AVOIDING FORECLOSURE!
“MAKING HOME AFFORDABLE” GUIDELINES
The
Making Home Affordable program has been revised several times in an effort to
be more effective and useful for borrowers facing difficulty. The following is
a summary of the guidelines. There are several aspects to the program including
a refinance option, a modification option and a new unemployment program. (the comments in parenthesis and
italicized are the author’s)
Home Affordable Refinance Program
(HARP)
(Program is set to expire June 10, 2011)
The
language describing this program upon its initiation was “Designed for
eligible homeowners who are current on their mortgages but have been unable to
take advantage of today’s low interest rates because their homes lack
sufficient equity due to loss of value.” The objective is to help
homeowners obtain more stable and/or affordable loans.
Thus,
this program is available to homeowners who have a solid payment history on an
existing Fannie Mae or Freddie Mac loan. The anticipation is that those
borrowers who have been prohibited from refinancing because their current
loan-to-value ratio exceeds 80% will now be eligible to refinance at
today’s lower rates. (If interest
rates increase, as some are predicting, this refinance option may become less
desirable)
The
expectation is that because the lenders and servicer
already have the borrower’s information on file, less documentation will
be required in the new refinance transaction.
This
reduction in documentation along with the expectation that an appraisal will be
able to be waived is expected to make a refinance quicker and less costly for
lenders and borrowers.
The
plan relies upon the voluntary cooperation of the lenders and seems to
allow each lender the latitude to determine the credit worthiness of the
borrower and other aspects of each refinance request. Nor do we have a clear idea of the
evaluation process and there seems to be a lack of consistent interpretation of
the guidelines, adopted by all lenders. (It may be reasonable to
assume that many borrowers may be deemed ineligible and thus we can expect that
short sale transactions may continue.)
Following
are the guidelines for eligibility.
· Loans
originated on or before January 1, 2009 and currently owned or guaranteed by
Fannie Mae or Freddie Mac.
· First
liens on owner occupied properties only whose current lien does not exceed 125%
of the current market value.
· Conforming
loan limits although the higher limits up to $729,750 in designated communities
are allowed.
· Full
documentation of income and assets required. The guidelines for qualification
seem to be left up to the lender performing the refinance. (Vague guidelines would seem to allow lender to make arbitrary decisions
that can not be easily refuted by consumers).
A homeowner obtaining a loan under the Home
Affordable Refinance Program (HARP) will be required to pay points and fees
similar to any refinance transaction. If the borrower has both a first and
second loan, the refinance will affect only the first mortgage. The second lien
holder must agree to remain in the junior lien position and the borrower is
only obligated to qualify for the first loan refinance. (Most feel that it is unlikely that junior lien holders will cooperate
in this arrangement).
Home Affordable Modification
Program (HAMP)
(Program is set to expire
December 31, 2012)
This
portion of the program has received the most attention and seems to have the
more developed guidelines. Designed to reach “at risk” borrowers
and modify loans into more affordable payment schedules. (It is also the portion of the program that has created the most
frustration for homeowners with the often extraordinarily long time frames for
accomplishing a modification. Too often, homeowners feel that they are strung
along for a long period of time only to be denied a modification.)
Following are the guidelines for eligibility.
· Loans
originated on or before January 1, 2009
· First
liens on owner occupied, one to four unit properties
· Conforming
loan limits although the higher limits up to $729,750 for single family homes in
designated communities are allowed
· Full
documentation of income and assets required accompanied by an
sufficient documentation of financial hardship is required. (While hardship can be identified as an
increasing payment or rate adjustment making the payment unaffordable, lenders seem
mostly to be looking for job loss or other reduction in income or medical
complications as the main reasons for the sudden hardship.)
· Borrowers who have not missed
payments but who are at imminent risk of default are to be targeted. The
borrower who is delinquent in payments seems ineligible under the guidelines. (Unfortunately,
many borrowers in the beginning were previously instructed that they were
ineligible for assistance until they were delinquent. Then, those same
borrowers were told that because they stopped making payments, in an effort to
qualify for help, that they were no longer eligible. Better communication has
hopefully resulted in less disappointment))
· The monthly
payments, including PITI and any PMI, will be reduced to no more than 31% of
the borrower’s gross monthly income. (As
an incentive to participate,the
lender will be reimbursed by the government for the cost of the reductions in
monthly payments from 38% DTI to 31% DTI.)
