Loan Modifications
Home Affordability Modification Program: The Troubling Reality
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President Obama’s Home Affordability Modification Program (HAMP) was intended with the purpose of keeping homeowners in their houses. Unfortunately, the idea was wonderful and the basic core concepts of the HAMP appear to be generated with good faith in mind but it lacks one key component—success in purpose. In other words, HAMP is failing and the troubling reality of the program is becoming very clear.
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Image Credit: blog.Foreclosure.com |
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The HAMP was designed to get consumers to work directly with their mortgage company to get into a modification of their current mortgage payment. The program was intended to make the modification so the consumer could actually make a payment that they could afford. The amount of the payment is based upon the general economic principle that a mortgage payment should be about a third of the homeowner’s income. The problem with this philosophy is that the principle owed to the mortgage company is too large to minimize to a third of the homeowner’s income or the homeowner’s income and other expenses cannot meet even the third payment. However, there are more problems on the surface of the HAMP. Once a homeowner is initially accepted into the trial period, the homeowner is given the false hope that this is a final agreement. The “trial” period is exactly that—“a trial.” It is not a final agreement. A homeowner can make all the required payments asked of them in this trial period and still not receive a final agreement from the mortgage company. The real issue is that a mortgage company is only required to “consider” the homeowner for the program. (See Home Affordability Modification Act 2009). A mortgage company is not required to do anything at all for the homeowner under the HAMP. The troubling reality of the program is that a homeowner could make three months of payments and still not have a final agreement and still be facing a foreclosure sale. Unfortunately, the most common pattern that we are seeing with this program is that homeowners are making three months of the trial payments and then being denied without cause or for some superficial reason. If this should happen to you, you should immediately seek a bankruptcy attorney to ensure protection of your home from a foreclosure sale. So what was once thought to be the hope of a nation is really a troubling facade. If you have experienced the troubling reality of the HAMP, we want to hear from you. Please email us at http://www.consumerdebtradio.com/contact.asp. |
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Home Affordability Modification Program: How does it work?
Everyone knows about President Obama’s program known as the Home Affordability Modification Program (“HAMP”). Many have wondered if the program can help them save their home, but how does it work? In brief, the HAMP was designed to save your home if you are struggling to pay your mortgage. It was also designed for consumers to be able to work through the process on their own without the need of an attorney or a consultant.
The HAMP process is not really that difficult. A consumer should review the mortgage company’s web site for all required documentation which is needed in order to be considered for the HAMP. Once all the required documents are submitted the company will put the consumer’s request for review under the HAMP into a pool of thousands of other like consumers.
It sounds simple right? Well, there are many problems hidden within this simply process. A consumer should keep in mind that the mortgage company in the HAMP is trying everything not to get the consumer into the review of the program. What I mean by this is that the mortgage company is likely to reject a consumer’s request for not having all documents requested even though you’ve submitted them. Also, the mortgage company is not going to stop foreclosure proceeding while the consumer’s request sits in the pool of thousands of request. The biggest issue with this process is time. The HAMP process is likely to take 3 to 12 months.
How to ensure that this process works for you? You really will need to either make a commitment to setting aside at least two hours a week to follow up with the mortgage company for updates and to ensure that the mortgage company continues to review your request. Alternatively, you could hire a professional like an attorney to ensure that the mortgage company continues to review your request and to ensure that the process is documented.
Overall HAMP is a simple process, but be prepared to dedicate the required time to prepare the documents and also for the long review process.
Home Affordable Mortgage Program Calculation
Many Consumer’s have heard of the Home Affordable Modification Program (“HAMP”). This is the Federal loan modification program. However, what most consumers do not realize is that the calculation of a new mortgage payment is very guideline specific. The following is a detailed explanation of how the program calculates the new or modified payment under HAMP.
The goal for borrowers, as they seek a HAMP Modification, is a Front-End Debt-to-Income of 31%. In plain English this ratio measures the percentage of monthly gross income that is consumed by debt and housing payments. This rate considers the value of consumer expenses compared to the borrower’s gross monthly income. This calculation begins with the reduction of mortgage payments by the investor to no more than 38%. The subsequent reductions by the lender, to get to the target of 31%, rest on the reduction of the borrower’s interest. If, however, the reduction reaches the floor of 2% without reaching 31%, the borrower may need to account for the difference with annual increases of the interest rate.
