Whether it’s called a loan modification, mortgage modification, restructuring, or workout plan, it’s when a borrower who is facing great financial hardship, having difficulty making their mortgage payments and is facing foreclosure, works with their lender to change the terms of their mortgage loan to make it affordable. The workout plan varies by lender, but changes could include temporary or permanent changes to the mortgage rate, term and monthly payment of the loan, the past due amount could be rolled into the loan, and the new balance re-amortized.
What is a loan modification under Obama’s plan?
In February 2009, the government unveiled the Making Home Affordable Program, which is made up of two main programs: one for loan modifications and one for refinance loans. The loan modification portion is called the Home Affordable Modification Program (HAMP). It is designed to reduce mortgage payments struggling homeowners pay per month to sustainable levels. The refinance plan is called the Home Affordable Refinance Program (HARP).
According to the details of the HAMP plan:
- The lender would first be responsible for bringing down interest rates so that the borrowers monthly mortgage payment is no more than 38 percent of his or her income.
- Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent.
- Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.
- Borrowers will be put on a trial modification at the new interest rate and payment for three months. If they make all their payments on time, the modification will be implemented at the new rate and be fixed for five years.
Under the HAMP, loan modifications will be standardized, with uniform loan modification guidelines used by Fannie and Freddie Mac, and then they will be implemented throughout the entire mortgage industry.
Who is eligible for a HAMP loan?
To qualify, you must:
- Have originated your mortgage before Jan. 1, 2009.
- Be an owner-occupant.
- Have an unpaid balance that is equal to or less than $729,750 (for a single-family home).
- Have trouble paying your mortgage due to financial hardship. That could be because you have had an increase in your mortgage payments, or because your income was reduced or you suffered a hardship (like medical problems) that increased your bills, or, you can show that you soon will be unable to make your payments. You will be required to enter an affidavit of financial hardship.
- Your monthly mortgage payment must also be more than 31% of your gross (pre-tax) monthly income.
According to the Department of Treasury: Anyone with high combined mortgage debt compared to income or who is underwater (i.e., has a combined mortgage balance higher than the current market value of his house) may be eligible for a loan modification. This initiative will also include borrowers who show other indications of being at risk of default. New borrowers will be accepted until Dec. 31, 2013.
Who’s not eligible for a HAMP loan?
Speculators or those who bought homes for investment purposes — are not eligible. All homes must be owner/occupied. Also, if you cannot afford the home due to job loss or a complete inability to pay, you will not be eligible. Also, mortgages with amounts above the conforming loan limits would not be eligible.
How does someone get a loan modification?
First, gather this information:
- Information about the monthly gross (before tax) income of your household, including recent pay stubs if you receive them or documentation of income you receive from other sources.
- Your most recent income tax return.
- Information about your assets
- Information about any second mortgage on the house.
- Account balances and minimum monthly payments due on all of your credit cards.
- Account balances and monthly payments on all your other debts such as student loans and car loans.
- A letter describing the circumstances that caused your income to be reduced or expenses to be increased (job loss, divorce, illness, etc.).
Second, call your mortgage servicer and ask to be considered for a “Home Affordable Modification”, or HAMP. The number is on your monthly mortgage bill or coupon book. Honestly state your situation. They will assess your financial state through phone calls and paperwork to determine whether you qualify for a loan modification. Keep copious, detailed notes on who you speak with and details of the conversations so you have documentation down the road if you are faced with foreclosure.
Third, depending on the direness of your financial difficulties, its always good to hire legal counsel. Get a referral from your local state bar association.
Fourth, call a local HUD-Approved Housing Counseling Agency for guidance.
How do loan modifications benefit lenders and borrowers?
A loan modification is usually a win-win situation: the lenders get their money in a reworked fashion and borrowers get a new chance to support their mortgage payments at a reduced cost.
But, under the HAMP plan, there are incentives for both lender and borrower. According to the Treasury:
- Pay for Success Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive pay for success fees awarded monthly as long as the borrower stays current on the loan of up to $1,000 each year for three years.
- Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.
