What is a loan modification?

A loan modification changes one or more material terms of the borrower’s current loan. Some examples are reduced interest rate, extended pay period (e.g. 30 years to 40 years), and deferred principal.

Under what circumstances can a home loan be modified?

Based on prevailing standards, a borrower’s home loan may be modified if he borrower has a financial hardship and/or is in imminent default.

What types of loan modifications are available?

There are different types of home loan modifications:

  • President Obama Home Affordability Modification Program under the Making Home Affordable® Program (“HAMP”).
  • HAMP Tier 2 Modification
  • In-House Loan Modifications
  • U.S. Department of Justice and Attorney General global settlement agreement.

The Making Home Affordable Program (MHA)—Home Affordability Modification Program (HAMP)

The HAMP program, approved in March 2009, provides eligible borrowers the opportunity to modify their first lien mortgage loans to make them more affordable. Under HAMP, servicers are supposed to apply a uniform loan modification process to provide eligible borrowers with affordable and sustainable monthly payments for their first lien mortgage loans. Affordability is achieved through the application of an interest rate reduction, term extension, principal forbearance, and/or principal forgiveness.

Eligibility for HAMP:

  • The mortgage loan is a first lien mortgage loan originated on or before January 1, 2009;
  • The mortgage loan has not been previously modified by HAMP;
  • The mortgage loan is delinquent or default is reasonably foreseeable. (A loan currently in foreclosure is eligible).   In other words, the loan is in default or in imminent default;
  • The subject home is owner-occupied, single-family property.  This means the mortgage loan is secured by a one-to-four-unit property, one unit of which is the borrower’s principal residence;
  • The property securing the mortgage loan is not vacant or condemned;
  • The borrower’s monthly mortgage payment (including principal, interest, taxes, insurance, and when applicable, homeowner association fees) prior to the modification, is greater than 31% of the borrower’s verified monthly gross income;
  • The borrower agrees to set up an escrow account for taxes and hazard insurance (homeowner insurance) and flood insurance prior to the beginning of the trial period if one does not currently exist;
  • The current unpaid principle balance of the mortgage loan prior to the capitalization not greater than $729,250 (1 unit); $934,200 (2 units); $1,129,250 (3 units) and $1,403,400 (4 units); and
  • The homeowner has not been convicted, within the last 10 years, of the crimes of felony, larceny, theft, fraud or forgery, money laundering or tax evasion in connection with a mortgage or real-estate transaction.

HAMP Tier 2 Changes

Expansion of number of loan modifications.  HAMP Tier 1 allows only one loan modification.   HAMP Tier 2 allows modifications of up to three different mortgages.

Inclusion of non-owner occupied/investment properties.   Mortgage holders who don’t occupy the home as their principal residence are now eligible under HAMP Tier 2.

An expansion of the owner occupied terms, to include properties of displaced borrowers — those deployed in the military, with job transfers out of the area, etc. — as long as the property was their principal residence before their relocation and they intend to re-occupy the home in the future. The current occupant cannot be a tenant for owner occupied terms.

Provides 12 month forbearance assistance to unemployed.   Servicers are required to offer forbearance assistance to unemployed homeowners for 12 months.  When the borrower gains employment or the 12 months have expired, they will be evaluated for eligibility under HAMP.  This UP unemployment assistance has been expanded to included borrowers whose loan is secured by a vacant or tenant-occupied property.   The borrower’s monthly mortgage payment ratio does not affect their consideration for assistance. Borrowers who defaulted on a HAMP trial plan or HAMP loan modification must also be considered for UP assistance.

UP unemployment assistance extended.   Servicers are being required to consider borrowers for UP assistance, without regard to their monthly mortgage payment ratio, or if they’ve defaulted on a HAMP Tier 1 trial or modification payment plan.

Eligibility for borrowers who received a modification under HAMP Tier 1.   Borrowers who weren’t successful with a HAMP 1 trial payment plan are eligible to apply for HAMP 2 modification, as long as 12 months have passed.

