Truth in Foreclosure

If your mortgage is held or serviced by Fannie Mae, whether or not you’re considered in danger of  imminent default may be up for reconsideration..which may be good or bad.

According to HousingWire.com,

Mortgage servicers of loans held in a Fannie Mae portfolio and part of a mortgage-backed securities (MBS) pool will begin to use Freddie Mac’s Imminent Default Indicator (IDI) in March.

Fannie servicers must use the indicator for borrowers either current or less than 60 days delinquent when determining eligibility for the Home Affordable Modification Program (HAMP).

So what’s this mean for you and your efforts to get a modified loan under HAMP?

Well, IDI uses statistical model to predict how likely you are to default or become seriously delinquent (60 days or more).  It uses all of your financial information including your credit score, your monthly debt payment to income ratio, in addition to other statistical information Freddie Mac has gathered over the last 9 months or so since HAMP started.

You can be considered in danger of imminent default if you have less than three times your monthly mortgage payment as a cash reserve. But if you have cash reserves of more than $25,000, you cannot be considered in danger of imminent default.  Having more than $25,000 doesn’t make you ineligible for HAMP, it just means you’re not able to qualify as being in danger of imminent default.

The HousingWire.com article continues:

Servicers must continue to process borrowers who were 31-59 days past due and cleared for a HAMP trial before the IDI implementation. The servicer must also provide the property value used for the initial Net Present Value (NPV) test. Servicers modifying a loan must get a borrowers debt-to-income ratio down to 31% through the various waterfalls including an initial interest rate reduction.

Overall, this should mean less inconsistency between servicers on how they treat and evaluate imminent default.  Of course, each case is different, but this decision at least gives you something to hang your hat on if you have one of the millions of Fannie Mae or Freddie Mac mortgages out there.  After almost 60% of the mortgages in America are backed by one of these two!

Finally, you should also know that simply because you’re in default doesn’t mean you’re in danger of imminent default.  I know it doesn’t make sense on the surface, but if you

1. You have the money to pay your payments but have chosen not to.
2. You have cash reserves but have chosen not to deplete them.

You do not meet the criteria for imminent default under HAMP.

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The Obama administration’s Making Home Affordable program requires that a modification be made when the net present value test is passed. Most servicers should be using net present value calculations to determine whether or not to offer a loan modification to homeowners in default.

What Is NPV?

NPV stands for Net Present Value. Leading investor representatives have stated that servicers should perform loan modifications when a proposed loan modification “passes” an NPV test.

If a loan mod passes the NPV test, the servicer is insulated from suits by investors under federal law.

Net present value calculations compare the value to investors of a loan modification as compared to a foreclosure. These are “net” calculations because the value of a foreclosure is subtracted from the value of the loan modification and “present value” because the value of the loan modification and the value of the foreclosure are both stated in present dollars. The present value calculation discounts the future cash stream of the loan modification or the future payoff from a foreclosure by a standard interest rate (sometimes called the “discount rate”), applied over the projected length of time of the foreclosure will take or the loan modification will last.

The modification is also discounted for the probability that it will not perform, or, in other words, that the borrower will “redefault.”

Embedded in any net present value calculation are assumptions about how much will be recovered after a foreclosure. These assumptions should include a reasonable estimate of foreclosure costs, the actual current value of the home, and some forecast as to what the value of the home will be when sold following foreclosure. The time to foreclose and the time to sell a home post-foreclosure are also critical elements.

Most net present value calculations also make assumptions about whether or not a loan modification will perform. The redefault rate assumptions critically affect the approval or denial a loan modification.

Remember that the NPV calculation only measures the expected benefit to investors of a loan modification versus a foreclosure. NPV calculations do not take account of claims a consumer may have, or the cost and time of litigation, or any of the larger societal costs of a preventable foreclosure. There will be many cases when a borrower may fail the NPV but should still be offered a loan modification.

What Are the Differences Between the Making Home Affordable Program NPV Calculation and the FDIC Spreadsheet?

Treasury has not publicly released its model spreadsheet and is allowing servicers to make their own, proprietary spreadsheets, thus a complete comparison is impossible. The servicer guidelines require servicers to combine the present value of the unmodified payment stream with the value realized after a foreclosure before netting the result with the value to be obtained from a modification. An additional theoretical difference is that servicers are expected to include the risk of prepayment in determining the value of a loan modification (but not, apparently, in setting the value of the payment stream pre-modification).

