Mortgage modifications seek to prevent foreclosure by absorbing mortgage arrears, lowering monthly payments, and improving mortgage terms.
A Mortgage Loan Modification permanently changes the terms of your original mortgage loan. It is intended to make your monthly payments or mortgage terms more manageable, and typically results in a lower monthly payment. Typically, the terms that that may be changed in a mortgage loan modification include the interest rate, the term of the loan and/or the possibility of deferment or even forgiveness of arrears. If you receive a loan modification, you’ll be required to complete a trial period plan where you’ll need to make trial payments on-time each month for a few months to ensure you can afford the new modified payment.
For additional information on what is a “Mortgage Loan Modification” please visit: https://www.consumerfinance.gov/ask-cfpb/what-is-a-mortgage-loan-modification-en-269/#:~:text=A%20mortgage%20loan%20modification%20is,a%20type%20of%20loss%20mitigation.&text=Modifications%20may%20involve%20extending%20the,or%20reducing%20your%20principal%20balance.
Negotiations with mortgage lenders was always an option for homeowners having difficulty with their mortgage. Mortgage loan modifications were always one of the options for borrowers in arrears but until the recession of 2008-2014, this was not a popular option, that was routinely suggested and frequently offered by lenders. Therefore, it was not a regular option for borrowers in arrears until the severity of the last recession, which was mortgage loan driven, and caused the Federal government and lenders to offer Mortgage Loan Modifications as regular options to be considered in most mortgage loan foreclosures. In early 2009 due to what was clearly a foreclosure crisis, the federal government enacted the Making Homes Affordable Program (“HAMP”) and other related programs to encourage private mortgage lenders to modify the mortgage loans of qualified homeowners undergoing hardship with their mortgage payments. Most mortgage lenders incorporated the HAMP program and reviewed a loan for a modification under HAMP criteria. Also, because of political pressure on banks and mortgage lenders, and because the HAMP programs were complicated by government administrative requirements and oversight, many banks had instituted their own “in-house”, non-HAMP mortgage modification programs, in addition or instead of HAMP.
The goal of Mortgage Loan Modifications was to avoid foreclosure by restructuring the mortgage to combine it with the arrears and allow for an affordable, resumed monthly payment. The method of accomplishing this goal was to combine the principal of a loan with the arrears on the loan in order to absorb the missed payment arrears and join them with the principal resulting in a larger loan balance with better terms: a lower interest rate, a longer loan duration and with possibly some arrears deferred till the end of the loan. Under legislation passed during February of 2009, the Federal government had enacted a voluntary program to help homeowners facing “hardship” in paying their mortgage: The Home Affordable Modification Program (“HAMP”), was enacted to encourage mortgage lenders to modify mortgages for the “at risk” homeowner. The HAMP program expired on December 31, 2016, but it inspired lenders to expand their similar “in-house” modification programs which were more within their control and less subject to government regulation.
Under HAMP and the “in-house” Modification programs the arrears on a mortgage would be combined with the remaining principal balance, with the interest reduced and the loan term extended, effectively creating a larger loan where the monthly payments are less. Because the HAMP program had expired on December 31, 2016, and has has been largely replaced by the system of non-HAMP private bank modifications that almost every major lending institution offers, borrowers no longer need to first be screened for a potential HAMP modification and only if they did not qualify for HAMP would the in-house modification be considered. Now the “in-house” options offered by the particular lender are the only modification options available.
The HAMP program expired at the end of December 2016, but it inspired lenders to expand their similar “in-house” modification programs which were more within their control and less subject to government regulation. Under HAMP and the “in-house” Modification programs the arrears on a mortgage would be combined with the remaining principal balance, with the interest reduced and the loan term extended, effectively creating a larger loan where the monthly payments are less. Because the HAMP program had expired at the end of 2016, and has has been largely replaced by the system of non-HAMP private bank modifications that almost every major lending institution offers, borrowers no longer need to first be screened for a potential HAMP modification and only if they did not qualify for HAMP would the in-house modification be considered. Now the “in-house” options offered by the particular lender are the only modification options available.
While the HAMP program provided advantages of government oversight and financial subsidies, and while it started at low rates of interest 2-3% with stepped up interest over time, they where mired in more regulations and paperwork and layers of administration. In many ways the present non-HAMP, private “in-house” modifications are more direct and quicker in some instances, but lack the federal government over sight that was helpful in some cases with the HAMP process. However, just as the HAMP program was ended at the end of 2016, the bankruptcy courts were seeing a surge of Chapter 13 and 11 cases featuring “loss mitigation” plans as central to their reorganizations; these “loss mitigation” bankruptcy cases provided judicial oversight to the modification process. Given the new circumstances due to the Covid-19 economic downturn, many more homeowners are expected to fall behind with their mortgages, and new, additional government and private efforts may be needed to address a potential new foreclosure crisis that may need new solutions.
