Over the past several years, the recession has triggered an explosion of mortgage defaults, propelling an unimaginable number of houses into foreclosure. In fact, since 2007, more than 4 million U.S. homes have been foreclosed upon, and the number is expected to continue climbing.
Before a bank can foreclose on a home, its owner must be in default on his or her mortgage payments for a period of 60 days or more. At times, refinancing a home is the primary option. Another one for homeowners facing foreclosure is to attempt to have the terms of the mortgage modified.
Mortgage Loan Modification Makes Homes More Affordable
With mortgage modification, the goal is to convince the lender to renegotiate the agreement in order to make the mortgage payments affordable again. That way, the borrower can remain in his or her home.
The advantage to the lender is that the loan will generate some reimbursement and it will not have to spend the effort, time and money to foreclose. It is estimated that a bank loses an average of $60,000 every time it forecloses on a home.
A loan modification includes one or more of the following:
- A reduction in the interest rate, a change in how it is computed, or a conversion from a variable to a fixed rate.
- A reduction in the principal. This is sometimes referred to as mortgage settlement.
- A reduction of late fees and penalties for nonpayment.
- A reduction in the monthly payment.
- Forbearance, which allows a homeowner to temporarily stop making payments, temporarily make smaller payments, or extend the time for making payments.
Many times, borrowers are able to work directly with their lenders to modify their mortgage. During the height of the real estate collapse, however, many lenders were unwilling to work with distressed homeowners wishing to modify their loan agreements. In addition, because so many mortgages had been sold, it was often difficult to determine who owned, or was empowered to modify the terms of, a particular mortgage.
Creation of HAMP
In 2009, the U.S. Treasury Department, in collaboration with banks, loan-service providers, credit unions and various federal departments, formed the Home Affordable Modification Program (HAMP). The program’s aim was to get struggling homeowners together with their lenders, in order to renegotiate their loans and prevent foreclosures.
Most conventional loans, including prime, sub-prime and adjustable-rate loans, are eligible for modification under HAMP. Servicers of loans owned or guaranteed by Fannie Mae and Freddie Mac are required to participate; other lenders have a choice. More than 100 major lenders have signed onto the program, which is set to expire in December 2013. By November 2011, 751,000 HAMP modifications had been made, and another 910,000 HAMP modifications had been started.
To apply for a modification under HAMP, a borrower must:
- Be the owner-occupant of a one-to-four-unit home.
- Be current, at risk of imminent default, behind in mortgage payments, or in foreclosure or bankruptcy.
- Have a mortgage that was originated on or before Jan. 1, 2009.
- Have a monthly housing payment (including mortgage, taxes, insurance and homeowners association dues) greater than 31 percent of monthly gross income.
- Have financial hardship that can be documented.
Participating servicers under HAMP are required to modify all eligible loans to reduce monthly payments to no more than 31 percent of a homeowner’s gross monthly income. To do so, a servicer will reduce the loan’s interest rate to as low as 2 percent and may extend the term of the loan up to 40 years. Finally, a servicer can defer a portion of the principal amount owed, or forgive part of the principal.
Before a loan can be officially modified, the homeowner must make on-time payments over the course of a three-month trial period. Homeowners who qualify for a permanent modification under HAMP are not required to pay a modification fee or pay past-due late fees.
Government Settlement Helps Homeowners
A $25 billion legal settlement between the government, and 49 states and five of the nation’s largest banks is providing more help for struggling homeowners.
The settlement came over charges of systemic and widespread mortgage fraud. The five banks — Ally Financial, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo — handle payments on more than half of the nation’s almost 60 million home loans.
In addition to mandating comprehensive reform measures relating to mortgage servicing practices, terms of the agreement include the following payments from the banks:
- $10 billion for reducing principal for borrowers who are delinquent or at imminent risk of default and are underwater (owe more than their homes are worth).
- $3 billion for refinancing loans for homeowners current on their mortgages and underwater.
- $7 billion for other kinds of assistance, including forbearance of principal for unemployed borrowers, anti-blight programs and short sales.
- $1.5 billion for payments to borrowers whose homes were sold or taken in foreclosure between Jan. 1, 2008, and Dec. 31, 2011, and who meet other conditions.
- $3.5 billion to repay public funds lost as a result of servicers’ misconduct; and to fund housing counselors, legal aid and other public programs.
According to the settlement, servicers must fulfill their obligations within three years.
Also, the deal only applies to privately held mortgages and not to those owned or guaranteed by mortgage giants Fannie Mae and Freddie Mac, which own about half of the nation’s mortgages.