mortgage--modification
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Colo CD6 Rob McNealy is running for US congress district 6 in Colorado
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Mortgage modification is a process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender and borrower (i.e mortgagor and mortgagee). In general, any loan or mortgage can be modified.
If you have fallen behind in your mortgage payments please read the information in this article that has been compiled form several reliable sources about mortgage modification. Mortgage modification can be complex and you want to make sure you have all the facts about mortgage modifications before you begin the modification process on your loan.
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| In the normal progression of a mortgage, payments of interest and principal are made until the mortgage is paid in full (or paid-off). Typically, until the mortgage is paid, the lender holds a lien on the property and if the borrower sells the property before the mortgage is paid-off, the unpaid balance of the mortgage is remitted to the lender to release the lien. Generally speaking, any change to the mortgage terms is a modification, but as the term is used it refers a change in terms based upon either the specific inability of the borrower to remain current on payments as stated in the mortgage[1], or more generally government mandate to lenders. | |
| Mortgages are modified to the benefit of the borrower in one or more of the following ways:
Reduction in interest rate, or a change from a floating to a fixed rate, or in how the floating rate is computed
Reduction in principal
Reduction in late fees or other penalties
Lengthening of the loan term
Capping the monthly payment to a percentage of household income
The borrower can be current, late, in default, in bankruptcy, or in foreclosure at the time the application for modification is made. The programs available will vary accordingly.
There may be modifications made at the discretion of the lender. The lender is motivated to offer better terms to the borrower because of the expectation that the borrower might be able to afford a lower payment, and that a performing loan (i.e. one in which payments are current) will be more valuable ultimately than the proceeds obtained from a foreclosure sale.[2]
The state and federal government may structure a mortgage modification program as voluntary on the part of the lender, but may provide incentives for the lender to participate. A mandatory mortgage modification program requires the lender to modify mortgages meeting the criteria with respect to the borrower, the property, and the loan payment history.
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| The adoption of this streamlined modification framework is an additional tool that servicers will now have to help avoid preventable foreclosures. This framework will not only help homeowners who receive a streamlined modification, but will also further address servicer capacity concerns by freeing up resources, helping ensure that borrowers do not fall through the cracks because servicers aren't able to get to them.
This is the first time the industry has agreed on an industry standard. The benchmark ratio for calculating the affordable payment is 38 percent of monthly gross household income. Once the affordable payment is determined, there are several steps the servicer can take to create that payment - extending the term, reducing the interest rate, and forbearing interest. In the event that the affordable payment is still beyond the borrower's means, the borrower's situation will be reviewed on a case-by-case basis using a cash flow budget. This program resulted from a unified effort among the Enterprises, Hope Now and its 27 servicer partners, Treasury, the Federal Housing Administration (FHA) and FHFA. In addition, we've drawn on the FDIC's experience and assistance from developing the IndyMac streamlined approach and have greatly benefited from the FDIC's input and example. To accommodate the need for more flexibility among a larger number of servicers, the Streamlined Modification Program does differ from the IndyMac model in a few areas. However, it uses the same fundamental tools to achieve the same affordability target.
The Streamlined Modification Program (SMP) was developed in collaboration with the Federal Housing Finance Agency (FHFA), the Department of Treasury, Freddie Mac, and members of the HOPE NOW Alliance.
SMP Eligibility Criteria Include
Conforming conventional or jumbo conforming mortgage loans originated on or before January 1, 2008;
At least three payments past due;
The loan is secured by a one-unit property that is the borrower's primary residence;
Current mark-to-market LTV of 90 percent or more; and
Property is not abandoned, vacant, condemned, or in a serious state of disrepair.
