Truth in Foreclosure

According to President Obama’s Home Affordable Modification Program, missing payments isn’t a requirement for you to qualify.  As a matter of fact, one of the stated goals is to reach homeowners who are in danger of “imminent default.”

One of the problems, though, is that no one has been talking about what that actually means.  For today’s article, I went straight to the source…Freddie Mac…and got the answer.  Now you’ll know exactly how to figure out if you’re in danger of imminent default from your servicer’s perspective and what to do if they say you aren’t.

This is taken directly from Freddie Mac’s Servicing Guide…so it’s straight from the horse’s mouth so to speak.  It also means it’s a little hard to read…but it’s very important to saving your home because it’s the rules your lender had to follow if you have a Freddie Mac loan.  Other lenders will be similar as well but may not work exactly like this.

How to Determine Imminent Default

A Borrower who:

(a) is current or less than 31 days delinquent,

(b) contacts the Servicer for a modification,

(c) appears potentially eligible for a modification, and

(d) claims a hardship must be screened for imminent default.

In the process of making a determination for imminent default, the Servicer must evaluate the Borrower’s financial condition in light of the Borrower’s hardship as well as inquire as to the condition of and any circumstances affecting the property securing the Mortgage loan. If the Servicer determines that the Borrower has not experienced a hardship, then the Borrower does not qualify for the Program.

The Borrower is required to identify the hardship type and detail the circumstances of the hardship on the Hardship Affidavit. In addition, the Borrower will be required to complete and sign page two of Form 1126, Borrower Financial Information, and the Servicer must legibly print the Borrower’s name below the Borrower’s signature and add the Freddie Mac loan number to the form. Servicers are to rely on the Hardship Affidavit, page 2 of Form 1126, the Borrower’s credit report, and income documentation to determine the hardship and financial condition of the Borrower.

If the Servicer makes a preliminary determination that the Borrower has a hardship and is otherwise eligible for evaluation under the Program, the Servicer shall determine whether the Borrower is in imminent default in accordance with the procedures described below. This imminent default calculation is independent of the calculation of the monthly housing expense-to-income ratio and the total monthly debt payment-to-income ratio.

• The Servicer must consider the Borrower’s financial condition, liquid assets, combined monthly income from wages and all other identified sources of income, monthly liabilities (including personal debts, revolving accounts and installment loans), other monthly expenses, including a reasonable allowance for living expenses such as food, utilities, etc., and make a determination of whether the Borrower is in imminent default based on the following evaluation:

The Servicer must consider the Borrower for a modification under the Program if both:

(1)  The Borrower’s Debt Coverage Ratio (“DCR Ratio”) is less than 1.20, and

(2)  The Borrower’s Cash Reserves are less than three times the current monthly PITIA payment (if the loan is not currently escrowed, use estimated taxes, insurance and HOA assessments).

The following are definitions for purposes of this calculation:

Disposable Net Income: The Borrower’s monthly Disposable Net Income is the Borrower’s monthly gross income minus

(1) payroll deductions,

(2) monthly escrow allocations of property taxes, insurance premiums, and mortgage insurance premiums (or if the loan does not have escrows, the monthly amounts of such items should be pro-rated as if the amounts were escrowed),

(3) monthly HOA assessments,

(4) monthly allocations of all other monthly credit obligations (except investor mortgages covered in item 6 below and excluding principal and interest payments on the Mortgage being modified),

(5) all other reasonable living expenses allocated monthly, and

(6) any other net negative amounts paid or incurred by Borrower (such as rental income that is exceeded by associated Mortgage payments)

DCR Ratio: The DCR Ratio is the ratio of the Borrower’s Disposable Net Income divided by the Borrower’s current monthly principal and interest payment (not including escrows)

Cash Reserves: Cash Reserves are any non-retirement liquid assets the Borrower has available for withdrawal from any financial institution or brokerage, including checking and savings accounts, CDs (even if held for an extended time), mutual funds, money market funds, stocks or bonds

The Borrower Qualification Worksheet includes the imminent default evaluation. The Servicer may use the Borrower Qualification Worksheet to evaluate whether the Borrower is in imminent default or may perform the DCR Ratio and Borrower’s Cash Reserves calculations manually or with its own systems. (See Section C65.6(f) for additional information on the Borrower Qualification Worksheet.)

If the Servicer determines the Borrower is not in imminent default or otherwise does not qualify for the Program, then the Servicer should evaluate the Borrower for other available loss mitigation alternatives.

If the Servicer determines that default is imminent, the Servicer must continue to process the request using the required Program parameters set forth in this Chapter C65.

A Servicer must document in its servicing system the basis for its determination of whether a payment default is imminent and retain all documentation used to reach its conclusion. The Servicer’s documentation must also include information on the Borrower’s financial condition as well as the condition and circumstances of the property securing the Mortgage loan, pursuant to the requirements described above. (See Section C65.8(i) for additional information regarding documentation retention requirements.)

What To Do If They Say No

If your servicer says you don’t qualify for as being in imminent default or any other portion of the Home Affordable Modification, demand to see the documents and numbers they used to make that determination.  Double check to make sure all their numbers are correct and then run them through this article to see if they make sense.

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