Mortgage Modification: Who Is Offering Loan Modifications and What Are They Offering?

There has been a lot of talk about loan modification recently. If you can’t afford your mortgage payments, you may qualify for a loan modification, either because you already have a federally insured mortgage, or because of a new federal program that encourages servicers to modify mortgages instead of foreclosing on them.

Depending on the context, loan modification can take a variety of shapes. If you have an FHA-insured mortgage, for example, the Department of Housing and Urban Development requires your loan servicer to offer you several kinds of loan modifications; the Department of Veterans Affairs offers similar support for its borrowers. If you don’t have an FHA or VA loan, you still have some options thanks to some recent federal and state programs.

On the state level, some jurisdictions are starting to impose waiting periods and required notices before a loan servicer can begin foreclosure proceedings. In Michigan, for example, the legislature passed a foreclosure prevention act which requires servicers to give notice to borrowers that housing counseling is available and that they can talk to a housing counselor about mortgage modification 45 days before the servicer begins foreclosure. The borrower also has the right to request a meeting with the servicer before the servicer starts foreclosure. Of course, nothing requires the servicer to agree to a modification. This is a recurring theme in the loan modification business—there are few cases in which a lender must agree to a modification.

The federal loan modification program is called Making Homes Affordable. This program is divided into the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP).

You may be eligible for HAMP if:

• You are the owner-occupant of a one to four unit home;
• You have an unpaid principal balance that is equal to or less than:
  • 1 Unit: $729,750
  • 2 Units: $934,200
  • 3 Units: $1,129,250
  • 4 Units: $1,403,400;
• You have a first lien mortgage that was originated on or before January 1, 2009;
• You have a monthly mortgage payment (including taxes, insurance, and home owners association dues) greater than 31 percent of your monthly gross (pre-tax) income; and
• Have a mortgage payment that is not affordable due to a financial hardship that can be documented.

If your loan is owned or guaranteed by FNMA or FHLMC, the servicer is required to participate in HAMP. Other servicers participate voluntarily, you can determine if your loan is owned by FNMA here, FHLMC here, and you can see if your loan servicer is participating voluntarily in HAMP here.

Under the HAMP program, you can modify your first mortgage even if you have a “junior” mortgage. If your loan qualifies, your servicer can take several steps to reduce your monthly payment to not more than 31% of your gross monthly income, including:

• Reduce your rate to as little as 2%;
• Extend the term of your mortgage to as much as 40 years;
• Delay repayment of a portion of the principal balance of the loan until the end of the loan’s term (called principal forbearance);
• Forgive a portion of the principal balance of the loan.

Your servicer should not charge you a fee for a HAMP modification. You should also be offered the option of rolling any costs (back taxes or insurance premiums, for example) into the loan balance. If you remain current on your loan, the Treasury will give you an incentive credit (which will reduce the principal balance of your loan) of $1000 per year. You can find more details about HAMP here.

You may be eligible for HARP if:

• The loan on your property is owned or guaranteed by Fannie Mae or Freddie Mac;
• At the time you apply, you are current on your mortgage payments;
• The amount you owe on your first lien mortgage does not exceed 125% of the current market value of your property;
• You have a reasonable ability to pay the new mortgage payments; and
• The refinance improves the long term affordability or stability of your loan.

You can refinance under the HARP program even if you are “upside down” on your property, and even if you have a junior lien mortgage, as long as your first mortgage balance is no more than 125% of the value of the property and the junior lien mortgage holder agrees to retain second position (this is called “subordination”). A HARP loan will not reduce your mortgage balance, and you can’t get “cash out” to pay debts, but it could reduce your monthly payments. Another advantage of the HARP program is that you can get the refinancing through lenders other than the one servicing your current loan. You can find out more about this program here.

Another program, offered through the Department of Housing and Urban Development is HOPE.

Under HOPE, you might be eligible to refinance your mortgage with an FHA-insured one if:

• Your mortgage was originated on or before January 1, 2008;
• You cannot afford your current loan;
• You must have made at least six full payments on your existing first mortgage and did not intentionally miss mortgage payments;
• You do not own a second home;
• Your mortgage debt-to-income ratio is at least 31%;
• You did not knowingly or willfully provide false information to obtain the existing mortgage, and you have not been convicted of fraud in the last 10 years;
• You can document your employment and income, and the documentation complies with FHA standards;
• You must agree to share both the equity created at the beginning of your new HOPE for Homeowners mortgage and any future appreciation in the value of your home with FHA;
• Any junior mortgage holders must agree to release their outstanding mortgage liens.

You can find out more about the HOPE program here.

While you can determine whether your servicer participates in these programs by following some of the links in this article, not all participating servicers are modifying loans at the same pace. The July 2009 Service Performance Report released by the Treasury

Department indicates that participating servicers modified anywhere from 0-25% of the eligible loans in their portfolios. Some servicers point to the fact that many loans are bundled as securities, and claim that they can’t modify loans without the investors’ permission. Experts say this isn’t true, but that servicers may fear lawsuits from investors, nevertheless. In any case, the common experience among those seeking modification is that it takes a lot of patience and perseverance.

Even when they do agree to modify a loan, servicers typically take a long time to decide about modification requests, and they often lose paperwork, so keep a copy of everything you send them—odds are you’ll have to send it again.

You can read more about the loan modification programs at these websites:

MakingHomeAffordable.gov: A consumer website providing detailed information about the Home Affordable Refinance Program and the Home Affordable Modification Program, self-assessment tools to determine eligibility, and resources for counseling, community events and helpful checklists.

HUD-Avoiding Foreclosure: A list of resources available in your state to help you avoid foreclosure.

HUD-Workout Solutions: List of workout solutions to help people avoid foreclosure, such as reinstatement, forbearance and repayment plans.

Department of Veterans Affairs-Avoiding Foreclosure: Information from the VA on how to avoid foreclosure and the ways in which the Dept. of Veterans Affairs can help you.