LOSS MITIGATION

What is a loan modification?

A mortgage loan modification is a permanent restructuring and change of a homeowner’s loan terms of the mortgage that is designed to provide a more affordable and sustainable mortgage payment. A loan modification may involve an extension of the term of a homeowner’s mortgage (amount of years to pay the loan), a change in the type of mortgage loan, a permanent or temporary reduction of interest rate and reduction of principal balance. Homeowners may seek a loan modification if they are: experiencing a long-term hardship, in default on their mortgage, a defendant in a foreclosure action, ineligible to refinance, and/or the mortgage amount exceeds the value of their home. The benefits of a loan modification are significant and ultimately allows a homeowner to stop foreclosure, preserve their credit score and save their home. 

The loan modification application process

 The loan modification process requires timely submission of all required documents, including pay stubs, tax returns, and hardship statements. Homeowners must thoroughly document income and expenses. Timely and complete application submission is crucial for success. Delays may lead to home loss in active foreclosure. Despite homeowner diligence, banks may engage in bad faith conduct. 

Examples of bad faith may arise where the bank has: lost financial documents, sent confusing and contradictory communications, inexcusably delayed a modification decision, or denied requests for loan modifications without setting forth grounds, and wrongfully denied an application. An experienced litigation attorney well versed in foreclosure defense can litigate claims against a homeowner’s bank or loan servicer regarding their bad faith conduct. 

Flex Modification program

Fannie Mae has combined the features of the Fannie Mae Home Affordable Modification Program (HAMP), Standard Modification, and Streamlined Modification into the Fannie Mae Flex Modification program, offering Servicers an easier, flexible way of helping more borrowers qualify for a loan modification in a changing housing environment. The Fannie Mae Flex Modification will replace HAMP and the Standard and Streamlined Modification programs with a single modification program that leverages the lessons learned from the housing crisis.

The Flex Modification leverages components of HAMP, the Fannie Mae Standard and Streamlined Modifications. Highlights include: The Fannie Mae Flex Modification can be applied to all mortgage loan delinquencies, and to mortgage loans that are determined to be in imminent default in accordance with the Servicing Guide. The program will offer additional payment relief allowing forbearance of principal to an 80% mark-to-market loan-to-value ratio (MTMLTV) for eligible borrowers (not to exceed 30% of the unpaid principal balance) in two ways: For borrowers less than 90 days delinquent, the program requires a complete loss mitigation application and targets a 20% payment reduction and 40% housing expense-to-income ratio. For borrowers 90 or more days delinquent, the program targets a 20% payment reduction and requires no borrower documentation. Evaluation Hierarchy Prior to implementing the Fannie Mae Flex Modification, the Servicer must follow the existing loss mitigation evaluation hierarchy.

Homeowners that have a Fannie Mae or Freddie Mac mortgage may be eligible to participate in their FlexMod program based upon fulfillment of criteria and income requirement guidelines outlined above. 

Private investor loans 

Private lending institutions that own a homeowner’s loan (by way of their valid status as originating lender, assignee or note holder), offer “in-house,” loan modifications. 

Private investors assess and grant loan modifications at their sole discretion and are not based upon clear, eligibility, guidelines and criteria. It is therefore critical that a homeowner obtain such information from their private investor prior to submission of a loan modification application. A comprehensive financial analysis of a homeowner’s household situation is necessary to improve the likelihood of success regarding the attainment of a loan modification. Still, private investors must provide homeowners with disclosures about the foreclosure process, their legal rights, and applicable foreclosure timeline. 

Bank’s assessment of a loan modification application

Lenders typically asses a homeowner’s loan modification eligibility based upon federal guidelines criteria. A mortgage loan payment should be less than 33% of a homeowner’s income. The ratio between a homeowner’s mortgage and income is a significant factor in determining their eligibility for a loan modification. A reduction in interest rate payments, conversion from a variable interest rate to a fixed interest rate, extension of loan term (smaller monthly mortgage amount for a longer period) and/or principal forgiveness by the lender would enable a homeowner to satisfy the 33% income eligibility requirement.