Once the lender reduces mortgage payments to no more than 38% Front-End Debt-to-Income ratio, the Federal Government will match further reductions in monthly payments down to 31% Front-End Debt-to-Income ratio for the borrower. At this point, lenders may capitalize arrearage.
The target Front-End Debt-to-Income (DTI) is 31%. The Standard Waterfall step that results in a Front-End DTI closest to 31% without going below 31% will satisfy the Front-End DTI Target. Front-End DTI is the ratio of PITIA to Monthly Gross Income.
- Gross Monthly Income—the amount before any payroll deductions.
- The total first mortgage debt and monthly payments (PITIA). This includes principal, interest, taxes, insurance, and homeowners association and/or condominium fees.
The calculation to reduce the interest rate to reach the Front-End DTI Target is subject to a floor of 2%. The interest rate reduction shall be made in increments of 0.125%, with the goal of bringing the monthly payment as close as possible to the Front-End DTI, without going below 31%.
If the modified interest rate is at or above the highest interest rate allowed by the original mortgage note, the modified interest rate will be the new note rate for the remaining loan term. If, however, the modified interest rate is below the maximum allowed rate in the note, the modified interest rate will be in effect for the first five years, followed by annual increases, until the interest rate reaches the interest rate cap, of up to 1% per year. The interest rate will be fixed once the interest rate reaches the interest rate cap. If the Front-End Debt to Income target has not been reached, the term of the loan shall be extended up to 40 years
It should be noted that there is no requirement to use principal reduction under HAMP, but servicers may forgive principal to achieve the Front-End Debt-to-Income target. Consumers should recall that the goal is to reduce Front-End DTI to 31%. By forgiving principal, monthly payments (as part of the PITIA calculation) are drastically reduced, thus reducing to overall ratio.
How the HAMP loan modifications affect your credit score
For many consumers, their existing home mortgage obligation has outpaced their ability to pay it back. Many homeowners have suffered some form of a hardship, be it from the loss of a job, an illness, a divorce, or other similar type of situation. For those in such a situation, many have turned to President Obama’s loan modification program called the HAMP program. This is a great program because it allows a reduction in mortgage payments for 5 years. However, what many Consumers need to understand is how this program may or may not affect their credit score.
Many mortgage companies are reporting the modified mortgages to the credit bureaus as a “rolling 30-day late” while the modification are in its 90-day trial period. Homeowners are deemed “delinquent” during the trial period because the modified payment amount is less than the original mortgage payment amount, but the homeowner is not yet officially in the modification program.
THIS IS NOT HOW A LOAN MODIFICATION SHOULD BE REPORTED
Homeowners who are current on their mortgage when they enter into the trial modification period should not be reported as late, according to servicer guidelines for Fannie Mae, Freddie Mac, as well as other loans (”non-GSE loans”) being modified by HAMP-participating servicers.
Homeowners who were delinquent when they entered the modification trial period, however, will continue to be reported as delinquent during the trial period. See below for more detail.
If your loan is owned or guaranteed by Fannie Mae, see page 12 of Fannie Mae Servicing Guide Announcement 09-05R for information about credit reporting for HAMP-modified Fannie Mae loans. It says:
“If a borrower is current when they enter the Trial Period, the servicer should report the borrower current but on a modified payment if the borrower makes timely payments by the last business day of each Trial Period month at the modified amount during the Trial Period. If a borrower is delinquent when they enter the Trial Period, the servicer should continue to report in such a manner that accurately reflects the borrower’s delinquency and workout status following usual and customary reporting standards. In both cases the servicer should report the modification when it becomes final.”
“Borrowers, who are current when they enter into the Trial Period and make payments by the 30th day of each month, report as current, but on a modified payment. Borrowers, who are delinquent when they enter into the Trial Period or do not make payments by the 30th of each month, report according to borrower’s delinquency and workout status. Notify when borrowers have completed the modification.”
If your loan is NOT owned or guaranteed by Fannie Mae or Freddie Mac, see page 22 of “HAMP Servicer Supplemental Directive 09-01? for information about credit reporting guidelines for modified non-GSE loans. It specifies the following:
“The servicer should continue to report a “full-file” status report to the four major credit repositories for each loan under the HAMP … on the basis of the following: (i) for borrowers who are current when they enter the trial period, the servicer should report the borrower current but on a modified payment if the borrower makes timely payments by the 30th day of each trial period month at the modified amount during the trial period, as well as report the modification when completed, and (ii) for borrowers who are delinquent when they enter the trial period, the servicer should continue to report in such a manner that accurately reflects the borrower’s delinquency and workout status following usual and customary reporting standards, as well as report the modification when completed. More detailed guidance on these reporting requirements will be published by the CDIA.”
