Is it possible to get a mortgage modification without being foreclosed or behind on your payments? For an increasing number of borrowers the answer is “yes” because recent changes in the mortgage industry now make loan modifications more likely than at any point since the financial meltdown began.
For much of human history mortgage lenders have been vehemently opposed to loan modifications — except when it’s to their advantage. Now, however, a nationwide foreclosure glut is forcing lenders to re-think the issue and for the first time do-it-yourself mortgage modifications are possible.
Not likely. Not guaranteed. But possible.
What we commonly call a “mortgage” is really a contract between a borrower and a lender. The borrower gets cash up-front and in exchange the lender gets a promise of full repayment with interest over time. Importantly, a mortgage is secured by the property — if the borrower doesn’t pay, the lender has the right to sell the property to get back its money.
The paragraph above pretty-much describes the traditional lending system. A local lender — say a bank, savings and loan association or a credit union — made a loan to a local homeowner. The lender made sure the borrower was qualified for the loan and that the property value was sufficient to repay the debt if something went wrong. Why? The lender kept the loan for as long as it was outstanding. The lender’s profit was in the cashflow from the loan — the difference between the interest being paid each month by the borrower and the lender’s cost of funds.
In other words, mortgages were traditionally made by so-called “spread” lenders, companies that had a vested interest in getting loans right. Such lenders wanted fully-documented loans, careful property appraisals and sizeable downpayments because they were prepared to hold the loan for many years. What they didn’t want were foreclosures because foreclosures mean losses. Examples of spread lenders today include community banks, credit unions, Hudson City Bancorp and ING DIRECT USA.
Lenders Without Cash
In recent years the system has changed. Now we have lots of companies that look like “lenders” and who make loans to local borrowers. The catch is that such “lenders” either don’t have any cash to fund mortgages or they have the money but don’t want to keep the loan.
Huh? How can companies without money make loans? They sell the mortgage in an electronic arena called the secondary market. Money from the sale of the mortgage on the secondary market funds the loan.
The benefit of this system is that by selling a loan the lender now has more dollars to lend. More loans, in turn, mean more fees, charges and profits. No less important, the secondary system means that local lenders will not run out of money. If a lender has $5,00,000 and makes 10 loans for $500,000 each then it might seem as though the lender could not fund any more mortgages. However, by selling the loans in the secondary market the lender gets fresh cash and therefore can make new loans.
Now the loan — most-likely your loan — is owned by an investor, not a lender. That investor paid a given amount for your loan under the assumption that your loan would generate a certain interest rate. No less important, you probably don’t know the investor that owns your loan. Instead, your payments are likely being collected by a servicer.
Fannie & Freddie
We now know that your mortgage most probably is not owned by the company that sold you the loan. If that’s the case then who does own it?
Remember we said the loan was sold in the secondary market to an investor. Buyers on the secondary market include pension funds, insurance companies and investors worldwide. However, the two biggest buyers of local loans are Fannie Mae and Freddie Mac.
To understand the importance of Fannie Mae and Freddie Mac consider some numbers. First, it’s generally estimated that there are about 50 million homes which have been financed with a mortgage. Second, Fannie Mae and Freddie Mac own more than 30 million of those loans.
Because Fannie Mae and Freddie Mac own so many mortgages other mortgage investors — but not all — have generally adopted their standards. If you want to know how the loan system generally works it’s good to keep your eyes on Fannie Mae and Freddie Mac.
No Modifications, Not Now, Not Ever
The mortgage system generally worked well until the past few years. There surely were foreclosures in the past, but typically there were very few foreclosures and most were related to such issues as the loss of a job, the death of a spouse, medical bills and divorce.
In the last few years the situation has changed. As the federal government reported in late 2008, “delinquencies on mortgages have tripled, not just for subprime and Alt-A, but also for prime mortgages. Foreclosures have increased almost 150% from two years ago.” Figures from the foreclosure listing site, RealtyTrac.com, show that during the months of March, April and May 2009 there were more than 1,00,000 foreclosure filings nationwide –more filings than in all of 2005.
Despite new and higher foreclosure levels, investors — the folks who own loans — have generally refused to modify mortgages. Their reasoning goes like this:
First, a contract is a contract. You got the money we promised and you should pay the money you promised.
Second, if loan terms are modified we’ll get a lower rate of return.
Third, if we have an asset with a lower rate of return it’s worth less and we will have made a bad investment.
In fact, investors have a pretty good argument except for one looming problem: Foreclosure rates are high and climbing — and the loss from a foreclosure according to a Congressional report is typically $40,000 to $80,000 per property. Given the lousy choice of foreclosure or the less-lousy choice of a loan modification, investors are beginning to consider modifications.
| In response to many requests, a longer and more in-depth discussion of loan modifications and how to get them is now available as an eBook. Please press here to obtain your copy of The Quick & Dirty Guide To Successful Mortgage Modifications. The guide is available in many eBook formats as a convenience to readers. |
The Inside Truth About Modifications
When lenders talk about loan workouts what they typically mean are two options:
- Modifications. A situation where the debt is restructured. For example, the loan term might be increased from 30 years to 40 years, thus reducing the monthly payment.