SMP is designed to reduce distressed borrowers' monthly mortgage payments to an amount equal to 38 percent of their monthly gross income. To do so, servicers may, in the following order:
Capitalize accrued interest, escrow advances and costs,if allowed by state law;
Extend the term of the mortgage loan by up to 480 months;
Reduce the mortgage loan interest rate in increments of .125% to a fixed rate that is not less than 3% (if this exercise results in a below market rate, it will, after 5 years, step up in annual increments to a market rate);
As a last resort, provide for principal forbearance, which will result in a balloon payment fully due and payable upon borrower's sale of the property or payoff or maturity of the loan. [11]
Borrowers meeting the SMP eligibility requirements enter into a trial period in which they must make monthly loan payments equal to the proposed modified payment. Timely payments must be made for three consecutive months before a borrower's loan can be modified under the SMP.
The "Streamlined Modification Plan," or SMP, which is an expansion of what many
lenders are already doing, will be implemented by December 15, 2008.
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| With the Bush administration refusing to enact FDIC Chairwoman Sheila Bair's controversial loan modification plan, lawmakers are taking matters into their own hands.
Offer proactive workout solutions designed to address borrowers who have the willingness but limited capacity to pay.
Return the loan to a current status.
Capitalize delinquent interest and escrow.
Modify the loan terms based on waterfalls, starting at a front-end 38 percent HTI ratio down to a 31 percent HTI ratio subject to a formal NPV floor.
Reduce interest rate to as low as 3 percent.
Extend, if necessary, the amortization and/or term of the loan to 40 years.
Forbear principal if necessary.
Provide borrowers the opportunity to stay in their home while making an affordable payment for the life of the loan.
Require the borrower to make one payment at the time of the modification.
Cap the interest rate at the Freddie Mac Weekly Survey rate effective as required to meet the target HTI ratio, fixing the adjusted rate and monthly payment amount for 5 years.
Step up the initial interest rate gradually starting in year 6 by increasing it one percentage point each year until reaching the Freddie Mac Weekly Survey rate cap.
Use a financial model with supportable assumptions to ensure investor interests are protected.
Input borrower specific income information into the NPV Tool, which provides a real-time workout solution.
Perform automated loan level underwriting across large segments of the portfolio to support pre-approved bulk mailings.
Verify income information the borrower provided via check stubs, tax returns, and/or bank statements.
Compare the cost of foreclosure to mitigate losses.
Mandate that the cost of the modification must be less than the estimated foreclosure loss.[14]
Borrower eligibility
The loan is at least 60 days delinquent where the loan is considered one day delinquent on the day following the next payment due date. Many servicing contracts often contain a standard clause allowing the servicer to modify seriously delinquent or defaulted mortgages, or mortgages where default is "reasonably foreseeable".
Foreclosure sale is not imminent and the borrower is currently not in bankruptcy, or has not been discharged from Chapter 7 bankruptcy since the loan was originated.
The loan was not originated as a second home or an investment property.
We (IndyMac Bank) commend FDIC Chairman Sheila Bair for her leadership in developing a systematic loan modification protocol. FHFA, the GSEs and HOPE NOW relied heavily on the IndyMac model in developing this new protocol
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| In the task at hand to make headway against foreclosures and the depressed housing market. Fannie Mae and Freddie Mac entered a new phase on December 9, 2008 for a fast-track program meant to make "hundreds of thousands of mortgages affordable to people who can't currently meet their monthly payments."
Through the SMP, servicers may change the terms of a loan to reduce a borrower's first lien monthly mortgage payment, including taxes, insurance and homeowners association payments, to an amount equal to 38 percent of gross monthly income. The changes in terms may include one or more of the following:
Adding the accrued interest, escrow advances and costs to the principal balance of the loan, if allowed by state law;
Extending the length of the mortgage loan as appropriate;
Reducing the mortgage loan interest rate in increments of 0.125 percent to an interest rate that is not less than 3 percent. If the new rate is set below the market interest rate, after five years it will step up in annual increments to either the original loan interest rate or the market interest rate at the time of the modification,whichever is lower;
Forbearing on a portion of the principal, which will require the borrower to make a balloon payment when the loan matures, is paid off, or is refinanced.
