertain as to the borrower’s ability to stay current on their mortgage obligation. What are the requirements to take part in this program?
Homeowners:
First and foremost, the homeowners, mortgage itself must qualify. In order to qualify, the loan must have commenced prior to January 1, 2009.
- The home must be your primary residence and a single family dwelling of no more then 4 units. More specially, the home may not be investor owned, it may not be vacant. The homeowner will need to prove they live in home though a tax return or a utility bill.
- The payoff on the primary mortgage must not exceed: 1 Unit: $729,750, 2 Units: $934,200, 3 Units: $1,129,250, or 4 Units: $1,403,400
- A homeowner must have a current or imminent financial hardship.
- Loans can only be modified once under this program, as such, if you have modified once, you will not be able to go back to the well a second time.
- The home must have an appraised or assessed value not older then 60 days.
- The borrower will need to verify their income by submitting an IRS form that allows the lender to request taxes directly from the IRS. Additionally, the borrower will be required to submit the two most recent pay stubs.
- Borrowers must also represent to the lender that they do not have enough money in the bank to stay current.
- If a homeowner’s overall debt is greater then 55% of their gross monthly income, you will need to first take part in a credit counseling session with an HUD- approved counselor and receive a certificate of compliance.
Lenders:
Participating lenders are required to consider all eligible loans under the program guidelines unless there is a pre-existing agreement which expressly states otherwise. For any modification request originating from a homeowner in default, a net present value of cash flow test will be applied. This test essentially looks at whether a modification will increase the homeowner’s cash flow should a modification be granted.
How does the Process work?
The process starts by providing your lender with all the required documentation and information. This is a step that can be very time consuming and is a prime reason to work with a licensed attorney in your area. Once the bank or lender has confirmed they have received your full package, and has reviewed the package, a loan negotiator will be assigned to the case. The lender then must start by determining if there are any missed loan payments in. If so, the lender may capitalize the late payments.
The next step is for the lender to determine 31% of the homeowner’s gross income. Once this income level is determined, the lender must follow a 3 step process to reduce the monthly payment to that 31% amount.
- Reduce the interest rate as low as 2%.
- If the rate reduction does not bring the mortgage payments down to the 31% mark, then the lender is to extend the duration of the loan to 40 years from the date of the modification. It should be noted that a full 40 year extension may not be required, but the lender only needs to extend to the point where the payment reaches the 31% watermark.
- The next step is for the lender to forbear principal. Should interest forbearance be used, no interest will accrue on the forbearance amount. If there is a principal forbearance amount, a balloon payment of that forbearance amount will due on the maturity date, upon sale of the property, or upon payoff of the interest bearing balance.
- If a homeowner has a junior lien (second mortgage, equity line, etc) and the first or primary mortgage is modified through the program, then and only then can the junior lien be modified. The Government is offering certain incentives to modify junior liens in this timeline.
The Loan Modification Approval Process
The first step in the approval process is for the homeowner to take part in a 90-day trial period based upon the new loan modification monthly payment. The borrower must remain current for the first three (3) months or 90-day period.
If the borrower’s total monthly debt exceeds 55% of their gross income, the lender or bank must notify the borrower in writing of HUD approved credit counselors. The borrower must complete a credit counseling program and obtain a certificate. If the homeowner’s debt does not rise to the 55% level, the forgoing is not required.
The lender must waive any late fees upon completion of the 90-day trial period.
The investor may not require the borrower to contribute cash
What about homes in foreclosure?
Subsequent to a modification agreement being entered into by the homeowner and the lender, any foreclosure action will be temporarily suspended during the 90-day trial period, In the event that the Home Affordable Modification or alternative foreclosure prevention options fail, the foreclosure action may be resumed. However, pursuant to the Affordable Home Modification Program, should the modification fail, banks and lenders are required to consider other programs before foreclosure including but not limited to short sales and deed in lieu of debt.
If you found this article helpful but would like to work directly with an attorney who handles these matters, you may want to contact a local bankruptcy or debt relief law firm, such as the author of this article, The Law Office of Goldstein and Clegg, LLC, Loan Modification Attorneys.