- Payment Plans. Loans where there’s a change in contract terms. For instance, the interest rate is reduced 1 percent for the next 12 months or penalties and fees are forgiven.
Notice that with workouts there’s one option lenders typically do not offer: A principal reduction. Notice also that in some cases monthly payments can actually rise with new mortgage terms.
If you have mortgage insurance (MI), if you’re facing foreclosure and if you’re having a tough time that’s temporary then you may be able to get help from your mortgage insurance company with a claim advance.
If the property is foreclosed then the mortgage insurance company can owe big money to the lender. Instead, if your situation is short term, the mortgage insurance company may be willing to lend you money to bring the mortgage current, typically with little interest and very soft terms. Ask your lender and your mortgage insurance company about such help.
The New Deal
In November 2008 the Bush Administration announced that Fannie Mae and Freddie Mac would now offer a streamlined modification program (SMP) so that borrowers could more easily obtain loan modifications.
However, a look at the SMP standards suggests that meaningful modifications — if any — were enormously difficult to get under the program.
- SMP targets borrowers who have missed three payments or more, own and occupy their property as a primary residence and have not filed for bankruptcy.
- SMP creates a standard definition of an “affordable mortgage payment” — no more than 38 percent of a household’s monthly gross income.
- Servicers will have flexibility in modifying loans, including reducing the mortgage interest rate, extending the life of the loan or even deferring payment on part of the principal. The servicer receives an $800 payment for each modification.
The SMP standards are ridiculously impractical. Here’s why:
First, they require borrowers to miss three or more monthly payments, meaning that homeowners who participate must have lousy credit.
Some lenders counsel borrowers to purposely miss payments so they can qualify for the SMP. The view here is that such advice is terribly harmful because there’s no guarantee that the borrower will, in fact, get SMP relief and also because whether or not an SMP arrangement is possible the borrower will now have terrible credit, meaning that a new loan on sane terms from other sources will be virtually impossible.
Second, the SMP applies only to owner-occupants. This means the SMP effort is useless when an investment owner is in trouble. This anti-investor approach may seem somehow warranted because investors are supposed to face more risks than owner-occupants, but if you think about the consequences of this policy you can see that it’s misguided: If a property down the street is foreclosed and the value of YOUR home declines, no one cares if the foreclosed property was owned by an investor or an owner-occupant. All anyone sees is that there was a foreclosure and therefore a lower price shows when buyers look at local sales.
Third, the SMP says borrowers must devote at least 38 percent of their gross, pre-tax income to housing costs. In comparison, the usual qualification standard for a conventional loan is that 28 percent of the borrower’s income can be devoted to principal, interest, property taxes and insurance, what is known as “PITI” to lenders. In effect, borrowers who qualify for the SMP are required to spend vastly more money on housing than baseline conventional borrowers. The better idea is to lower monthly housing costs for troubled borrowers so their homes are not foreclosed.
Fourth, if you have declared bankruptcy you do not qualify for a loan modification under SMP — the very modification which may prevent the loss of all your assets.
In December 2008, Fannie Mae — which held 18 million mortgages at the start of 2008 — said it would offer an “early workout” program as an alternative to the SMP.
How does the early workout program differ from the SMP?
- Early workouts, says the company, are “a separate Fannie Mae effort to assist a wider spectrum of distressed borrowers in various stages of delinquency, including those who are current on their loan payments but facing imminent default.” Translation: The new program can apply to borrowers who are current. You don’t have to miss mortgage payments to qualify, you don’t have to lose your credit standing.
- The early workout program has two phases, a trial period and then a modification. During the trial period a non-delinquent borrower must complete four timely, consecutive monthly payments at the new level. A delinquent borrower must make at least three consecutive monthly payments. Translation: Make certain you make all trial-period payments in full and on time. In fact, be smart — pay early.
- “Preforeclosure sales, acceptance of deeds-in-lieu of foreclosure, and short payoffs (accepting a payoff for less than the amount owed), will not be permitted loss mitigation alternatives for use with borrowers whose loans are current but are determined to be in imminent default,” says Fannie Mae. Translation: If you’re not in default why not try to save both the home and the mortgage?
While the early workout program has started with Fannie Mae it will logically be expanded to other lenders and investors. Since investor programs can differ, it’s important to know who or what actually owns your loan. Most probably, the people you identify as your “lender” are actually loan “servicers” and not the loan owners. The ability of servicers to make modification decisions may be limited — or non-existent — depending on the arrangement they have with the loan owner, something usually called a “pooling-and-servicing” (PAS) agreement.
