*In this first part in the series, we’ll cover what a loan modification is, and who is eligible. Please keep in mind that if you have lost your job, or have extremely limited income, you probably will not qualify for a loan modification. You must have income in order to pay any loan, even a modified one. If you are in this category, help may be on the horizon. For now, please start with our Help with Arizona Short Sales and Foreclosure series. Next time, we’ll look at the pros and cons of doing a loan modification.
The Rise of “The Loan Mod”
Until just this last March, if you couldn’t afford your home, you had little choice but to allow the lender to foreclose, or try to do a short sale. In other words, you were moving; there were no options to stay in your home. Now, in an effort stop foreclosures and stabilize the economy, the federal government has created some programs to enable you to stay in your home and avoid foreclosure by modifying the terms of your current mortgage.
There are currently four federal programs to make mortgage modifications available to the public: HARP (Home Affordable Refinance Program), HAMP (Home Affordable Modification Program) HOPE for Homeowners, and the FDIC’s Mortgage Modification Program for IndyMac. Of these four programs, only HAMP has made any real progress in modifying mortgages. The other programs do not have broad lender participation, and the guidelines are too strict for many borrowers.
The Congressional Oversight Panel (who oversees these programs) in their review released in October 2009, reported that 85% of all servicing lenders are either participating in the HAMP program, or have programs of their own that are comparable. For this reason we will focus exclusively on HAMP, as this is how most people will modify mortgages. HAMP modifications are made on a 3 month trial basis first, and if you make the new payments and provide all documentation that your lender requests, your loan modification will become locked in for five years. After the five years, your loan will gradually revert to either your original loan interest rate, or the Freddie Mac 30-year fixed rate at the time of your modification, whichever is less. (The Freddie Mac rate is currently around 5%.)
How Does A Loan Mod Work?
How is a mortgage modified to make it more affordable? First, we have to define “affordable.” For the purposes of this plan, the government has determined that a monthly mortgage payment that is 31% or less of your monthly income is affordable. If your monthly mortgage is more than 31% of your monthly income, it is not. In order to reach this 31% affordability level, lenders can make several changes to your mortgage. Before we get to the actual modifications that can be done, we must first advise of a few key points of the program.:
-Lower your interest rate to as low as 2% for a period of up to 5 years.
*After 5 years, your loan rate goes up again. This is the method used in almost all modifications. The average modified loan rate goes from 7.58% to 2.92%.
-Extend the term of your loan, or re-amortize, for up to 40 years
*Most lenders are not doing this for two reasons, 1.) an interest rate reduction will usually work to reach the desired 31%, and 2.) most lender’s Pooling and Servicing Agreements (PSAs) will usually not allow them to modify loan lengths.
*A portion of your loan is “lopped off” and placed into a “bubble” that you don’t pay any interest or payments on. This portion of your loan is due “later”. This is very rare.
*A portion of your loan is again “lopped off,” but this time, it’s forgiven. It’s gone. This is not only rare, it’s an anomaly: of the 362,348 borrowers placed into HAMP loan mods, only 5 had principal forgiven.
Who Can Participate in The Loan Mod Program?
So, does anyone who can prove that their mortgage is more than 31% of their monthly income get a loan modification? How do the government and lenders determine who is eligible? The eligibility requirements for HAMP are fairly simple, but also prohibitive for some:
#1.) You must be in default or be in imminent danger of default.
*Default is defined as “behind on payments,” and in order to be eligible, you must have either already stopped making payments, or demonstrate that your ability to make payments is about to end.
#2.) You must have a certifiable hardship
* You must be able to explain why you now CAN’T pay your mortgage, whereas you COULD before. Did you lose a job? Get divorced? Get ill? These reasons and others like them are certifiable hardships.
#3.) Your loan has to have been issued prior to January 1st, 2009
#4.) Only 1st Mortgages are eligible under the program’s guidelines
*2nd loans or home equity lines are not eligible (Treasury is working to include these.)
#5.) Mortgage balance cannot exceed $729,750
* If a review of your finances indicates that 55% or more of your income is servicing consumer debt (credit card, mortgage, etc), enrollment in a credit counseling program is mandatory for program participation.
What’s To Come:
While mortgage modifications will be a ray of hope for some homeowners in distress, many more will either not qualify for a modification, or will choose not to do one. Why would an Arizona Homeowner NOT do a loan mod?
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*I am not an attorney, and neither do I play one on TV or the Internet. This article should NOT be construed to impart specific legal recommendations or advice to ANYONE. If you have questions regarding your specific set of circumstances, please call our office, or contact an attorney. (Our Office: 602-499-4798)