HAMP Loan Modifications - The Truth be Told

Everyone has had the experience of thinking that something just is not right.  Ok, we know that something is wrong.  We know it is rotten.  It may have been the time your teenager was going to a study group on Saturday night or maybe you got passed over for a job even after your boss tells you that everyone is being treated equitably.   We have all been there.

We knew that things were rotten with the Home Affordable Modification Program (“HAMP”).  How many times could the Bank lose the paperwork, pay stubs?  How long could a modification be in underwriting?  The Trial Payment Plan (“TPP”) said it was 3 months, but it had been 12 months.  How could the Bank not have received the Trial Payments when they had received all of the regular monthly payments prior to HAMP?  How could a loan modification be approved and then denied 6 months later? 

Well in the case of Bank of America and BAC Home Loan Servicing, the facts are starting to come to light.  In a Second Amended Consolidated Class Action Complaint filed in Massachusetts, the Plaintiffs allege that Bank of America systematically failed to comply with the terms of HAMP.  It alleges that the Bank had financial incentive to avoid modifying home loans and to continue to keep a mortgage in a state of default or distress and to push loans toward foreclosure.  According the Compliant, this was especially true when the loans were owned by a third party investor and the Bank was merely servicing the loan. 

Recently, a declaration filed in the case by a former Bank of America employee alleges that employees were told  “to lie to customers and claim that Bank of America had not received documents it had requested, and that it had not received trial payment(when in fact it had).  We were told that admitting that the Bank received documents would “open a can of worms” since the Bank was required to underwrite the loan modification within 30 days of receiving those documents, and it did not have sufficient underwriting staff to complete the underwriting in that time.”  In addition, the employee alleges “Employees were rewarded by meeting a quota of placing a specific number of accounts into foreclosure, including accounts in which the borrower fulfilled a HAMP Trial Period Plan.”         

If you applied for a loan modification with Bank of America or any other HAMP servicer and you think you should have been approved, you should complain to the Bank, the California Attorney General and you should try to join a class action lawsuit.  If you are still in the house, apply again for a loan modification and put in the hardship letter all evidence you have that you were wrongly denied before.    

Character counts.  At the end of the day, what we do matters.  If your house is a big deal to you, then act like it is a big deal.  If you should have received a loan modification, you need to speak up.  If you don’t, they win.  

This is a complicated area of the law and I recommend you to seek legal counsel prior to taking any action on a loan modification or proceeding with a short sale or foreclosure.  There may be personal and tax liability. I provide a free 30 minute consultation at all of my offices located in Walnut Creek and Brentwood.       

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. © 2013  Joan M. Grimes. (925) 939-1680 Grimesbklaw.com

Why Most Loan Modifications Don’t Work

Everyday people come into my office saying that they have been working on a loan modification for months or even years.  They have applied for the Home Affordable Modification Program (“HAMP”). They have done trial modifications, then been denied.  They have then applied for the lender’s “in house” modification program, then been denied.  They have gone to NACA and been denied.  Some people hire mortgage attorneys to file suit against the lenders.  The bottom line is that most loan modifications don’t work.  Why?

First, a loan modification does not reduce the balance on the loan.   The best we have seen is where the investor waives the accrued interest on the loan.  If a person tells you they got a principal reduction, it usually means that a portion of the loan balance is now a silent second which will need to be paid at the time of sale of the property or as a balloon payment later.

Second, a loan modification will require payment of principal.  Therefore, if you have an option arm loan (also known as a pick-a-payment) or an interest only loan, the loan modification payment in all likelihood will be higher than your prior payment amount.  Also, loan modification payments will include an impound for taxes and insurance which will further increase the monthly payment.     

Third, a loan modification payment will again start with a teaser interest rate of 2%-2.5% and then rise over time.  Furthermore, if you miss any payments on the loan modification, the lender in many cases has the right to go back to the original payment terms and resume the foreclosure from the prior point without starting over.

Fourth, a loan modification requires documented income sufficient to qualify for a real loan i.e. either a 30 or 40 year fixed loan.   If a borrower did not qualify for a 30 year fixed 5 years ago, how are they going to qualify now?  If a person does not receive a regular paycheck, monies need to be going through a bank account to show income.  Loan modifications are much harder for self-employed individuals.

Fifth, even a trial modification does not guarantee a permanent modification.  I have clients who have been in trial modifications for over 1 year with no permanent modification.  The lenders are being paid to work on modifications.  The loans are in default.  They are receiving default servicing fees.  They are in no rush to do a loan modification. 