Loan modification during foreclosure proceedings 

It is a widely held misconception that a homeowner’s active loan modification negotiations or application submission prevents a foreclosure action. A mortgage lender employee’s claims or promises has no bearing on the foreclosure process in New York State. Thus, a lender’s representative who unexpectedly calls a homeowner soliciting their submission of a loan modification application does not mean foreclosure has been prevented or stopped. Nor, is a loan modification approval guaranteed. In short, loan modification negotiations and/or submission of a loan modification application does not in any way stop or prevent a foreclosure action. Ongoing long-term communication with a mortgage lender’s representative does not constitute a legal response to a pending foreclosure action. If a foreclosure action has commenced, loan modification negotiations and its attainment are typically a by-product of a homeowner’s foreclosure defense (i.e., legal opposition in court to the bank’s foreclosure action). It is essential for homeowner to retain an experienced foreclosure defense attorney to preserve their legal rights to stop foreclosure and fight to obtain a loan modification. 

Possible negative consequences of accepting a loan modification offer 

A homeowner should not readily accept a bank’s loan modification approval and offer. Oftentimes the bank’s loan modification offer is one-sided, contains clauses that waive a homeowner’s most significant legal claims, and provides only short-term relief while exacting long-term consequences. Teaser adjustable rate mortgages, excessive mortgage term extensions, and balloon payments are designed to benefit the lender and typically doesn’t provide a homeowner with a long-term affordable and sustainable mortgage. Therefore, a homeowner should carefully assess their financial situation prior to accepting a loan modification offer. A homeowner should consider his future ability do the following prior to accepting a loan modification offer:

· Save for retirement

· Pay costs and fees for unexpected emergencies (i.e., death, medical illness)

· Pay for education (college, vocational training)

· Provide child care 

· Make emergency home repairs.

Only after assessing the long-term consequences of a loan modification offer can a homeowner best determine if he should accept it or not. 

A homeowner may want to consider pursuing a loan modification if: his hardship is temporary, can afford to resume making mortgage payments, is no longer un/under employed, and/or there has been an increase in household income.

However, the pursuit of a loan modification based solely on the strong desire to keep ones’ home is not a pragmatic approach to address the long-term affordability of a new mortgage loan. It is thus highly recommended that a homeowner consults with an experienced foreclosure defense attorney to assess the viability of applying for a loan modification. A homeowner may want to consider other loss mitigation options in lieu of a loan modification. 

Forbearance agreement

A Forbearance agreement is an agreement between the lender and a homeowner where a mortgage lender agrees to reduce or suspend the mortgage payments for a specific time-period to permit short-term financial relief to the homeowner. According to the terms of forbearance agreement, the bank will not initiate foreclosure proceedings during the forbearance period. This is most applicable to homeowners’ that have experienced job loss, disability, illness, recent disaster, divorce, death of wage earner or other unique circumstances.

Repayment plan

A repayment plan is an agreement between a lender and a homeowner where the lender agrees to spread a homeowner’s overdue mortgage payment amount over a specific period. A portion of the overdue amount is added to each of the homeowner’s regular monthly mortgage payments. At the end of the repayment period, a homeowner will be current on his mortgage and will resume payment of his monthly mortgage amount as outlined under the terms of his mortgage. A repayment plan is a viable option for a homeowner that has missed one or several payments due to a temporary hardship.

Short Sale

A short sale occurs when a homeowner’s lender/servicer agrees to the sale of a homeowner’s property to a third-party in an amount that is less than what is owed on the mortgage. In short, the homeowner’s lender/servicer agrees to the sale of a homeowner’s property to a third-party at a significantly discounted amount. If the lender approves a short sale, a homeowner’s unpaid portion of the mortgage is canceled, and the debt obligation owed to the lender/servicer by the homeowner is satisfied. A short sale terminates the homeowner’s foreclosure action, reduces their overall debt and prevents the derogatory entry of a foreclosure sale on the homeowner’s credit report. However, the homeowner’s inability to benefit from the proceeds of a short sale, and potential tax liability regarding their cancelation of debt necessitates counsel with an experienced foreclosure defense attorney to determine whether a short sale is a homeowner’s best option.