Mortgage Loan Modifications

Since the collapse of the mortgage industry that began in 2007, several attempts have been made to establish programs to help homeowners avoid foreclosure.  In addition to helping families stay in their homes, these programs were also intended to help stabilize home prices in local communities.  By stabilizing home values, the aggregate value of the local property tax base is maintained at a higher level, which helps protect the revenues that go to local and state governments.  Programs that help families save their homes from foreclosure also help protect the values of neighboring homeowners.  Everyone wins when foreclosures are reduced.

Because Congress did not pass any laws to force mortgage servicers and lenders to modify problem loans, all the programs that have been tried have been voluntary.  In other words, if the servicer/lender does not want to participate in the program they don’t have to.  In addition, even if the servicer/lender agrees to participate in a loan modification program, there is no enforcement of the rules of that program by any government agency.  So, even if a servicer/lender agrees to participate in a loan modification program, the homeowner cannot force the servicer/lender to follow the rules of the program.  This problem has created a situation that frustrates, disappoints, and angers many homeowners (and us, too!).

A term that is often used in connection with loan modification applications is “net present value” or NPV.  Most loan modification programs include a NPV test, by which the servicer calculates whether the lender would receive more money by approving the proposed loan modification or by denying the modification and foreclosing on the property right now.  The results of this test will rely heavily on the true value of the property and the income of the borrower, and therefore, the monthly payments the borrower can afford.  The higher the current value of the property, the less likely the loan modification proposal will pass the NPV test.  The lower the borrower’s income, the less likely the proposal will pass the NPV test.

The following loan modification programs exist:

HAMP (Home Affordable Modification Program) Loan Modifications

The regular HAMP program is available to owner-occupant borrowers whose loans do not exceed the Fannie Mae loan limits for the local area, and whose servicer has agreed to participate in HAMP.  This program was started in mid-2009, and has had many problems since then.  For the first year, there were few rules to help homeowners who were applying for modifications.

In mid-2010, the U.S. Treasury Department (Treasury) adopted rules that set out some protections for applicants and stopped the servicers from discriminating against bankruptcy debtors (called “Supplemental Directive 10-02”). Having traveled to Washington D.C. on behalf of the National Association of Consumer Bankruptcy Attorneys and spoken with Treasury officials about the problems experienced by bankruptcy debtors, Norma Hammes was invited to be a member of the Bankruptcy Working Group set up to advise Treasury on this topic.  After several months of meetings and conflict with bank representatives on the Working Group, several important protections for bankruptcy debtors were included in Treasury’s Supplemental Directive 10-02 that became effective in June 2010.

At that time, we were hopeful that homeowners would now be treated more fairly by servicers, because rules were in place that should protect them.  Unfortunately, as time went on we saw that Treasury was unwilling to effectively enforce compliance with the rules it had adopted.  Therefore, throughout late 2010 and 2011, the numbers of HAMP trial plans and permanent modifications dropped off rather dramatically

To re-energize the program in late 2011, Treasury increased the “financial incentives” (money they paid) to servicers for loans they modified under HAMP, and the program was extended out to the end of 2013 (it would have terminated at the end of 2012).  The changes have had a minor positive effect on the number of HAMP modifications granted, but the program is still widely considered to be a failure, because so few homeowners have been able to receive truly helpful assistance.

Links to relevant  sites:

MHA official website: http://www.makinghomeaffordable.gov/Pages/default.aspx

MHA list of participants: http://www.makinghomeaffordable.gov/get-assistance/contact-mortgage/Pages/default.aspx

Proprietary Loan Modifications

Most servicers have their own loan modification programs, which are separate from HAMP.  Each servicer’s “proprietary” loan modification program has different benefits which may be offered to homeowners.  One problem with proprietary modification programs is that it is impossible to estimate how much of a modification would be offered in given circumstances.  The homeowner is completely at the mercy of the servicer in this situation.

FHA, Fannie Mae & Freddie Mac Loan Modifications

FHA, Fannie Mae, and Freddie Mac loans are eligible for HAMP modifications; however, the rules for applications and benefits are slightly different from normal HAMP.

Links to relevant sites:

FHA-HAMP: http://portal.hud.gov/hudportal/documents/huddoc?id=nschampfact.pdf

Fannie Mae HAMP: https://www.efanniemae.com/lc/sir/pdf/impfmhampmods.pdf

Freddie Mac HAMP: https://www.efanniemae.com/lc/sir/pdf/impfmhampmods.pdf

FDIC Loan Modifications

When the Federal Deposit Insurance Corporation (FDIC) takes over a failing bank, they find another bank to buy the assets of the failed bank, which include the mortgages that it owns and the mortgages for which it has servicing rights.  While the FDIC holds the assets, and as a condition of the sale to another bank, the FDIC has its own separate rules for modifying the mortgages.

Links to relevant sites:

http://fdic.gov/consumers/loans/loanmod/index.html