The basic requirements to qualify for most “in-house’ modifications is similar to the qualification for the former HAMP modifications and are as follows:
• The modification applicant needs to be liable for the mortgage lien and preferably an owner of the real property;
• The mortgage loan must be in default or in imminent default; and
• The loan default must be due to a hardship faced by the borrowers but the borrower’s finances need to be able to now sustain a payment level that is usually only slight less than the original monthly payment.
The methods by which lenders may help homeowners under “in-house” modifications are as follows:
Mortgage Arrears Absorbed into Principal – Mortgage arrears (including escrow arrears and the costs/fees from any legal proceedings if applicable) are absorbed into the principal balance creating a new loan that is larger in its new principal amount than the original loan, but is no longer in arrears. The New Modified Loan Has Better Terms – The Modification usually has better terms as to interest (which is lowered) and the duration of the loan term (which is extended), resulting in a monthly payment that is usually slightly less than what the borrower paid prior to their default.;
Loan Duration – Lenders may extend the loan term up to a term of 40 years; and/or
Arrears Deferment – Lenders may provide for deferment of some loan arrears in the form of a large balloon payment at the end of the loan term.
Most institutional lenders, offer several “in-house”programs, which are often modeled after the former HAMP program, but are less regulated than HAMP. Because navigating through these programs and dealing with the lenders’ bureaucracy can be difficult, successful modifications usually involve the client retaining a qualified professional, working on their behalf, and a concerted and a persistent campaign to urge the lender to modify a particular mortgage loan.
There are different forums that can be used to modify a mortgage as follows:
Direct Modification Negotiations with Lender – Borrowers can deal directly with the lender. By dealing directly with a lender, you can resolve the delinquency immediately and avoid foreclosure. This process must be started immediately to avoid your lender from hiring an attorney to start a state action against you and repossess the collateral property.
State Court Foreclosure Settlement Conferences – Modifications and can be reviewed during the beginning stages of a foreclosure litigation (at foreclosure settlement conferences) where the Supreme Court Judge assigned to a case or their clerk reviews with the party’s attorneys progress toward settlement and/or modification and encourages both sides to engage in good faith negotiations.
Bankruptcy “Loss Mitigation” Hearings – The benefit of requesting a loan modification through a bankruptcy chapter 13 or 11 case is that both sides need to regularly at “loss mitigation” hearings report to the bankruptcy court progress in seeking a modification and/or other settlement. Lenders therefore have less of an ability to act in bad faith because of this close supervision. The Bankruptcy Judge assigned to the case will give both the lender and the borrower a timeline to produce all documentation. The lender is usually on its best behavior and are less likely to be arbitrary or to make a mistake in fear of being sanctioned by the judge.
Streamline Modifications – These modifications are offered without an application by the Borrower and are simply the Lender reaching out on its own with a modification offer.
Special Mortgage Loan Modification Programs – Some lenders, like government backed mortgage loans, such as FHA, have special applications and requirements and criteria. For additional information on FHA modifications you can visit https://www.hud.gov/sites/documents/23699_PANEL_II-HASS.PDF Further information about FHA loans can be found at the HUD website https://www.hud.gov/program_offices/housing/sfh/nsc/lossmit
An application can be submitted in multiple ways.
A borrower can apply directly with the lender and have discussions directly with the lender. A borrower would need to contact the lender and request to get the application needed for this process.
A borrower can also submit an application through the lender’s attorney should the case be in front of a judge and during settlement conferences. A borrower would need to contact the attorney handling the foreclosure. The borrower’s attorney handling the foreclosure would need to request for the application needed during the settlement conference part.
Should a borrower be in a bankruptcy, the modification would be submitted through the lender’s attorney handling the bankruptcy. This attorney is different from the foreclosure attorney. The borrower’s attorney handling the bankruptcy would need to request for the application needed after requesting for loss mitigation through the case.
Although the forum may be different, there are specific requirements that all lenders use to qualify a borrower for a home loan modification. Although most lenders have their own internal policies, they all have similar specific criteria in terms of applications, proof of income, proof of expenses, proof of existing debt, and other documentation. There is a need to prepare the “application package” in a manner where it is complete, free of missing/defective documents or information and is optimized by a modification professional in order to maximize the probability of acceptance. Important in assessing how to present the clients application is a strategy which takes into account many criteria used by lenders to evaluate a modification application application including:
A. Housing Ratio (HR) – Borrowers must fall between a very specific Housing Ratio (HR) The Housing Ratio is the percentage of a borrowers monthly gross income goes towards the monthly contractual payment.