Revision to debt-to-income ratio for qualification.   HAMP Tier 2 sets the pre-modification monthly mortgage payment below 31 percent of debt-to-income ratio.  Borrowers are not eligible under HAMP Tier 2 if their post-modification debt-to-income ratio is less than 25% or greater than 42%.

A requirement that a modification must result in at least a 10% reduction to qualify.  HAMP Tier 2 eligibility requires a 10% or greater reduction in monthly principal and interest payments after modification.   If less, the mortgage is not eligible for modification under HAMP.

Loan modifications and other programs that fall under HAMP and the Making Home Affordable Program apply:

  • To properties with one to four units with documented hardship
  • For loans that originated before January 1, 2009
  • For homes that have not been condemned
  • In addition, the Net Present Value (NPV) has been revised in an effort to qualify more homeowners for assistance under HAMP’s Tier 2.

In-House Loan Modifications

A bank’s in-house loan modification is an alternative loan modification that a lender provides to a distressed homeowner. Unlike the HAMP program, the lender sets its own rules. Like the HAMP program, the borrower must be able to show a financial hardship. Some in-house loan modifications are equal to or better than HAMP modifications—because the lender is not restricted. For instance, some in-house loan modifications do not have the mandatory 3—month trial period that the HAMP program requires; also, most in-house loans set fixed interest rates for the life of the loan.

Problems With borrowers being denied for modifications

  • Forms not properly filled out by the consumer, such as profit-and-loss statements.
  • Failure of consumer to submit proper documents, e.g. stale bank statements, or missing pages to bank statements. (When a bank says they want “all pages”—they mean it . . . including the pages that say “blank”.)
  • Failure by the consumer to provide the lender with all documents required by the lender— including documents that the lender failed to request at the beginning of the loan modification process, such as copies of Homeowner Insurance policies, copies of the Tax Bill, a “Declaration of No HOA Fees Due”—even though the HAMP application has a place to indicate that the consumer has no HOA dues for their property!
  • Loan process extended, resulting in “stale documents”; thus, requiring the borrower to resubmit (and resubmit) financial documents to their lender.
  • High turnover rate of bank staff.
  • Poor training of bank staff.
  • Lenders losing documents that borrower(s) timely faxed over to their lender.
  • Failure on part of bank representatives to properly document file.
  • Failure of bank representatives to work with and communicate with other departments, such as the “Foreclosure Department” or Trustee—resulting in home being foreclosed upon when in the middle of a loan modification process or trial payment.
  • Inability of borrower to work with one contact person at bank—instead, working with different people each time borrower calls or each time bank calls.

Department of Justice Mortgage Settlement

In February 2012, 49 state attorneys general and the federal government announced a historic joint state-federal settlement with the country’s five largest mortgage servicers:

  • Ally/GMAC
  • Bank of America
  • CitiMortgage
  • JPMorgan Chase
  • Wells Fargo

This settlement will provide as much as $25 billion in relief to distressed borrowers

This agreement settles finding that the country’s five largest mortgage servicers was processing foreclosure in violation of the law.   According to the Attorney General, these banks routinely signed foreclosure related documents outside the presence of a notary public and without really knowing whether the facts they contained were correct.

What does that mean to you?

If your servicer is one of the above mentioned 5 banks you may be eligible for this settlement.

Immediate aid to homeowners needing loan modifications now, including first and second lien principal reduction.  The servicers are required to work off up to $17 billion in principal reduction and other forms of loan modification relief nationwide.

State attorneys general anticipate the settlement’s requirement for principal reduction will show other lenders that principal reduction is one effective tool in combating foreclosure and that it will not lead to widespread defaults by borrowers who really can afford to pay.

If you are behind on your monthly mortgage payments, give Johnston Law a call today to review your case and see whether you are eligible for any of the many loan modification programs available today.