Charlotte Short Sale Advisors

Recent legislation encourages loan modification in an effort to decrease the number of foreclosures. If you are meeting with homeowners, see if one of their goals is to keep their home.

The new rules on loan modification provide relief for people who have had financial difficulty, but remained current on their payments. There are also some new programs for those in imminent danger of foreclosure, and those who are already up to 60 days late on their payments.

These programs are only for a family’s principal residence. It does not apply to second homes or investor owned properties. Loans that were originated before January 1, 2009 are eligible for modification.

Loan servicers will follow a series of steps specified in the programs to reduce the homeowners’ monthly payments in order to first bring the amount of the payments down to 38 percent of gross monthly income. As a second step, the government will share in the obligation to lower the payments even further to 31 percent of borrowers’ income. The first step in the process involves reducing the interest rate down to as low as two percent. Next, the term of the loan can be extended to up to 40 years. As a last resort, the principal of the loan can be reduced. The homeowner’s monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner’s association dues and/or condominium fees.

There is a payment to the loan servicer from the government to encourage the completion of this process. Also, if the borrower makes the mortgage payments on time for three years, there is a principal reduction payment by the government to the lender as a reward to the borrower for staying current on the financing.

To qualify, the borrower must still be employed and show the ability to make the payments after the adjustment. The loan can be well over the 80% of the value of the home that is required for refinancing. In fact the loan can be over 100% of the value of the home, so that people who want to keep their homes, even if it is worth less than the amount of the loan, can get their payments in line and stay in their home. The borrower gets only one loan modification, so it better be right the first time, because there will be no second time.

Loan servicers will use a net present value (NPV) test as a standard to judge each loan that is at risk of imminent default or is at least 60 days delinquent. The NPV test compares the net present value of cash flows with and without modification. If the test is positive – meaning that the net present value of expected cash flow is greater with a modification – the servicer must modify the loan. If the NPV test returns a negative result, loan modification is optional.

To see the Guidelines issued by the US Treasury, click here. For details on the Making Home Affordable Plan with all of its modification opportunities, click here. For all the details on the Financial Stability Plan that is part of this initiative, click here. Executives from Housing and Urban Development emphasized that access to the loan modification program is free and they warned homeowners to beware of rescue scams that claim to charge a fee for a government modification

For owners who have lost their jobs, this program will not work. If the owner needs to sell the home to move to another area, or if there are other personal issues such as divorce, these programs will not change the choice of pursuing a short sale. But for families who want to refinance out of a bad loan but have been prevented from doing so because the value of the home has fallen or the loan qualification requirements have become too severe, this new program should work well. In the next few weeks the loan servicers should be set up to review applications for loan modification.

For people who want to stay in their homes, this could be a godsend, if they qualify. There is no moving, no tax consequences, no effect on credit scores and no emotional trauma. For those who have to move, the short sale, deed in lieu of foreclosure or foreclosure itself are still the choices.

WASHINGTON – As part of the Administration’s ongoing housing market stabilization plan, the U.S. Department of the Treasury and the Department of Housing and Urban Development (HUD) today released updated guidance for servicers participating in the Administration’s mortgage modification program. This guidance refines the documentation requirements in order to expedite conversions of current trial modifications to permanent ones.

“With more than 850,000 homeowners in trial and permanent modifications, we are providing immediate relief to struggling homeowners,” said Phyllis Caldwell, Chief of Treasury’s Homeownership Preservation Office. “Today’s guidance represents our commitment to more efficiently move qualified homeowners into permanent modifications.”

“Increasing the number of borrowers receiving permanent modifications under HAMP is critical to our efforts to preserve affordable and sustainable homeownership,” said HUD Senior Advisor for Housing Finance William Apgar. “While we continue to meet our goals to provide immediate assistance, the updates announced today should enable servicers to transition borrowers more quickly and easily from trial to permanent modification.”

On December 23, 2009, the Administration required most trial modifications to be placed in a temporary review period to ensure that all borrowers are being fairly evaluated for the program. During this temporary review period, servicers were not permitted to cancel an active HAMP trial modification for any reason other than failure to meet the HAMP property eligibility requirements. This allowed servicers to convert a significant number of trial modifications to permanent ones. In fact, the total number of conversions more than doubled in December. Guidance released today will help improve this conversion process for the future.

The updated process requires that key documents, including proof of income, be obtained from the borrower before a borrower evaluation can begin. This more robust requirement of upfront documentation will make it easier and quicker to convert trial modifications to permanent modifications and enable servicers to use their resources more effectively.

Guidance Details

Supplemental Directive 10-01 provides guidance on two major issues:

1) New Requirements that Documentation be Provided Before Trial Modification Begins

Today’s guidance refines the documentation process and makes it easier for eligible borrowers in trial modifications to get permanent modifications quickly. Under this guidance:

A simple, standard package of documents will be required prior to the servicer’s evaluation of the borrower for a trial modification. This process will be required for all new HAMP modifications that became effective after June 1, although mortgage servicers may implement it sooner.

2) Converting Borrowers in the Temporary Review Period to Permanent Modifications

In December, Treasury implemented a review period through January 31 to provide servicers additional time to collect and submit missing documentation for borrowers in trial modifications, to require that borrowers be notified of any missing documents, and to give borrowers an opportunity to dispute and correct any erroneous information in their applications. Today’s guidance clarifies for servicers the proper procedures for conversion of those borrowers who are current on their monthly payments to permanent modifications.

Background

The Home Affordable Modification Program aims to help responsible American homeowners maintain a sustainable monthly mortgage payment through a pay-for-success framework that aligns incentives of borrowers, lenders and servicers. Over 900,000 Americans have begun trial modifications since the program’s inception and over 110,000 have been approved for permanent modifications as of December 31, 2009. The median monthly savings for individual homeowners is more than $500 per month. Over 100 servicers have signed up to participate in HAMP, covering more than 89% of mortgage debt outstanding in the country.

January 28, 2010

Supplemental Directive 10-01 is available at https://www.hmpadmin.com/portal/docs/hamp_servicer/sd1001.pdf