Taken from the NCLC website.

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Why have several recent programs designed to encourage loan modifications failed to slow America’s still-worsening home mortgage foreclosure crisis?

A new report from the National Consumer Law Center (NCLC) discloses that mortgage servicers – including many large banks – have found it cheaper to foreclose on homeowners than to offer loan modifications that would benefit homeowners and investors.

The result: Americans who might be able to stay in their homes under a loan modification plan are being moved right past that option and on to foreclosure.

The new NCLC report, “Why Servicers Foreclose, When They Should Modify, and Other Puzzles of Servicer Behavior,” reveals that servicers, unlike investors or homeowners, generally don’t risk losing money on foreclosures. In fact, servicers usually make money on foreclosures.

Report author Diane E. Thompson, an attorney with NCLC, said,

The country is in the midst of a foreclosure crisis of unprecedented proportions. Millions of families have lost their homes and millions more are expected to lose their homes in the next few years. With home values plummeting and layoffs common, homeowners are crumbling under the weight of mortgages that were at best only marginally affordable when made. One common sense solution to the foreclosure crisis is to modify the loan terms in more instances. Foreclosures are a costly ordeal for the homeowner, the lender, and the community. Yet they continue to outstrip loan modifications because servicers have no incentive to help borrowers stay in their homes.”

Who are these servicers that profit from foreclosures? Servicers are the banks or financial companies that usually collect payments and administer mortgage loans. They play a key role in the current foreclosure crisis, since original lenders frequently sell loans to investment trusts that rely on servicers to carry out most day to day transactions. Homeowners seeking to save their homes by modifying unaffordable loans typically deal with servicers. That is why the financial interests of servicers have the potential to hurt homeowners.

And too many of those financial incentives encourage servicers to ignore the interests of homeowners. For example, the report found that servicers often deny homeowners principal and interest rate reductions because as servicers they find it profitable to offer repayment plans or forbearance agreements that do little to reduce homeowners’ debt burdens.

The consequences of such choices can be grim for homeowners. As the NCLC report notes: Loan modifications inevitably cost the servicer something. A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified, and no penalty, but potential profit, if the home is foreclosed.”

The NCLC report also found that the lack of third-party oversight allows servicers to pursue foreclosure instead of effective loan modifications that would benefit homeowners as well as investors. While credit rating agencies and bond insurers do monitor servicers, their oversight too often encourages servicers to foreclose.

The NCLC report includes a detailed examination of loans in foreclosure from 1995-2009 and how components of servicer compensation affected the likelihood and speed of foreclosure. It also looks at the rise of the servicer industry as a by-product of securitization; and the limited, but only effective oversight of servicers by credit rating agencies and bond insurers.

Recommended Reforms

• Avoid irresponsible lending through regulation of loan origination
• Mandate loan modifications before a foreclosure
• Fund quality mediation programs
• Provide for principal reductions on existing loans in the Administration’s Home Affordable Modification Program (HAMP) and through bankruptcy reform
• Increase automated and standardized loan modifications for borrowers in default and provide a safety net for borrowers for whom a standardized modification is not affordable or who later default, through no fault of their own, on a loan modification
• Ease accounting rules for modifications to facilitate standardized review, encourage long-term modifications, and enhance servicer recovery of the expenses incurred in performing a modification
• Require more transparency and uniformity in how servicers report loan modifications to investors
• Limit fees charged borrowers in default to reasonable and necessary ones

About NCLC
The National Consumer Law Center is a non-profit organization that seeks marketplace justice on behalf of low-income and vulnerable Americans. NCLC works with, and offers training to, thousands of legal-service, government and private attorneys, as well as community groups and organizations representing low-income families. Our legal manuals and consumer guides are standards of the field. Learn more and find a link to the new report on their Web site: http://www.consumerlaw.org.

CONTACTS: Pat Mitchell, (703) 276-3266 or pmitchell@hastingsgroup.com.

EDITOR’S NOTE: A copy of the new NCLC report is available for download at http://www.consumerlaw.org.

