Mortgage Loan Modifications: How They Work and What to Avoid

There are any number of reasons people fall behind on mortgage payments – job loss, medical emergencies, divorce, other financial hardship.  Once you begin to fall behind on your mortgage it can be incredibly difficult to catch back up.  You may well find that banks will not accept payments, making the situation worse every month.   Chapter 13 bankruptcy may offer the surest way to catch up past due mortgages, but there is another alternative.  In some cases, loan modifications worked out with your bank could lower your payment and help you to catch up on what you owe.  But it is important to realize that there can be pitfalls in the mortgage loan modification process, and to understand how the process works.

What is a loan modification?

“Loan modification” generally refers to a process where the original terms of your mortgage are modified by a new agreement.  This often involves lowering your interest rate, hopefully lowering your monthly payment, and possibly spreading the past-due amount out over time. Some modification programs will achieve their results through “re-amortization,” which means that they will extend the length of the repayment plan so you can make lower payments over a longer period of time.   This means that some loan modifications may cost more in the long run as a way to make ongoing payments affordable.

What is HAMP?

The predominant loan modification program currently available is the Home Affordable Modification Program (HAMP), which was formed and funded by the federal government in 2009. Under HAMP, banks that took TARP bank bailout money are required to offer HAMP modification to borrowers whose loans are backed by Fannie Mae and Freddy Mac, two government-funded agencies.  You can find out whether your mortgage is backed by Fannie by going here, or whether it is backed by Freddie by going here.

The HAMP guidelines provide for a number of benefits designed to help you get back on track with your mortgage and save your home. The benefits may include lowering your monthly payment to 31% of your family’s gross monthly income, lowering your interest rate to as low as 2%, and a possible forbearance of some of your arrearages on the principal or forgiveness of some of the remaining balance on your principal.

Who is eligible for HAMP?

One of the beauties of HAMP, at least in theory, is that lenders must consider each borrower on the basis of uniform federal guidelines. Ideally, it should be a straightforward process where your loan is modified under the guidelines if you meet the eligibility criteria:

First, you must be in default or in danger of default on your mortgage. You must have obtained your mortgage on or before January 1, 2009, and your current monthly payment must be more than 31% of your gross monthly income. If you’re seeking a modification on your primary residence, you cannot owe more than $729,750 on the loan.

In addition, you must have a documented hardship, such as a loss of income, job loss, divorce, or illness, to name a few examples. With that said, you must still have sufficient income to support the modified payment. You will need to prove your income, so be prepared to show documentation such as tax returns and pay stubs.

When HAMP was first introduced you could only get a modification on the first mortgage of your primary residence. The new requirements allow modifications on rental properties as well.

Finally, in order to qualify for a long-term HAMP modification you must successfully complete a 3-4 month trial period by making every payment on time and in full. If you fail to do this, you have to wait 12 months until you may apply for a HAMP modification again. If you are successful in the trial period, your lender must convert you to a permanent plan.

Pitfalls to watch out for when applying for a loan modification – banks may not play by the rules.

Applying for a HAMP modification is supposed to be fairly straightforward: you submit your documents, the bank evaluates per the federal criteria, and you are either confirmed or denied based on those criteria. But that doesn’t always happen.

Unfortunately, many banks have made getting a HAMP modification far more difficult than it is meant to be.  Some banks will only consider borrowers who are two to three months behind on their mortgages, even though HAMP guidelines clearly don’t require this.  They may “lose” your paperwork repeatedly or claim that you never sent in the requested documents.  That is why you should always document everything: keep notes on every phone call, every email, and every action you take with your lender. Make sure you keep all of your originals and provide copies if the bank asks for something more than once.

In the midst of confusion about the status of your documents, some banks may pursue foreclosure at the same time they consider you for a loan modification—this is referred to as “dual-tracking.” In many cases, the modification department simply has no knowledge of what the foreclosure department is doing, or vice versa. The problem with this is that banks are not supposed to “lead you on” by making you think you will receive a modification all while moving forward with foreclosure.

Banks have a right to go through some parts of the foreclosure process while you pursue a modification, but they cannot sell your home before making a final determination on your HAMP application.  HAMP requires banks to wait 30 days after sending a written notification denying a loan modification before conducting a foreclosure sale.  Unfortunately, some banks have foreclosed on applicants that qualify under HAMP standards by sending a denial letter on the eve of a foreclosure sale (based on—surprise!—insufficient documentation) or even by telling applicants that the foreclosure process will be postponed but going forward anyway.  Call us if you think this has happened to you.

Beware of mortgage modification scams – you can apply on your own!

Finally, it is important to understand that you can pursue a loan modification on your own.  If a company is charging you to submit documents for a loan modification, it may be a scam.  It is illegal in North Carolina for a person or company not licensed to practice law to accept an upfront fee to negotiate with your lender on your behalf.  No reputable companies or lawyers will draft hundreds or even thousands of dollars directly from your bank account to send banks paperwork that you could just as easily send yourself.  In fact, HAMP offers free counselors who will help you through the process.  You can find out more here.

What other options are available?

If you aren’t successful in modifying your mortgage but want to save your home, a Chapter 13 bankruptcy may be an option.  A Chapter 13 bankruptcy will immediately stop foreclosure proceedings and can give you time to catch up on mortgage payments that are behind.  It could also give you breathing room to allow time for a modification to be approved.

If you’d like to schedule a meeting to discuss your situation and how a Chapter 13 bankruptcy may be able to help, give us a call at 919-313-4636.

Photo by 401(K) 2012

Jim White
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Jim White helps people and companies facing serious financial injury by bringing and defending lawsuits and representing debtors in bankruptcy. He has successfully taken on banks, large financial institutions and other corporations in “David v. Goliath” cases. You can reach him at 919-246-4676.