Eligibility Requirements
Conforming conventional and jumbo conforming mortgage loans originated on or before January 1, 2008;
Borrowers who are at least three or more payments past due and are not currently in bankruptcy;
Only one-unit, owner-occupied, primary residences; and
Current mark-to-market loan-to-value ratio of 90 percent or more. [16]
New Servicer Guidance
Fannie Mae's foreclosure prevention efforts have generally been made available to a borrower only after a delinquency occurs. Under Fannie Mae's new guidance, loan servicers can use foreclosure prevention tools to assist distressed borrowers when a borrower demonstrates the need. As noted above, these guidelines apply to borrowers who are still current in their payments, but whose default is reasonably foreseeable. This new guideline is effective immediately.
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| The H4H Program is effective for endorsements on or after October 1, 2008, through September 30, 2011.
Affordability versus value: lenders will take a loss on the difference between the existing obligations and the new loan, which is set at 96.5 percent of current appraised value. The lender may choose to provide homeowners with an affordable monthly mortgage payment through a loan modification rather than accepting the losses associated with declining property values.
Borrower eligibility: Lenders that determine the H4H program is a feasible and effective option for mitigating losses will assess the homeowner's eligibility for the program:
The existing mortgage was originated on or before January 1, 2008;
Existing mortgage payment(s) as of March 1, 2008 exceeds 31 percent of the borrowers gross monthly income for fixed-rate mortgages; For ARMs, the existing mortgage payment(s) exceeds 31 percent of the borrowers gross monthly income as of March 1, 2008 OR the date of the new loan application.
The homeowner did not intentionally default, does not have an ownership interest in other residential real estate and has not been convicted of fraud in the last 10 years under Federal and state law; and
The homeowner did not provide materially false information (e.g., lied about income) to obtain the mortgage that is being refinanced into the H4H mortgage.
Original Cost of Program
3 percent upfront mortgage insurance premium and a 1.5 percent annual premium,
Equity and appreciation sharing with the Federal government [19],and
Prohibition against new junior liens against the property unless they are directly related to property maintenance.
Also view the HUDS fact sheet (PDF) for full details
Updated Hope for Homeowners Improvements
Eliminates 3% upfront premium
Reduces 1.5% annual premium to a range between .55% and .75%, based on risk-based pricing (also makes technical fix to permit discontinuation of fees when loan balance drops below certain levels, consistent with normal FHA policy)
Raises maximum loan to value (LTV) from 90% to 93% for borrowers above a 31% mortgage debt to income (DTI) ratio or above a 43% ratio
Eliminates government profit sharing of appreciation over market value of home at time of refi. Retains government declining share (from 100% to 50% after five years) of equity created by the refi, to be paid at time of sale or refi as an exit fee
Authorizes payments to servicers participating in successful refis
Administrative simplification: (a) eliminates borrower certifications regarding not intentionally defaulting on any debt, (b) eliminates special requirement to collect 2 years of tax returns, (c) eliminates originator liability for first payment default, (d) eliminates March 1, 2008 31% DTI test, (e) eliminates prohibition against taking out future second loans, (f) requires Board to make documents, forms, and procedures conform to those under normal FHA loans to the maximum extent possible consistent with statutory requirements. | |
The systematic foreclosure prevention and mortgage modification program under this section shall be a program established by the Secretary, in consultation with the Chairperson of the Board of Directors of the Federal Deposit Insurance Corporation and the Secretary of Housing and Urban Development, that
Provides lenders and loan servicers with certain compensation to cover administrative costs for each loan modified according to the required standards; and
Provides loss sharing or guarantees for certain losses incurred if a modified loan should subsequently re-default.
Commitment of Resources
The comprehensive plan established pursuant to subsection (a) shall require the commitment of funds made available to the Secretary under title I of the Emergency Economic Stabilization Act of 2008 in an amount up to $100,000,000,000 but in no case less than $40,000,000,000.