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From the Neighborhood Assistance Corporation of America (NACA) web site:

NACA advocacy was instrumental in passing the federal Homeownership and Equity Protection Act (HOEPA) and the strongest state anti-predatory legislation in Georgia. NACA’s campaign against Fleet focused national attention to the issue of predatory lending. NACA brought over 400 people to testify in front of the Senate banking committee. The tremendous participation of predatory lending victims from around the country clearly had an impact on Chairman Riegal and Senator Alphonse D’Amato, who sponsored HOEPA. It was NACA’s grassroots mobilization that brought the issue to the elected officials attention and had them address it. NACA’s campaigns and other testimonies in front of the House and Senate committees were instrumental in the passing of the only federal legislation to combat predatory lending.

The campaign in Georgia reunited Governor Roy Barnes with NACA. Governor Barnes worked extensively with NACA in the Fleet Bank campaign. He was the lead attorney in the Georgia class action lawsuits against Fleet. Despite the Georgia Supreme Court rulings against all the lawsuits, NACA was able to negotiate a settlement for his class. The class received six million dollars and his firm two million dollars.

Governor Barnes was looking to pass comprehensive anti-predatory lending legislation. He needed grassroots advocacy to bring the issue to the legislatures’ attention. NACA mobilized hundreds of NACA members who converged on the Georgia statehouse. NACA organized a loan closing in the rotunda of the state house, to refinance a NACA Member out of a predatory loan with Wells Fargo. NACA was able to get Wells Fargo to reduce the payoff by $20,000 to make the loan affordable. NACA advocacy was instrumental in providing Governor Barnes with the opportunity to pass the strongest lending protections in the country.
NACA has worked in mobilizing predatory lending victims and supporters in other states and continues its advocacy in providing the opportunity to pass comprehensive and effective lending protections against predatory lending.

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I saw this video on the Tony Robbins web site and immediately thought you could use it as well.  I know most people that come to this site do it for straight-forward, no-nonsense foreclosure advice.  And that’s what I try to provide as often as I can.

But today’s a little different because I know that it’s easy to get down on yourself and your life situation when you’re going through foreclosure and the financial difficulties that typically surround it.  So I’m putting this video up as an encouragement…and to help you learn some things you might be able to use not just to get through your situation now, but in the rest of your life as well.

Strategies are the Secret to Learning

Whether you’re just starting the foreclosure process or you’ve been dealing with your lender for several months (or even years), you have to constantly learn new things and apply them to your situation.  I hope this video helps you do that.

Be proactive about your foreclosure exit plan.  Your future is not in your lender’s hands…it’s in yours.  even if they take your home, your life and your family will continue.  So you have to make plans to make that future (whatever it holds) as happy as you can.  Don’t let your lender take you family’s joy, happiness or security.

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Rep. Barney Frank (D-Ma.), chairman of the House Financial Services Committee, said Friday that Fannie Mae and Freddie Mac should be eliminated as they stand now.

“This committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance, that’s the approach rather than the piecemeal one,” Frank said.

Well, the idea that Freddie and Fannies can’t survive is all well and good and may very well be accurate.  But do you really think it will help the financial crisis the country is in or help you save your home from foreclosure?

NO WAY!

All it will do is cost more money, more time, and still do nothing to help.  I mean look at where the debate on health care is…and where it’s going.  This wouldn’t be any better.

Even if they begin discussing how to end Freddie and Fannie, it’ll be years before anything changes because the big lobbying groups and lawyers will get involved and have to throw their two cents worth into the mix.

I’m NOT saying that they shouldn’t try to fix Fannie and Freddie or the rest of the mortgage and securitization mess they’re in.  I’m sure some new regulation would help in some situations.  Of course, what I think will happen is they’ll over react and tighten the reigns down too far…but that’s a discussion for another day.

What I AM saying is that you should not put any hope in the discussion going on in Congress about disbanding or reorganizing Freddie Mac and Fannie Mae.  It’s unlikely to help you for two very simple reasons:

1. Unless they grandfather homeowners (which would take years of legal wrangling!), the agreement you have right now wouldn’t change even if Freddie and Fannie go away or change.  After all you’re still going to owe someone for your home.
2. Congress moves way too slow.  Any new laws or organizations would take years to truly be effective at helping people in need…and you probably don’t have that kind of time.

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Have you ever wondered how your lender or servicer decides what to do when you submit a hardship package to them?

Well, it’s actually pretty simple.  And while most servicers don’t put their workout hierarchy out there for everyone to see, Fannie Mae has.  And while not all servicers and lenders will follow this process exactly, most will be very close.

The first thing they do is determine if you qualify for a Home Affordable Modification.  If you don’t theyll see whether your hardship is short term or long term and then they’ll go down the appropriate leg of the chart above.