- Reaching Borrowers Early: To keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind.
- Home Price Decline Reserve Payments: To encourage lenders to modify more mortgages and enable more families to keep their homes, the Administration — together with the FDIC — has developed an innovative partial guarantee initiative. The insurance fund to be created by the Treasury Department at a size of up to $10 billion will be designed to discourage lenders from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on. Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index.
Also, banks would rather have you stay in your home than risk foreclosure since they stand to lose more money through foreclosure. Think about it: a bank would need to make any repairs to the home, pay real estate agents to list it, and then perhaps list it at a discounted price. And, if the real estate market is slow, the price could be further reduced.
In any case, a Loan Modification is a change in one or more of the terms of a Borrower’s loan, allows the loan to be reinstated, and hopefully, results in a payment the Borrower can afford.
Question 1: In utilizing the Loan Modification Option to bring an asset current, can the Lender include all fees and corporate advances?
Answer: Mortgagee Letter 2008-21 states in part: Legal fees and related foreclosure costs for work actually completed and applicable to the current default episode may be capitalized into the modified Principal Balance.
Question 2: May a Lender perform an interior inspection of the property if they have concerns about property condition?
Answer: Yes, per Mortgagee Letter 2000-05, page 20, the Lender may conduct any review it deems necessary to verify that the property has no physical conditions which adversely impact the Borrower’s continued ability to support the modified mortgage payment.
Question 3: Can a Lender include late charges in the Loan Modification?
Answer: Mortgagee Letter 2008-21 states that the goal in providing the Borrower a Loan Modification is to bring the delinquent mortgage current and give the Borrower a new start; therefore, the Lender should waive all accrued late fees.
Question 4: When utilizing a Loan Modification Option, can a Lender capitalize an escrow advance for Homeowner’s Association fees?
Answer: HUD Handbook 4330.1 REV-5 (Paragraph 2-1, Section B, Escrow Obligations) states: Lenders must also escrow funds for those items which, if not paid, would create liens on the property positioned ahead of the FHA-insured mortgage.
Question 5: Is there a new basis interest rate which Lenders may assess when completing a Loan Modification?
Question 6: Are Lenders required to re-amortize the total amount due over 360 month period?
Answer: Yes, per Mortgagee Letter 2009-35, the Lender must re-amortize the total unpaid amount due over a 360 month period from the due date of the first installment required under the Modified Mortgage.
Question 7: What date is utilized when determining the correct interest rate for a Loan Modification?
Answer: The date the Lender approves the Loan Modification (all verification completed and servicing notes documented, reported to SFDMS) is the date that Lenders are to use in determining the interest rate.
Question 8: Will HUD subordinate a Partial Claim should a Borrower subsequently default and qualify for a Loan Modification?
Answer: If a Borrower subsequently defaults and qualifies for a Loan Modification, HUD will subordinate the Partial Claim.
Question 9: Are Lenders required to perform an escrow analysis when completing a Loan Modification?
Answer: Yes, Lenders are to perform a retroactive escrow analysis at the time the Loan Modification to ensure that the delinquent payments being capitalized reflect the actual escrow requirements required for those months capitalized.
Question 10: Can a Lender qualify an asset for the Loan Modification Option when the Borrower is unemployed, the spouse is employed, but the spouse name is not on the mortgage?
Answer: Based upon this scenario, the Lender should conduct a financial review of the household income and expenses to determine if surplus income is sufficient to meet the new Modified Mortgage Payment, but insufficient to pay back the arrearage. Once this process has been completed the Lender should then consult with their legal counsel to determine if the asset is eligible for a Loan Modification since the spouse is not on the original mortgage.
Lastly, and most important. Beware of Foreclosure Rescue Scams
Scammers are targeting people having trouble paying their mortgages. These so-called foreclosure rescue companies promise to stop foreclosure. But they’re out to make a quick buck, and can turn a homeowners distress into disaster.
If you would like more information on how you too may work with the Scott Ivey Real Estate Team, please contact us today. You can reach Scott Ivey by calling (916) 283-7959 or email Scott personally at email@example.com
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