In a press conference Tuesday, Federal Housing Finance Agency director James Lockhart said the program would target high-risk borrowers - those 90 or more days delinquent on their mortgages - and employ various modification strategies to get borrowers down to an "affordable" mortgage payment, defined as 38 percent of a household's monthly gross income on a first mortgage payment.
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| The Office of the Comptroller of the Currency and the Office of Thrift Supervision reported on 2009-04-03
"Nearly one in four loan modifications in the fourth quarter actually resulted in increased monthly payments". This can occur when late fees or past-due interest are added to the monthly payment.
The redefault rate was about 50 percent where the monthly payment was unchanged or increased, and 26 percent where the payment was decreased.
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Streamlined Refinance Mortgages are a fit for your borrowers looking to lower their rate and payment or refinance from an ARM to the security of a fixed-rate mortgage.
Freddie Mac's two offerings-our Streamlined Refinance Mortgage and the Freddie Mac-owned Streamlined Refinance Mortgage (where the mortgage being refinanced is owned by Freddie Mac)-provide flexibility for you and your borrowers.
Whether you take advantage of Loan Prospector automated underwriting technology to assess Streamlined Refinance Mortgages or choose to manually underwrite these loans, you'll retain your customer base and profitably build new volume with less time invested by your production staff.
Product Features
| Feature |
Requirements |
| Property Type |
- 1- to 2-unit primary residences, including condos and PUDs.
- Second homes
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| Eligible Mortgage Products |
- 15-, 20- and 30-year fixed-rate mortgages
- 5- and 7-year balloon/reset mortgages
- ARMs with an initial adjustable-rate equal to or greater than five years
- Super conforming mortgages
- 12-month seasoning requirement for Streamlined Refinance Mortgages where the mortgage being refinanced is not owned by Freddie Mac; no minimum seasoning requirement for Freddie Mac-owned Streamlined Refinance mortgages.
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| Ineligible Mortgages |
- A-minus Mortgages, Home PossibleR Mortgages, Initial InterestR Mortgages, Mortgages for Newly Constructed Homes, FHA/VA Mortgages, Section 502 Guaranteed Rural Housing Mortgages, and Section 184 Native American Mortgages, special purpose cash-out refinance mortgages; mortgages with negative amortization, mortgages secured by manufactured homes; mortgages secured by 3- to 4-unit properties; and investment property mortgages.
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| Cash Back to Borrower |
- Two percent of the refinanced mortgage amount or $2,000, whichever is less.
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| Down Payment/Closing Costs |
- May roll into the new loan amount up to the loan amount of the mortgage being refinanced
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| Maximum LTV Ratios |
- Up to 95% LTV for a 1-unit primary residence
- For maximum LTV ratio requirements for super conforming mortgages, see Guide Chapter L33.
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| Eligibility/Underwriting |
- Loan Prospector Accept mortgages
- Minimum Indicator Score of 620 for Freddie Mac-owned Streamlined Refinanced Mortgages
- Minimum Indicator Score of 680 for Streamlined Refinance Mortgages where Freddie Mac does not own the mortgage being refinanced
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| Execution Options |
- Servicing-retained Fixed-rate Cash
- WAC ARM Cash
- Fixed-rate Guarantor
- WAC ARM Guarantor
- MultiLender Swap (Non-seasoned mortgages only)
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| Delivery Fees |
- Postsettlement delivery fees apply based on the unpaid principal balance of the mortgage (including the financed discount points) and the gross LTV ratio.
- See Guide Exhibit 19 [PDF 271K] for details on these fees and all other applicable fees.
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| Special Delivery Requirements |
- You must deliver all mortgage data required by Form 11 or 13SF, as applicable, including the Note Interest Rate and the gross LTV ratio calculated by our systems.
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| Single-Family Seller/Servicer Guide |
- Refer to Guide Sections 24.3 and 24.4.
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