We have articles on most of these programs if you would like more info from your trustworthy source for foreclosure information:

Payment Reduction Plan

Forbearance

HAMP – Home Affordable Modification

HAMR – Home Affordable Refinance

HAFA – Home Affordable Foreclosure Alternative Program

Home Affordable Short Sale and Deed in Lieu Program

Hope for Homeowners

NACA Home Save Program

State programs for Loan Modification

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Part four of a multi-part post. Click the Fannie Mae tag to see the rest.

The Payment Reduction Plan (PRP) replaced the HomeSaver Forbearance (HSF) program in Fannie Mae’s Workout Hierarchy as of 31 Oct 09. The goal of the PRP is to allow additional time to identify a permanent foreclosure prevention solution.

**Note: this only affects homeowners with loans backed by Fannie Mae.

If you don’t know whether your loan is backed by Fannie Mae or not, you can check here.

PRP Limitations and Notes

1. The servicer must not impose any late charges, penalties, stop payment fees, or similar fees on the mortgage loan during the PRP.
2. Servicers are not allowed to terminate existing forbearance plans and then offer a PRP.
3. All HSF agreements offered on or before October 31, 2009 will be honored.
4. Granting forbearance is contingent on the servicer’s ability to ensure the continuation of mortgage insurance coverage. Fannie Mae will pursue blanket delegations of authority from most mortgage insurers so that servicers can grant PRPs without having to obtain mortgage insurer approval on individual mortgage loans to extend the delinquency beyond the date that foreclosure proceedings would otherwise be required to begin.
5. A servicer should first evaluate a borrower to determine if they are eligible for HAMP, and if not, the servicer should then determine whether the borrower is eligible for an alternative foreclosure prevention option based on whether the borrower is experiencing a temporary or permanent financial hardship.

Temporary Hardship
For a borrower who is expected to overcome a temporary financial hardship and be able to make future scheduled payments in addition to an amount to cure any outstanding arrearage over time, the following foreclosure prevention alternatives should be considered in the following preferred order. Notwithstanding the options below, in the event a borrower requires a particular workout that the servicer deems to be in both Fannie Mae’s and the borrower’s best interest, the servicer is strongly encouraged to submit the workout case to Fannie Mae for review and approval.

• Forbearance – A temporary reduction or suspension of payments which must be immediately followed by an arrangement to cure the delinquency.
• Repayment Plan – An arrangement in which a borrower agrees to pay down past due amounts while still making regularly scheduled payments.
• HomeSaver Advance – A monetary advance to cure a delinquent loan resulting in a separate unsecured loan for the arrearage amount.

Permanent Hardship
For a borrower who has experienced a permanent or long-term/enduring financial hardship, foreclosure prevention alternatives should be considered in the following preferred order:

• PRP – For a borrower who is not eligible for, or who does not meet the terms of the HAMP but has the willingness and ability to make reduced monthly payments of at least 70 percent of the borrower’s contractual monthly P&I payment and for whom a more permanent foreclosure prevention solution cannot be readily determined, a servicer should consider the borrower for a PRP.

If a borrower is not capable of making the level of payments required under the PRP, then the servicer should consider the borrower for a more permanent foreclosure prevention alternative.

Once a borrower has a PRP or other forbearance, the following options, along with any new programs that may become available, should be considered in the following preferred order.

• Modification – For mortgage loans that are ineligible for or have failed the HAMP Trial Period Plan or the HAMP modification, and by changing any of the permanent terms of the mortgage loan (including changes to the interest rate, interest and expense capitalization, or changes to the loan term) the borrower would cure the present delinquency, avoid disposition of the property, or prevent future delinquencies.
• Pre-Foreclosure Sale – For delinquent mortgage loans, the acceptance of a sales contract prior to a foreclosure sale resulting in a payoff of less than the total amount owed on the mortgage loan and release of the mortgage lien.
• Deed-in-Lieu of Foreclosure – For delinquent mortgage loans, the voluntary transfer of title from a borrower to the servicer to satisfy the mortgage loan and avoid foreclosure (also called a “voluntary conveyance”).

A servicer must immediately resume or commence foreclosure proceedings as soon as it determines that the above foreclosure prevention solutions are not feasible.

Part four of a multi-part post. Click the Fannie Mae tag to see the rest.

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Part three of a multi-part post. Click the Fannie Mae tag to see the rest.