B. Debt to Income Ratio (DTI) – Lenders also calculate a borrowers Debt-To-Income (DTI) to qualify for assistance. The DTI is the percentage of a borrowers monthly gross income goes towards all a borrower’s monthly expenses.
C. Loan tor Value Ratio (LVR) – Lenders will also calculate the Loan-to-Value (LTV) An LTV ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage. For example, if you buy a home appraised at $100,000 for its appraised value, and make a $10,000 down payment, you will borrow $90,000.
D. Loan History – Lenders will also take the history of the loan into consideration. For example, most loans must have a minimum of 12 consecutive contractual payments to qualify for home retention after any alteration such as a modification or refinance and after origination.
E. Number of Modifications – Lenders also have a cap on the number of modifications allowed per the life of the loan. Should a borrower exceed the cap, modifications will not be allowed.
To be reviewed by the lender an application first of all is looked at for past history and if it was recently denied for a reason that is considered to be a “hard denial”, the application may not make it to a review. Second, the file is assessed for whether all required forms, documents and information were submitted since it needs to be deemed “complete” in order to be reviewed. Third, the file is given for review where the various factors are evaluated according to each lender’s separate criteria.
Some of these criteria, result in different decisions by lenders. For example if a borrower is significantly above the allowable HR or DTI percentages, a lender may decide to deny an application because of lack of hardship, or in the eyes of the bank, the borrower may have defaulted intentionally. To overcome such a denial, proof of hardship must be provided. Depending on the reason for default, documentation to overcome a hardship denial may vary. However, one example would be loss of income. If a borrower claims that the reason for default is loss of employment, a borrower would half to provide either a termination letter from their employer, unemployment award letter or tax returns reflecting the loss of income before and after the initial hardship.
On the other hand, borrowers who fall below the allowable HR or DTI ratios, may be denied due to insufficient income or excessive obligations. Should a borrower have excessive obligations, a bankruptcy chapter 7 may be beneficial to discharge their unsecured debt. By getting rid of unsecured debt, the borrower may then qualify for a modification as the only secured debt they may have would be the mortgage.
In addition, if a borrower fails to show it can cure the arrears within the acceptable period of the modification loan (usually 30-40 years), an opportunity to modify will be denied. The reason for the denial would be due to the lender not being able to create an affordable monthly mortgage payment in that the modified payment would be higher than the original mortgage payment that the borrower already defaulted on. If the modified payment will be higher than the contractual payment, many Lenders will not allow it; a contractual payment to increase by 10% -15% (monthly income will not be a factor in the decision) could be cause for denial. In order to overcome such a denial, a large down payment must be submitted with the application in efforts to lower the amount the will be capitalized back into the mortgage or deferred.
Some of the basic requirements are as follows:
A. Applicant for Modification is a Borrower for the Loan– Borrower must be on mortgage or have letters of testamentary allowing them to absorb the mortgage and make decision on the loan.
B. Qualifying Income is also a Requirement –Income used towards a review are but not limited to W2 wage earnings, self-employment, social security, pension, child support, alimony, and monthly rental. Temporary income such as unemployment is not used towards a review due to being a temporary source of income. Contributions by non-borrowers could be considered, only if the the non-borrower resides at the property.
C. Basic Documentation and Application and Some Lenders also have specific required documentation to qualify a borrower – Some of the documents needed are but not limited to a hardship letter, proof of income in the form of bank deposits, 2 most current taxes and detailed source of income (W2, P&L and award letters) Many lenders have their own “lender specific application” that must be submitted with the borrower’s personal information to be reviewed.
Once the file has been submitted to your lender with all required and up to date information, it may take an estimated 2 weeks for your lender to complete the initial review of your file. During the first 2 weeks, your lender will assign a “point of contact” who is responsible for reviewing the file and gathering internal information. Once this process is complete your file will be turned over to the underwriter (your investor) for a decision on the application.
Should the modification be approved, there are two (2) kinds of approvals:
A. Stipulation to Modify – this is a loan modification that does not require a trail period. The applicant will be provided with a contract and begin making the modified monthly mortgage payments immediately.