The Obama Plan
In February 2009 the Obama Administration came out with a $75 billion foreclosure prevention plan which combines the best approaches from Fannie Mae and the FDIC.
The program is complex, but in basic terms it has two elements:
First, if you’re facing foreclosure and your loan is one of the 30 million owned by Fannie Mae and Freddie Mac, you may be able to refinance if the value of the property is not more than 25 percent greater than the remaining mortgage balance (originally the government limited refinancing to a 5 percent shortfall). In other words, the program does not require borrowers to have any equity in the property, but it does limit the amount of risk which the government is willing to take.
As the government explains: “The unpaid principal balance of the first lien mortgage does not exceed 125 percent of the current market value of the property. (For example, if the property is worth $200,000, the borrower must owe $250,000 or less on that first lien mortgage).”
Second, imagine that you’re not facing foreclosure but have a toxic loan. Payments have risen rapidly or about to rise. You’re not in trouble yet, you’re making all your payments, but you could be in hot water within the next few months.
In this case, hopefully, the lender will try to reduce your interest rate so that no more than 38 percent of your gross (pre-tax) income is set aside for housing. The government will then subsidize your loan to bring the monthly housing cost down to 31 percent. Note that not all lenders are participating in the Obama plan as of this writing.
In other words, this is the Fannie Mae early workout program supported, finally, with government funds.
The Obama plan, for the first time, uses federal dollars for real people with real mortgage problems, not just bankers and Wall Street insiders.
It’s estimated that as many as 7 to 9 million borrowers will be helped by the Obama program, however the program will not protect everyone against foreclosure. If the value of your home is too low, if you do not earn enough income or if you have a rental property that’s in trouble, you won’t be eligible for help. Unfortunately, for millions of people who have bought in recent years with little or no money down, or have bought with loans that negatively amortize, or who have lost their jobs, the Obama program will not work for them. For a list of specific limitations and exclusions, press here.
The Obama plan if successful could substantially reduce the inventory of unsold homes in many areas and thus bring a halt to home-price declines — assuming job losses can be contained. We should get some sense of the program’s success or failure by mid- to late-summer, 2009.
For additional information, try:
Steps To Take
As you look at loan modification options you can see that loan owners logically do not want to make such arrangements if they can be avoided and they are not required to modify loans. Thus, if you want a loan modification, if you want to avoid foreclosure, you must make the first move.
What should you do? The first step is to analyze your financial situation,
- What percentage of your gross income (your income before tax deductions) is now devoted to housing costs, meaning mortgage principal, interest, taxes and insurance — PITI.
- How much could you pay each month if PITI was limited to 38 percent of your gross income?
- How much could you pay each month if PITI was limited to 31 percent of your gross income? This is an important question because the FDIC has been using a 31-percent benchmark when modifying loans made by IndyMac, the lender taken over by the FDIC in 2008. The 31-percent standard has now spread to other programs.
- What are your assets? Include such items as savings accounts, IRAs, other retirement accounts, certificates of deposit, stock, bonds, vehicles, other real estate. Be sure to include account numbers, the date when valued, contact information for the account holder such as a brokerage or bank, balances and required payments.
- What is the value of your home? Local real estate brokers may be willing to help provide a general valuation on a pro bono basis with a comparative market analysis (CMA) or a broker’s price opinion (BPO)– it’s good PR for the broker and you could be a future source of referrals and business.
- What are your debts? Include credit cards with account numbers, account information, total debt and required monthly payments. Also, student debts, auto loans, other mortgages, etc. Again, show account numbers, balances, required payments and contact information.
- What are your typical monthly expenses for utilities, condo fees, gasoline, health insurance, child care, alimony, etc.
- Have in hand your tax returns for the past three years and payment stubs for the last three payment periods.
- Make sure your information is accurate and current. Have receipts and documents to support your statements.
- No matter how enticing, do NOT sell your home with a quitclaim deed, especially if the property is being sold “subject to” the mortgage without FIRST speaking with a real estate attorney or legal clinic of your choice or to your state attorney general.
- No matter how enticing, do NOT sell your home by making a payment to someone else. Remember, when you sell a home buyers pay YOU — not the other way around. Again, for specifics FIRST speak with a real estate attorney or legal clinic of your choice or to your state attorney general.
Once you’ve gathered baseline information arrange your data with a spreadsheet so it’s easy to follow — income, assets, debts, etc. Then review your numbers and write out a one-page letter explaining why your need for a modification is compelling.
One useful approach is to download and complete the free loan modification forms used under the Obama Administration’s Make Homes Affordable loan modification program.