· The modification sequence requires first the reduction of
interest rate with a floor of 2% and then extending the term to a maximum of 40
years. Then, if necessary, a principal forbearance could be initiated.
· Participating
servicers are to use reasonable effort to contact homeowners facing foreclosure
and are not to refer a loan for foreclosure until the borrower has been
evaluated for HAMP.
· When deemed eligible for a modification,
most homeowners are offered a “trial” modification for three
months, after which the modification may be made permanent if the borrower has
made all payments on time and the originally provided income and expense
documentation is determined to be accurate. (Some homeowners have complained
that in spite of their following all the guidelines of the trial modification
they have bee denied permanent modification.)
· Loans
can be modified only once (this was in response to the criticism that
previous modifications were insufficient to provide real relief and were for
only a short period of time)
One
major concern already identified with the process has to do with the
requirement that servicers conduct a “net
present value” calculation. Translated, this means that the servicer will compare the cost of a loan modification with
a foreclosure and will implement whichever option provides the lesser cost or
loss to the lender. (The net present value is non-transparent, meaning that
the numbers used to make the calculations are presently available only to the servicers.)
There
has been confusion regarding because some loans were deemed unavailable for
modification because the servicer was unable to proceed. The problem resulted
from the original bundling of loans into Mortgage Backed Securities and
globally sold to investors. The servicer in most cases does not
“own” the loan but must acquire permission to proceed with any
action with or against the borrower. Most contracts allow servicers to proceed
as long as the modification provides a better financial outcome for the lender
or investor than the status quo. In some cases, it was difficult to determine
the servicer’s authorization and delays occurred while determining if the
servicer could actually offer a modification.
Here
are several additional conditions accompanying loan modifications:
-
all modifications must include an impound account for
taxes and insurance -
if mortgage insurance was required in the original loan, it will be
continued -
the interest rate on the modified loan will be fixed for life unless
your initial modified rate is below
the current market rate. In such a case, the rate will be fixed for 5 years
after which it is subject to an annual increase of 1% until it reaches the market rate
that prevailed on the day of the original agreement, at which time it will be
fixed for life.
While
many homeowners are severely “under water” (the principal owed
exceeds the current value of the home), lenders have been reluctant to offer a
principal forbearance (where the amount owed is put off until the future).
Should such a forbearance occur, the amount owed will be ultimately owed and
will likely result in a balloon payment at some time in the future. (Many homeowners, depending upon how much
over the current home’s value is owed, may never recapture the lost
value. In such cases, the borrower may remain under water when they attempt to
liquidate their home in the future. If
home values have not rebounded significantly during that same 5 year period,
home owners may have found that they only postponed a problem rather than
having found a solution. It is possible that they will merely be renting
their homes and still encounter no way to avoid a
short sale in the future with its resulting negative impact to their credit,
etc. It is easy to see why some homeowners are abandoning their homes now to
foreclosure or short sale with the conclusion that they will be able to join
the homeowner ranks again in four years when their credit has recovered from
the current negative impacts.)
Home Affordable Unemployment Program (UP)
One
of the main additions to the Home Affordable Programs is the introduction of an
option for those homeowners who are unemployed. This new option provides
a temporary time (forbearance) during which the regular monthly payment is
reduced or suspended. The eligibility requirements remain mostly the same as
for the HARP and HAMP programs. The additional eligibility requirements
include:
· The
borrower must request consideration for UP before three full mortage payments are due or unpaid.
· The
borrower must be unemployed and able to document the s/he will receive
unemployment benefits in the month in which the forbearance period begins.
· Some
servicers are requiring that the borrower receive unemployment benefits for up
to three months prior to the forbearance period beginning.