Deed for Lease Program
Even if you don’t qualify for a loan modification through the HAMP or some other loan workout program, you may be able to qualify for the Deed for Lease Program by Fannie Mae (“D4L”). This is a new option for qualified borrowers or tenants of borrowers, who have Fannie Mae loans, who are facing foreclosure. According to Fannie Mae, the program will allow the homeowner or tenant to remain in their home by surrendering the deed to their home to Fannie Mae and in return be allowed to sign a lease through a deed-in-lieu of foreclosure transaction. Fannie Mae executives were quoted in an MSNBC report stating, “the rental program is designed to help delinquent homeowners who don’t qualify for a loan modification, but still want to stay in their homes”
The program is intended to keep families in their homes even after a possible foreclosure or transfer of ownership of their property back to the bank by executing a lease of up to 12 months. Investment properties that are tenant-occupied may also be considered as long as the borrower is cooperative in providing information from the tenant to facilitate the transfer of ownership.
A CNN report quoted Jay Ryan, a Fannie Mae vice president, “The program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities”.
As stated in the November 5, 2009 announcement by Fannie Mae, In order to qualify for the Deed for Lease Program, the occupant of the property must have the ability to pay rent at the value the market bears, which can not be more then 31% of his or her monthly gross income. The home must also be the primary residence of either the homeowner or the tenant who will continue to occupy the property. The homeowner must not be more then 12 months behind on their mortgage payments and most importantly, the person responsible for paying the rent, will have verifiable income. In addition, Fannie Mae will inspect the property to confirm that the occupants have been keeping the property in good condition. The occupants will need to agree to be responsible for regular maintenance, to keep the property in good condition, and to permit marketing of the property for sale. Finally, the occupants signing the lease must agree to a credit review and all occupants over the age of 18 must have an acceptable background check.
At the conclusion of the 12 month lease term, there is the potential for a month-to-month extensions of the lease. There is also the potential to buy back the property from Fannie Mae at the end of the lease period if the homeowner can obtain the proper funding. The obvious benefit here is that the buy back price would be at current market value and not at the original mortgage value. If the value of the home has decreased too much, it is also possible the Lender will want to continue to rent the property to the occupant in order to continue to generate cash flow.
To find out if your loan is with Fannie Mae go to:
http://loanlookup.fanniemae.com/loanlookup/
Produce the Note (or mortgage)
I recently came across a great article drafted by a former paralegal of our firm, Rick D. Misitano regarding foreclosure defense. Below are the pertinent parts of that article. When a lender can’t produce the original note, allowing a foreclosure to proceed puts the homeowner at risk of owing that debt again to another party in the future.
So, what happens when the lender tells the Court it can’t produce the original note, because it is lost? Let’s start with the basics. If a lender wants to foreclose on a property, it has to be able to show that it is, in fact, the appropriate person to whom the money is owed. That right to foreclose belongs only to the person who has legitimate possession of the original note, not a copy, not an electronic entry, but the original note itself with the original signature of the person(s) who allegedly owes the money along with appropriate raised notary seal and signature. So, if you are faced with a foreclosure, you have every right to demand that the person or entity trying to take your property, first prove to the Court that they have the legal right do to so in the first place by proving they have legal possession of the original promissory note.
Pursuant to Federal and Massachusetts law, a Lender Must affirmativly prove:
1. The person or entity has to swear and attest that it no longer has the original note;
2. The person or entity has to prove that it was properly in possession of the note and was entitled to enforce it WHEN it lost possession of the note;
3. The person or entity has to prove it didn’t “lose” possession simply because it transferred the note to someone else (i.e., it’s not really lost); and
4. The person or entity has to prove that it cannot produce the original note because the instrument was destroyed or its whereabouts cannot be determined or it was stolen by someone who had no right to it.
All of these matters have to be definitively proven by the person or entity trying to foreclose on the property. It is not the obligation of the borrower to prove or disprove any of this. The borrower can challenge the right of the person or entity trying to foreclose and demand proof.
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.
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.