B. Trial Modification – The 2nd type of modification come with trial period. This is the most common form of modification. If approved, your lender will put the borrower in a “temporary payment plan” (TPP)
The trial can be between 3 months, 6 months, 9 months, or 12 months. The purpose of the trial is to ensure that the borrower can resume making payments. This will also prove to your lender that your default was not intentional, and you are not deliberately dragging your feet to delay a foreclosure auction sale. In addition, a trial is used to ensure that the borrower did not falsify income to qualify for a modification.
C. If a Denial, is it a “Hard” or “Soft” Denial? – Should a modification be denied borrowers need to assess or verify the reason for the denial since some denials can be rectified and are considered “soft’ denials but some denials are very difficult to get around and are considered “hard denials”. can appeal the lenders decision directly with the lender.
If a borrower is accepted approved for a modification, we strongly advise that you accept the modification offer should retaining the property be the main goal. However, there are times when a modification is approved, and the borrower falls under a new hardship not allowing them to accept. This is a matter that needs to be discussed with the attorney as there may be other options available to borrowers. One example is, if a borrower is overwhelmed with debt that is getting in the way of accepting a modification, a bankruptcy chapter 7 may be a good option. This option will discharge a borrowers unsecured debt and freeing up funds to save the property from foreclosure.
However one advantage in taking the modification is that any foreclosure action will need to be dismissed by the lender, upon the start of payments on a permanent modification.
Unfortunately, lenders can permanently deny a borrower for a modification. If they do, there are several options depending on the reasons for the denial:
1. Resubmit / Supplement – a resubmission of parts of the same application without resending the entire package. For example sending more documentation or proof of income to support an existing application.
2. Reapply – Start a new application and submit an entirely new package. Needed where the issues are beyond minor issues that need to be reworked.
3. Adjustments to the Application – If an application is denied for a particular, identifiable reason, the adjusted or new application needs to make necessary adjustments. For example if an application is denied for lack of income, the remedy is to show more income. If the reason for the denial is that the arrears are excessive, then a large downpayment will potentially address that issue.
4. Appeals – Appeals directly with the investor are used to correct some kinds of mistake made by the lender. There are times when the lender will confuse the information provided by the borrower and not use income correctly.
5. Complaint to Government Agency – However, borrowers do have the ability to file complain with the Consumer Financial Protection Bureau (CFPB) https://www.consumerfinance.gov to file a complaint directly with the investor should the servicer act in bad faith.
6. Qualified Written Request (“QWR”) or A Request for Information (“RFI”)- Borrowers also have the ability to file a Request for Information (RFI) from the lender also known as a Qualified Written Request (QWR). A RFI is an important part of any disputed transaction. This request will allow the borrower to “give your side of the story” to the lender. Another purpose to request an RFI is to get a history of your loan. It will provide you any and all transfer notices and provide you feed back of how your file is being treated by the lender. Al lenders are legally required to respond to a RFI in 35-45 days of receipt of the request. Should they fail to provide you with an acknowledgement in the required time frame, your lender is acting in bad faith.
7. Bankruptcy (Chapter 13 or 11) “Loss Mitigation” Plan – Seeking the help of the bankruptcy Court to oversee a case and the modification efforts which are pursued in front of the Court at hearings designed to allow for more transparency and fairness in the modification process.
8. Bankruptcy (Chapter 13 or 11) Traditional (“Catch-up”) Plan – Avoid modification altogether by concentrating on catching up over time on the mortgage arrears rather than on modifying the entire loan. In Chapter 13 a 5 year (60 month) plan and in Chapter 11 a longer plan are possible that divide up arrears over the life of the plan while paying the regular monthly mortgage payment, which the lender will now accept.
1. “Hard” Denials Are Difficult to Overcome – A hard denial is a type of denial that is next to impossible to overcome. Examples of hard denials are as follows:
a. “Unseasoned Loan” or Modification that did not “Cure” – Lenders will also take the history of the loan into consideration. For example, most loans must have a minimum of 12 consecutive contractual payments to qualify for home retention after any alteration such as a modification or refinance and after origination. Lenders refer to this as an unseasoned loan or having “cure” issues.
b. Caps on Number of Modifications – Lenders also have a cap on the number of modifications or modification applications allowed per the life of the loan or during the life of the current default. Should a borrower exceed the cap, modification applications will not be allowed. These kinds of caps vary in that some are based on the number of applications over a period of time. However, whether a modification should count toward this computation can be contested. For example, if a borrower applies for a modification and are denied due to an internal error, a lender can reject all future applications. However, should an error take place and the lender refuse to acknowledge their mistake and reject an application, a borrower does have options. A borrower can file a complain with the lender directly or they can contact government entities to complain and overcome the bad faith review they have received. Borrowers can also take legal action against the lender and demand for a good faith review.
c. The Investor Does not Provide Modifications –For this type of denial, a borrower can request for the pooling requirements and receive proof of modification history from the investor. There are times when an investor will reject a modification application due to a new internal policy that does not apply to a borrower. A dispute and research can be requested to validate their claim.