The
forbearance period is described as being available “for at least three
months” but can be extended, depending upon the servicer and their
specific guidelines. The expectation is that during the forbearance period, the
monthly payment will be reduced to no more than 31% of the gross monthly
household income although the payment could be reduced more or suspended
entirely. The UP program anticipates that at some time, the borrower will be
re-evaluated regarding his/her eligibility for HAMP. (Is it reasonable to assume that with rare exception, one who remains
unemployed is unlikely to be able to meet the HAMP guidelines?With
the average unemployment time frame now stretching many months, a possible
three month limitation for the UP assistance may be ineffectual. While the
program calls for the assistance to last “at least” three months,
the process for re-evaluation and extension do not seem well defined.)
Home Affordable Foreclosure Alternates Program (HAFA)
This
part of the program deals with the Foreclosure, Short Sale and Deed-In-Lieu
options offered by lenders. The frustrations accompanying all of these options
are well documented. Interestingly, in spite of all of the emphasis on the
above options, it is predicted that 1.4 million foreclosures will occur in
2011. (It would seem that something isn’t working with all of these
offered alternatives. In spite of the relatively poor results achieved by the
above efforts in the past, government seems to be promoting the same programs
while predicting failure for 1.4 million homeowners . . . the classic
definition of insanity where one continues doing the same thing but hoping for
a different result.)
Judicial Modification at Bankruptcy
Provisions
initially introduced an option for homeowners seek a debt payment plan via
bankruptcy. With evidence that the borrower had tried unsuccessfully to obtain
an affordable loan modification, a bankruptcy judge would be enabled to reduce
the outstanding principal balance to the current fair market value to
facilitate the borrower’s retention of his/her owner occupied home. Known
as a “cram down” provision, lenders were understandably opposed to
the ruling. Their resistance was based on the supposition that the number of
bankruptcies will increase dramatically. Proponents,
pointed out that bankruptcy was a last choice situation and would encourage
lenders to work with borrowers in seeking loan modifications. The banks
won and this provision, while still be discussed, has not been adopted as a
potential final resolution for desperate home owners.
Why Wouldn’t
This Work?
Why
must a homeowner wait until s/he is in imminent danger of losing a home before
s/he can seek assistance? How many homeowners would be helped today if their current
lender would allow a refinance up to 125% LTV of the current value? Taking
advantage of lower rates to reduce monthly payments might reduce the number of
homeowners who are ultimately forced to seek more drastic help via the above
options. Clearly there are considerations, among them the concern that
refinancing homes so far under water in value might still be merely postponing
a problem when the owner seeks to liquidate the home in the future. But, for
homeowners anticipating long term tenancy, being able to reduce their payments
to a more affordable level could be the thing that keeps them in their homes.
Just an idea!
Other provisions
The
total legislation is lengthy and has other provisions included. There are
elements to strengthen FHA, Fannie Mae and Freddie Mac in their ability to
intervene with at risk borrowers. There are outlined provisions for borrowers with
high total debt ratios who can seek HUD certified consumer counseling and a
debt reconstruction program along with their loan modification.
Incentives for lenders and servicers are spelled out
in the legislation along with expectations regarding how PMI companies will
assist in the modification process. While a very ambitious program, we continue
to wait to see if it will actually help many troubled homeowners.
A good start
In
spite of the limitations to the programs noted above, there was anticipation that
the refinance and modification programs set out above would help millions of
projected borrowers. Keeping home owners in their homes was a big step towards
establishing some stability to the housing segment of the economy. (Note: In
spite of the constant tweaking of the regulations, the number of homeowners
assisted remains a disappointing minimum number)
ASK THE LENDER FOR THE NOTE
The most recent suggestion for home owners facing
foreclosure is to ask your lender or the original note from the original
purchase loan.
Here is the rationale behind this strategy: Home
owners, facing possible foreclosure, are advised to contact their lender to
“negotiate” a loan modification. Complaints have occurred in which
homeowners acquire no cooperation from the lender. We have also heard that
because of the way that mortgages were packaged and sold globally, that lenders
have experienced difficulty in retrieving the paper work related to the loans
that they are “servicing”. Perhaps there is a connection between
the lender’s unwillingness to modify a loan and the fact that they really
are not in possession of the note and thus do not have the authority to
negotiate a modification. On the other hand, as a servicer,
they are authorized to initiate a foreclosure action.