Sixth, there is no requirement for lenders to do loan modifications.  The lender can do the “Net Present Value Test” and simply say “no” to the requested modification.  As a practical matter, this means that the lender looks at  the borrower’s long term ability to pay on a modification combined with the present value of the investor’s investment i.e. the collateral. Therefore, if you live in a “low” foreclosure area such as Danville or San Ramon, the likelihood that an investor will want to “get out” now, is very high.  On the other hand, if the value of the investment is very low at this time i.e. the value of the home is low, the lender will be more inclined to approve the modification.

In conclusion, most loan modifications make no sense for borrowers.   There will be no principal reduction or long term payment reduction.  Where loan modification make the most sense is where the balance on the first mortgage is close to the fair market value of the property and the borrowers have the ability to pay on a real loan i.e. a 30 year fixed with an impound for property taxes and insurance.  If you are considering a default on your home or considering a loan modification, I urge you to seek legal counsel as soon as possible to fully understand the consequences of the decision and the other options available to you.  In see people for free 30 minute consultations in my offices located in Walnut Creek, Antioch and Brentwood.    

WE ARE DEBT RELIEF AGENCY AND HELP PEOPLE FILE FOR BANKRUPTCY. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UP IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

In Limbo: The Forever Trial Modification

Every day, at least 1 person comes into my office complaining that they have made all of their payments under a trial loan modification, but there has been no permanent modification.  According to the latest numbers, only 4% of all trial modifications under HAMP have become permanent.  The Treasury indicated in December, 2009 that it would start fining lenders for failing to complete loan modifications, but we have seen little improvement yet. 

Borrowers are told a host of explanations as to why there has been no permanent loan modification on their loan including missing paperwork, the loan is with a negotiator or simply that the loan modification takes time.  While all of these explanations may be true, the result is that borrowers throughout the country are left in limbo not knowing whether they should try to stay or make preparations for leaving the home.  To make matters worse, most borrowers know that the loan modification documentation signed by them warns that foreclosure may be immediately resumed from the point at which it was suspended if this trial modification plan terminates and no new notice of default, notice of intent to accelerate, or similar notice is required. What should they do?

In order to reduce some of their anxiety, I ask them to work through a simple 3 step process to see if any loan modification really makes any sense for them.

        Step 1- What are the terms of the loan modification being offered?  There are many types of loan modification/forbearances being offered by lenders.  However, the one most helpful to borrowers is HAMP which stands for Home Affordable Modification Program.  Lenders are not required to participate in this plan.  However, the biggest lenders including Bank of America, JPMorgan Chase Bank, Wells Fargo Bank, Citibank and American Home Mortgage Servicing are participating.  The program lowers the interest rate to 2% for years 1-5 and increases the interest rate over the next 3 years until it is fixed in year 8 at approximately 4.5% -5.0% for the remaining term of the loan or in some instances extending the loan term to a 40 year loan.  If the trial period is not for a HAMP loan modification, you should immediately contact the lender and apply for HAMP loan modification.

        Step 2-  Can you pay off the principal balance?  A good rule of thumb is that a borrower can payoff 2-2.5 times their gross household income in a home loan over the course of their working life and go on vacation and have a child or two.  Therefore, if a family’s average gross household income is $100,000, they should not have a home loan which exceeds $250,000.  This is assuming a 30 year fixed loan.  If a borrower has less than 30 years remaining work time, the amount should be reduced accordingly.  If you determine that you are never going to “own” this property, is this the best use of your money?  If you didn’t have this huge mortgage payment plus property taxes, insurance and maintenance, could you be putting away more money into retirement or maybe saving for a home you could actually “own.”

        Step 3- Is the loan modification payment less than I would pay in rent?  Assuming, the above calculation shows that you will not be able to pay off the balance of the loan over the course of your remaining work career, is the loan modification payment still less than I would pay in rent?  Depending on where you live, the loan modification payment may still be less than rent you would pay in your immediate area.

Loan Modifications are difficult.  Most of these loans were made with little or no documentation and now the lenders seem to be requiring full loan documentation at the beginning, middle and whenever they feel like it until they decide a loan modification is granted or denied.    If you are in a forever trial modification, I urge to continue a dialogue with the lender seeing if any new programs have become available which may help you.  In 2010, we expect lenders with the assistance of the federal government to roll out additional loan modification programs. I recommend calling the lender at least once a week.  Continue to ask if there is anything new available.  A 4% permanent loan modification rate is not good, but if it improves, you do not want to miss the modification which may allow to retain your home.   

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

© 2011 Joan M. Grimes. Grimesbklaw.com