What is a loan modification? A loan modification changes one or more material terms of the borrower’s current loan, e.g., reduced interest rate, extended pay period (e.g., 30 years to 40 years).
Under what circumstances can a home loan be modified? Based on prevailing standards, a homeowner’s home loan can be modified if there are least two factors met: 1) the home is underwater; and 2) the borrower(s) has a financial hardship. If a homeowner has equity in their home, it is customary for the homeowner to seek to refinance their home.
What types of loan modifications are available? As of the writing of this section, there are two types of loan modifications:
- President Obama Home Affordability Modification Program under the Making Home Affordable® Program (“HAMP”).
- In-House Loan Modifications
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);
- 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.
As many homeowners know by now, the HAMP program, while well-intentioned by the Obama Administration, is a little short of a complete failure. Part of the problem is that the program is a volunteer program only—not mandatory. The drafters of the HAMP program, in order to entice more lenders to consider offering HAMP programs to their borrowers, wove in to the fabric of the HAMP program, financial incentives. Unfortunately for the consumer, financial incentives were not enough, as many lenders quickly realized they could get more on their investment by foreclosing their Fannie Mae or Freddie-Mac backed mortgages.Other reasons for HAMP loan modifications being denied or the process prolonged for an inordinate amount of time:
- 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 of bank staff.
- Poor training of bank staff.
- Lenders losing documents that borrowers 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.
Only a lucky few have been able to receive a permanent loan modification with their lender through the HAMP program. As part of Ms. Garrett’s coaching, she teaches her clients to do everything possible to eliminate error on their part, as well as teaches them how to reduce bank error and bank excuses. Many people have had success in utilizing Ms. Garrett’s coaching services in connection with submission of HAMP loan modifications.In-House Loans
A bank’s in-house loan is an alternative loan modification that a lender provides to a distressed homeowner. Unlike the HAMP program, the lender sets their own rules. Like the HAMP program, the borrower must have a home that is “underwater” and can show financial hardship. From Ms. Garrett’s experience, in-house loan modifications are equal to or better than HAMP loans—because the lender is not restricted. For instance, most in-house loans 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. HAMP, on the other hand, will use a “floor” interest rate of 2% and then gradually increase it to the prevailing rate that exists approximately 5 years later.
Other benefits include a quicker turn-around time for loan approval-as well as being assigned to one bank representative throughout the loan modification process.
The ideal candidate for an in-house bank loan is someone who does not qualify for a HAMP loan. For example, the subject home is a vacation home, or the amount owing is above HAMP guidelines.
Some draws-backs to the in-house loan modification is that a lender can consider retirement accounts as “assets” and require that the borrower make them available for repayment of arrears; or, in other instances, deny a borrower for a loan modification based on high-value retirement accounts, e.g. pensions and 401(k)s.