When one finances a home purchase, the
“agreement” between the lender and the borrower is identified in
the NOTE. The lender produces the note as evidence that they have the authority
to negotiate with the borrower as well as exercise the foreclosure option.
The rationale behind seeking a copy of the note is that
the owner wishes to “negotiate” a modification with the lending
entity in possession of the note and with whom the owner is obligated. If the servicer is not capable of negotiating a note modification,
the owner is encouraged to “demand” being able to relate to the
note holder directly.
Thus, if the foreclosing entity cannot produce the note,
there may be a reasonable question as to their authority to foreclose without
having at least addressed the issue of a note modification.
Will this strategy work? We don’t know. But, it may
be worth a try! Seeking guidance from a qualified attorney or a HUD counselor
representative may be in your best interest.
SHORT SALE OPTION
(Italics represent the author’s comments)
Lenders seem to be open to participating in a short sale,
often arranging for the homeowner to remain in the home during the sale
process. A short sale can be less costly than having the lender actually
proceed with foreclosure. There has been increasing frustration among borrowers
who find that, in spite of their willingness to participate with the lender,
the process is lengthy and convoluted. It was anticipated that the Home
Affordable program would decrease the need for short sales as borrower would be
able to arrange payment plans to allow them to remain in their homes?
Unfortunately, that hasn’t occurred and short sales remain common.
A “short sale” transaction is one in which
the home owner sells their home, with the consent of the lender, for
“less than is owed”. Until
recently, homeowners were punished for such transactions as they were taxed on
the amount of “debt forgiven”. In other words, if the lender
allowed the home owner to sell for $50,000 less than owed on the mortgage, the
borrower was taxes on the $50,000 as if it were income. One of the better
things that Congress has done is to eliminate this “phantom tax”.
While the phantom tax rule is not a panacea for dealing
with the foreclosure situation let’s celebrate this as a first step in
resolving some of the growing foreclosure problems. A less discussed
consequence exists for borrowers who choose to participate in a short sale.
Lenders are likely to view the borrower in the same way as an individual having
declared bankruptcy. The credit report will most likely identify the mortgage
as having been “settled for less than owed”. This, in turn, could
affect a borrower’s ability to acquire future financing but may still be
a better alternative than going through foreclosure?
The
next phase to making this legislation most effective for short sale home
sellers would be to amend the credit scoring models in regard to how said sales
affect the calculation of future individual credit scores. It has been
suggested that the scoring models be changed to permit new home mortgage
financing after two years has elapsed from the past short sale? Of course,
other conditions such as unblemished credit since the short sale, etc. would
have to occur. Unfortunately, no
such options appear to be under consideration at this time.
Past Fannie Mae rules allowed a borrower to seek new
financing after four years had elapsed from the foreclosure and/or short sale.
More recent discussions have centered around
increasing this time frame to five years. While often suggested, it remains
unclear whether a borrower who participates in a short sale will be eligible
again to purchase a home within two years or will have to wait the new five
year term recently suggested by Fannie Mae.
A borrower can contact their lender directly or
contact a real estate licensee to help to arrange a short sale. Lenders are
very willing to work with Real Estate representatives
so you may find it helpful to have an advocate working for you when negotiating
with your lender.
In either situation, be prepared to confront several
potential hurdles. The fact that a short sale is being considered means that
the amount owed exceeds a possible sales price. In recent years we saw an
increase in 100% loans wherein two loans were obtained . . . a first mortgage
for 80% of the sales price and a 20% mortgage for the remaining purchase
amount. In most cases, two different investors now “service” the
two loans. While the first mortgage holder will likely be cooperative with your
short sale request, the second mortgage holder will most likely be literally
“wiped out” and lose their investment in any short sale. Acquiring
the voluntary participation of the secondary lender in this kind of situation
can not only be time consuming but can result in not
being able to proceed at all.
Complaints about the length of time it takes to consummate a short sale
are more understandable when recognizing the position of any secondary lender.
(see “ask for the
Note” article below that may explain the reluctance and/or inability of
some lenders to negotiate a loan modification).
Word/john/avoiding foreclosure