The Payment Reduction Plan (PRP) replaced the HomeSaver Forbearance (HSF) program in Fannie Mae’s Workout Hierarchy as of 31 Oct 09. The goal of the PRP is to allow additional time to identify a permanent foreclosure prevention solution.

**Note: this only affects homeowners with loans backed by Fannie Mae.

If you don’t know whether your loan is backed by Fannie Mae or not, you can check here.

PRP Process

The servicer must evaluate the borrower’s financial circumstances to determine an affordable monthly amount that the borrower can contribute towards the mortgage obligation. If the amount of the borrower’s contribution (minus any amounts required for monthly taxes, insurance, and other escrow payments for mortgage loans with escrow accounts) is at least 70 percent or more of the borrower’s contractual P&I payment, then the borrower is eligible for PRP at an amount he or she can afford. The borrower must continue to make taxes, insurance, and other escrow payments during the PRP forbearance period.

If the borrower cannot afford a payment that is at least 70 percent of their current monthly payment then alternative foreclosure prevention solutions must be considered in accordance with the new workout hierarchy (as described below).

When a borrower has been approved for a PRP, the servicer will communicate the terms and conditions of the PRP to the borrower and, when feasible, offer the borrower the opportunity to make payments via Automated Clearing House (ACH); provided that the borrower must not be charged a fee for such ACH transactions.

After a servicer has placed a borrower in a PRP, the servicer must actively work towards finding a foreclosure prevention solution and is encouraged to find one as early as possible during the forbearance period.

Borrowers will not be permitted to remain in a delinquent status with no action by the servicer upon completion of the PRP six-month forbearance period. If the borrower fails to make a payment more than 15 days after it is due during the forbearance period, the servicer determines that a foreclosure prevention solution is not feasible at any point during the forbearance, or a foreclosure prevention solution has not been identified by the end of the forbearance period, the servicer must immediately resume or commence foreclosure.

Part three of a multi-part post. Click the Fannie Mae tag to see the rest.

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Part two of a multi-part post. Click the Fannie Mae tag to see the rest.

The Payment Reduction Plan (PRP) replaced the HomeSaver Forbearance (HSF) program in Fannie Mae’s Workout Hierarchy as of 31 Oct 09. The goal of the PRP is to allow additional time to identify a permanent foreclosure prevention solution.

**Note: this only affects homeowners with loans backed by Fannie Mae.

If you don’t know whether your loan is backed by Fannie Mae or not, you can check here.

PRP Process

The PRP is available to borrowers who do not qualify or are not eligible for HAMP and who are either in default or are at risk of imminent default. If a borrower has the willingness and the ability to make reduced monthly payments of at least 70 percent of their contractual monthly P&I payment and a more permanent foreclosure prevention option cannot be readily determined, then a servicer should consider the borrower for the PRP. This program is not available for borrowers who are unable to make reduced monthly payments of at least 70 percent of their contractual monthly P&I payment. Those borrowers can be considered for a regular forbearance while the servicer evaluates a permanent foreclosure prevention solution; however, the servicer will not receive the PRP incentive under these circumstances.

While the borrower is eligible for the PRP for a maximum of six months, the servicer must actively work towards finding a permanent foreclosure prevention solution during this timeframe. The servicer is encouraged to find a solution as early as possible during the six-month forbearance period, with the expectation that a solution will generally be identified in the first three months and then implemented during the latter part of the forbearance period, as borrowers will not be permitted to remain in a delinquent status with no action taken by the servicer upon completion of the PRP term.

When a servicer offers a borrower a PRP, the terms of the PRP offer must indicate that the forbearance will end and foreclosure action will be resumed or commenced as soon as one of the following occurs:

1. The borrower fails to make any payment more than 15 days after it is due during the forbearance period
2. The servicer determines that a foreclosure prevention solution is not feasible – even if the borrower is making timely forbearance payments, or
3. A foreclosure prevention solution has not been identified by the end of the six-month forbearance period.

Servicers can enroll the borrower in a PRP while they are exploring other foreclosure prevention strategies provided the PRP does not exceed six months. However, a servicer must immediately resume or commence foreclosure proceedings, in accordance with applicable laws, when a borrower fails to make any payment more than 15 days after it is due during the forbearance period or as soon as the servicer determines that a foreclosure prevention solution is not feasible

Part two of a multi-part post. Click the Fannie Mae tag to see the rest.

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