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

Late on Mortgage Payments? Is a Loan Modification for You?

 In the last column, I discussed the “overall” problems with loan modifications. Specifically, that most of the programs do not give any meaningful modification to the loan and there is no “upfront” approval or denial of the modification prior to entering into the trial modifications payments.

Since the column was published, I have received many calls wanting to know more nuts and bolts information about the current state of loan modification programs. So here is what I know after 2 years.

1. Income- The borrower needs to have documented income.  If the borrower 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.

2. Loan Modification Payments include 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 will in all likelihood 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.     

3.  There are no principal balance reductions.  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 is 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.

4.  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 word on the street is that “new” people who are applying for modifications will have their underwriting done prior to starting the trial modification and that the modification is guaranteed.  However, I will believe it when I see it. 

5.  Consider filing bankruptcy to discharge credit card and other unsecured debt before applying for loan modification.  When you apply for a loan modification, the lender will run your credit.  While a low credit score will not prevent a modification, the less unsecured debt you have, the more money you will have available to make the modification payments.  A Chapter 13 may also be available to avoid a junior lien on your home.    

6.  Net Present Value Test.  This is the mystery calculation used by investors to determine whether a loan modification should approved.  What we do know is that 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 weighs heavily in the calculation.  Therefore, if you live in a “low” foreclosure area such as Danville or San Ramon, the likelihood that an investor will want “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.  However, if you are considering a 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.    

*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.   

© 2010 Joan Grimes