This took a little longer than I wanted it to, but I wanted to be as thorough as possible for you. There’s a lot of information in the documents I posted yesterday and I really recommend you read the ones that apply to your situation for yourself. I’ll start with the loan modification part of the President’s plan first since I know that’s what most of you want to know about. If you want to refinance rather than modify your loan, check out our Making Home Affordable Refinancing article.
Home Affordable Loan Modifications
Who it helps: Homeowners behind or in danger of falling behind on their payments due to a financial hardship including rising payments due to resetting loans.
Who it doesn’t help: Homeowners with the income to pay their payments or those that don’t occupy the house in question.
Basic concept: Servicers and the Treasury Department are partnering to bring the payment for your first mortgage down to 31% of your gross income. In mortgage terms, this means until you reach a 31% Front-end Debt-to-Income (DTI) ratio.
Participating servicers: Participation is voluntary except for Fannie Mae and Freddie Mac loan. However, most major servicers will participate due to the program incentives, government involvement, and standardized modification model. A list of participating servicers will be maintained by the Treasury department at www.FinancialStability.gov once the program gets rolling.
Foreclosure moratorium: Fannie Mae announced March that it’s extending its foreclosure moratorium until it reviews all cases in foreclosure for program eligibility. Most lenders are expected to follow suit, but are not required to do so. In addition, once you’ve been qualified and your loan mod goes into the program’s trial period, your foreclosure will be suspended until you complete the trial period.
What will it cost homeowners: Zero. All allowable costs are rolled into the modified note and homeowners should expect to pay nothing out of pocket.
How do I qualify?
1. House must be owner-occupied, primary residence with a mortgage originated before Jan 1, 2009 that has an unpaid balance less than $729,750.
2. Have a mortgage payment that is more than 31% of your monthly gross (pre-tax) income.
3. Have a mortgage payment that’s no longer affordable
- When figuring your mortgage payment, include principal, interest, home insurance, property taxes, and condominium or homeowner’s association dues (PITIA). The 31% does not include private mortgage insurance (PMI) fees.
- You can qualify whether you’ve missed payments or not. The program is actually set up to encourage services to modify loans before homeowners miss any payments, but you are still eligible even if you have missed some payments.
- Homeowners in bankruptcy can qualify
- Homeowners pursuing litigation regarding their mortgage can qualify
How does it work?
1. You contact your servicer (the people you send your payment to). They are required to do a phone screening with anyone that requests it. They will ask you the questions above and maybe a few others.
2. Your servicer verifies your income, mortgage payment, and hardship. They will obtain a copy of your last tax return from the IRS to verify your income as well as request your 2 most recent pay stubs. You must also warrant that you do not have enough liquid assets to make your payments.
3. Your servicer and the Treasury Department work together to bring your payment down to 31% DTI using the following steps (in this order):
- Add any arrearage (accrued interest, past due taxes and insurance, late charges paid to third parties, and escrow advances) to your loan balance. Note: Your lender must forgive all late fees that aren’t paid to third parties.
- Reduce your interest rate until you reach either 31% DTI or 2% APR.
- If you’re still above 31% DTI, they will extend the term of your loan until your payment reaches 31%. They cannot extend the loan past 40 years, however.
- If you’re still above 31%, the lender will forbear your principal balance. This forbearance will become a balloon payment due on the maturity date of the modified loan, upon sale of the property, or upon payoff of the interest-bearing mortgage balance. This forbearance will have no required payments except the balloon payment and will not accrue interest. The lender cannot forbear your principal to a point lower than the current market value of your home.
4. Lenders/servicers can also use permanent principal reductions to lower your DTI as well. They can do this as a standalone measure or at any time in the process above. Personal opinion: Permanent principal reductions would not have to be repaid, so why would servicers choose this option? I don’t expect to see many permanent principal reductions.
5. Servicers are required to escrow your property taxes and insurance on this new loan even if they weren’t escrowed before.
6. After your payment reaches 31% DTI and you sign all the modification paperwork, you enter a 90-day trial period. If you’re current at the end of this period, your loan is permanently modified and you start your new loan term.
7. Homeowners are eligible for an incentive of up to $1,000/year from the Treasury Department for paying on time. This incentive will last for 5 years and will be paid directly to the servicer to reduce the principal balance on your loan. “On time” for this incentive means no more than 30 days late.
8. If you ever go over 90 days delinquent at any time during this modified loan, your modified loan will be terminated and you will be considered for other loss mitigation programs or foreclosure.
9. Modified loans are not assumable
10. If your payment can’t be reduced below 31% DTI, you will be considered for traditional loss mitigation programs. This program offers servicer incentives to allow a short sale or deed in lieu rather than foreclosing.
Why would servicers participate?
Because they get paid to modify your loan (and paid more if they do it before you default). They also get paid for every year you pay on time. In addition, since this program only deals with first mortgages, they are offered an incentive if they work with subordinate mortgage holders to reduce or eliminate their liens. In the end, they (the servicing companies) will be paid more to help you stay than they will to foreclose in most cases.
I know this is A LOT of information, so if you have questions or comments, please post below. But remember, what I say is just an informed opinion…you really need to talk to your lender. You can also check out yesterday’s post for links to all the official Treasury Department Home Affordable Loan Modification documents.
Finally…because I know you’re thinking it…I would expect most lenders to be able to start answering questions and screening you for qualification starting next week sometime. This is a big change and they not only have to get it out to all their loss mitigators, they have to set up internal processes to handle a completely new, government-mandated (which means a ton of compliance monitoring) programs. All I’m saying is be patient with them and expect to be on hold for a while. And don’t expect that every person you talk to will be an expert. You need to be the expert so you’ll know if something they’re telling you is wrong.
Tomorrow’s post on the Home Affordable Refinance program will be shorter…I promise. Oh…I almost forgot…in my posts last week, I gave some bad info…these mods and refinances are good up to $729,500, not the $417,000 I said last week. Good news for all you Californians and Floridians!
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Update: The article below is one of many I expect over the next several days that you’ll definitely want to check out…they list several major services and their plans to support the Home Assure Loan Modification and Refinance programs.
GSEs, Lenders Rally Behind Modification Plan – Housingwire.com (added March 5)
GSEs Suspend Foreclosure Evictions Through March – Default Servicing News.com (added March 9)fannie mae, freddie mac, government regulation, Home Affordable Modification, loan modification, loan process, loss mitigation, refinance, workout plan