Should you wish to talk with a HUD approved counselor, please visit https://www.consumerfinance.gov/ask-cfpb/what-is-a-hud-approved-housing-counselor-how-can-they-help-me-en-261/ in addition, borrowers can also visit https://www.knowyouroptions.com/options-to-stay-in-your-home/overview/modify-overview/modification to know your options.
2. “Soft” Denials Allow the Borrower to Try Again for a Modification- A soft denial is a type of denial that can be corrected. Examples of soft denials are as follows:
a. Insufficient Income – Lenders will allow borrowers to use individuals who reside in the property to contribute to the property. However, should a contributor be allowed there is a possibility that the investor will require that contributor to be added to the mortgage. However, increasing the income entering the property will help overcome an income denial.
b. Inability to Give Affordable Payment – Once the arrears are combined with the principal the resulting monthly payment is higher than the original monthly mortgage payment that the borrower defaulted on. As such the Lender does not want to give the borrower a modification with a higher payment that may appear likely to go into default. However, a downpayment that reduces the arrears will also reduce the proposed monthly mortgage payment so that it is below the amount of the original mortgage.
c. Excessive Arrears – The amount of arrears capitalized back in must not be over a specific percentage. Down payments will also be allowed should the arrears be substantial. If a borrower is denied for a modification due to the arrears being too high, a borrower can offer a down payment to the lender in efforts to reduce the amount being capitalized back into the mortgage allowing the contractual principal and interest payments to stay the same or be reduced. If a down payment has already been offered and rejected, a borrower can increase the down payment and reapply with a “change in circumstance” application. This will cause a borrower’s ratios to change and prompt a new review.
d. Lack of Hardship – A borrower does not have proof of hardship. A formal hardship letter would be needed and depending on the hardship, a waiver / exception can be requested from the lender. If they refuse to review the file, a formal complaint can be filed through a CFPB complaint. Arbitrary Denials – Arbitrary denials are also common when dealing with lenders. When a borrower is facing this type of denial, a demand for higher personnel to take over the file can be requested. Should the lender refuse to provide a borrower with a good faith review a borrower can escalate the matter to an executive officer to review their file.
However, should the arrears be manageable and a modification be denied due to a hard denial a borrower may want to look at other options available to save the home such as a bankruptcy chapter 13 which will reorganize your debt to a more manageable monthly payment.
Many homeowners in Suffolk and Nassau Counties, Long Island experiencing financial difficulty with their mortgage payments are obtaining representation in seeking a mortgage modification and are retaining mortgage modification attorneys such as the Law Office of Ronald D. Weiss, P.C. to handle what has become a complex and often difficult negotiation process. The Law Firm of Ronald D. Weiss, P.C. has negotiated hundreds of agreements giving its clients the opportunity to catch up with their mortgage arrears. We have negotiated many mortgage modification agreements, forbearance agreements, payment plans, short sales, deed in lieu agreements and other settlements, which may resolve the foreclosure process. While the ultimate goal of mortgage reduction negotiations is very worthwhile, such negotiations can be difficult and uncertain because many mortgage holders and their attorneys are not sufficiently responsive to negotiated offers thereby requiring a significant and persistent effort that involves careful strategy and planning. Allowing us to represent and negotiate terms for you enhances the probability of a prompter and better resolution of the foreclosure process. Also, it is critical to have the settlement terms agreed to in a legally binding written stipulation of settlement while making sure that your rights are protected at all times.
Because we are always considering more than one foreclosure solution, and we are not solely dependent on mortgage modifications, our broader approach to mortgage modifications helps our clients. We are able to defend our clients in foreclosure, file bankruptcy cases and complain to government agencies in a manner where another services may not be able to assist a homeowner. This broader ability gives us greater leverage and helps us considerably in negotiating with lenders. In addition we have huge experience in dealing with foreclosure solutions for over 25 years. Finally, our persistence, knowledge and ability to take the lenders to task for delay all help us to negotiate on your behalf. Although the negotiation process can be time consuming and often has many challenges, the goal of a lower mortgage payment and better mortgage terms is very worthwhile. Therefore, the client should maximize their negotiating advantages by having our office seek a modification on their behalf.
Our consultations are free, the advice may be invaluable.
Please call us at (631) 271-3737 or e-mail us at [email protected] for a free consultation to discuss mortgage modification options in greater detail.