- Request Form (Request for Modification and Affidavit)
- The Help Guide you can use to complete the Request Form (Request for Modification and Affidavit)
- Tax Authorization (IRS 4506T-EZ Form)
- Proof of Income
- Proof of Income Checklist
- Get contact information for major mortgage servicers that are participating in the program.
Your goal is to convince the loan owner that a modification is in HIS best interest. This is a business matter, it must reflect cold hard facts and it must be documented. Make sure your letter is properly written, properly spelled and grammatically correct. Write and re-write your letter until it discusses only the need for a modification and the probable consequences to the lender if you cannot modify the loan.
To see an example, go to LoanSafe.org and read their model hardship letter and related information.
Contacting The Lender
Take a look at your loan document. What is the loan number?
Who do you contact regarding mortgage payments? This will be the lender or the loan servicer, most likely there is an 800-number on your monthly bill. Check and see if there’s a specific number for the “loss mitigation” department or something similar.
As you communicate with the lender take these steps.
- Always write down the name of the person with whom you are speaking, the date and the time. Get their direct phone number if possible. Keep notes in a file of each and every phone call you make, with whom you spoke, the date and time, the number you called and what was said.
- Never yell at the person on the other end of the line. Their goal in life is not to make things hard for you. They may have instructions from the loan owner which makes it difficult or impossible for them to help in your situation. Always assume they’re trying their best. Remember the old saying, you catch more flies with honey than with vinegar. Treat lender representatives with respect and dignity.
- Ask for the name and number of people who actually make modification decisions. This usually means someone in the loss mitigation department. If you can’t get such information by phone, search around the lender’s website or search Google for the lender and the term “loss mitigation.”
Once you get to speak with a loss mitigator offer all the data you’ve put together. Make certain to send your materials by certified mail with a return receipt requested — this way you will have proof showing when the material was mailed, that it was received and when it was received.
Once the lender has your materials the real question then becomes will he make the modification? If yes, what changes will be made and how long will they last?
Be persistent. You must follow-up because there is no chance that a modification can be done with one letter or one phone call. Always ask what you can do to make the matter easier and faster for the loan owner — and then do it.
In the end what is your goal, what would you like from the lender? The best possible result would be a smaller and more-affordable monthly mortgage payment which has been created by a lower interest rate, a longer loan term, or both. In addition, getting the lender to waive accumulated fees, penalties and charges is also a benefit.
Once you have a lower payment then you must keep your end of the bargain — every payment, without exception, must be made in full and on time. This is not only fair to the lender, it will also help build your credit standing.
If you have mortgage problems there are plenty of people who are willing to help you — for a fee. Unfortunately, while there are experienced individuals and organizations who can provide assistance, there are others who simply want your money.
You are vastly more-likely to get a loan modification if you have assistance. Good sources of such assistance include:
- Local attorneys and legal clinics that specialize in real estate.
- Local law schools with pro bono or low-cost programs to assist members of the community.
- Local bar associations with pro bono programs. In Maryland, for example, the Washington Post reports that more than 600 lawyers have volunteered to help homeowners with mortgage problems.
- HUD has a list of foreclosure avoidance counselors at: http://www.hud.gov/offices/hsg/sfh/hcc/fc/.
- Your state attorney general. State attorneys general often have existing contacts with lenders. Contact your state attorney general directly for help and assistance.
- Community housing organizations — they often have contacts with local attorneys.
- Legal Services Corporation — Funds 900 offices around the country to help the poor obtain legal services.
- National Consumer Law Center — An excellent source of legal information for the public.
- LoanSafe.org has online tools and information and has been featured in the New York Times.
- The Neighborhood Assistance Corporation of America has been a forceful and effective advocate for those facing foreclosure.
Homeowners Assistance Program (HAP) For Military & Civilian Personnel
The government has established a Homeowners Assistance Program (HAP) to “assist eligible homeowners who face financial loss when selling their primary residence homes in areas where real estate values have declined because of a base closure or realignment announcement.” Translation: It’s a program to help those who may be forced to have a short sale or foreclosure because a local base has closed or contracted.
HAP offers significant benefits — if you have any association with the military please go to the HAP site to see who qualifies and what benefits are available.
Making Home Affordable
Be certain to check the government’s loan modification web site, MakingHomeAffordable.com. This site is entirely-free and contains the latest information regarding loan modifications under the Obama program.
To Check The Stats
To see how lenders are doing, look for the latest Making Home Affordable Program Reports issued by the Treasury Department.
To Contact Lenders
The government maintains an extensive list of individual lender foreclosure and modification contacts including names, addresses, websites, phone numbers and fax numbers. Be sure to press the show all servicers link if you cannot find a lender in the search box.
Help for Lenders
If you’re a lender and want additional information, information, policies and news regarding the Making Home Affordable program, please see HUD’s special site for lenders at www.hmpadmin.com.