Before you apply for a loan modification, it is wise to understand and have realistic expectations about the process. The Home Affordable Modification Program, now in its fifth year, is the federal modification program that has, to date, successfully provided for over 1.3 million permanent loan modifications nationwide. Many homeowners, however, do not know the steps in the HAMP modification process and feel frustrated or upset if they receive a modification with terms that are not what they expected. What homeowners must realize is that a HAMP Tier 1 loan modification requires a 31% debt-to-income ratio and must be reviewed in a ‘waterfall’ process, meaning that the Lender must modify the loan by specific means in a specific order.

The waterfall process is as follows:

1. Capitalization: When the Lender adds unpaid interest and unpaid tax and insurance payments to the principal balance. Late fees may not be capitalized for HAMP modifications.

2. Interest rate reduction: When the Lender reduces the original interest rate of the loan. Oftentimes, the Lender reduces the interest rate to 2% for the first five years and then gradually increases the interest rate on the loan every year until it reaches the current market value.

3. Term extension: When the Lender extends the life of the loan. The cap on a term extension for HAMP is 480 months or 40 years.

4. Principal forbearance: When the Lender forbears a portion of the principal balance. This portion of the principal balance becomes a “balloon payment,” which must be paid in full at the loan’s maturity or when there is a transfer of the property. It does not accrue interest.

If the debt-to-income ratio is not 31% after the Lender capitalizes the loan, then the Lender must then try to reduce the interest rate and so on until it achieves the desired ratio. If the ratio is still not 31% after the Lender has gone through the entire waterfall process, then the homeowner will be deemed ineligible for HAMP Tier 1 and then will be reviewed for other loan modifications, if available.

Yesterday, the New York Attorney General, Eric Schneiderman, announced the New York State Mortgage Assistance Program to help homeowners avoid foreclosure. 

Long Island, with its beautiful, expensive real estate, was devastated by the economic crisis in 2008 and is still struggling to recover six years later. It currently has the highest rate of defaulted mortgage loans and some of the highest foreclosure rates in New York State. In order to speed up the recovery process, Mr. Schneiderman launched this program yesterday to help struggling homeowners borrow up to $40,000 to stave off foreclosure. This program will become effective in September and will be available to Long Island before the rest of New York State, using the money from the National Mortgage Settlement of 2013 to fund these loans.  Many homeowners have been denied for loan modifications in the past because they were unable to pay off their arrears or because there were liens against their property. These loans, which are interest-free and not due until the mortgage is paid off in full, will help struggling homeowners pay off the obstacles to their loan modification approval and allow them to keep their homes.

Bank of America is under scrutiny by the United States Department of Justice for its unscrupulous financial practices. In order to prevent another economic collapse, the federal government believes that Bank of America, along with other large financial institutions, must be penalized for their actions.

Allegedly having handled shoddy and fraudulent loans, Bank of America is in negotiations to settle civil probes for 12 billion dollars. The amount of this settlement may go up, and if a deal is reached, at least $5 billion will go towards consumer relief by way of loan modifications with principal and monthly payment reductions and other forms of help for defaulted loans. This potential settlement, of course, is great news for the struggling homeowner and represents an enormous fine against the financial behemoth of Bank of America.

If a deal cannot be reached, the Justice Department will most likely proceed with a lawsuit against Bank of America for its fraudulent practices.

Please go here if you like to read more.

Starting in June 2014, judges on Long Island will take on a substantial role in Foreclosure Settlement Conferences as issues arise in foreclosure litigation. The purpose of this new policy is to solve homeowners’ issues in an efficient way and help more homeowners obtain loan modifications in an area of the country where the percentage of foreclosures is still quite high.

New York requires judicial intervention in the foreclosure process. It is New York State Law that the courts must hold Foreclosure Settlement Conferences for all residential foreclosure actions involving home loans originating between January 1, 2003 and September 1, 2008, or nontraditional home loans. Previously overseen only by Court-appointed referees, these conferences allow borrowers to discuss workout options with their mortgage lenders in order to avoid foreclosure. However, the process has always been flawed, as lenders oftentimes would send representatives who not only did not have knowledge of the cases but also had no authority. This new policy is supposed to address these types of issues quickly, correct the flaws of the Foreclosure Settlement Conferences, and protect borrowers against the wrongful practices of these mortgage lenders. A judge is much more equipped to handle these issues than a referee, allowing for fewer foreclosures on Long Island.

Updates to the Making Home Affordable Handbook for the federal Home Affordable Modification Program are available here and will be effective July 1, 2014!

Top things you need to know about HAMP:

1. The Home Affordable Modification Program (HAMP) is a federal program designed to help homeowners obtain affordable loan modifications.
2. HAMP Tier 1 only applies to loans of principal residences.
3. A HAMP Tier 1 mortgage payment must reflect 31% of the homeowner's gross monthly income.
4. HAMP Tier 2 may apply to loans of principal residences or to loans of rental properties.
5. A HAMP Tier 2 mortgage payment must be within the range of 25% to 42% of the homeowner's gross monthly income.
6. A HAMP Tier 2 mortgage payment must represent a reduction of at least 10% of the original mortgage payment amount. 

In Section 6.3.3 of Chapter II of the MHA Handbook, the post-modification principal and interest payment under HAMP Tier 2 must be at least ten percent less than the pre-modification principal and interest payment. To clarify, if the original monthly principal and interest mortgage payment is $3,000, then the modified monthly principal and interest mortgage payment under HAMP Tier 2 must be $2,700 or less according to the ten percent reduction rule. Under this Supplemental Directive, however, this required percentage is totally erased. Now, it is only required that the post-modification principal and interest payment be less than the pre-modification principal and interest payment, thus expanding the amount of homeowners eligible for HAMP Tier 2. In the past, many homeowners were ineligible because servicers could not reduce the principal and interest amount by the required percentage due to the default amount, monthly real estate taxes, property value, and other similar factors. Without a required percentage, servicers will have a much easier time reducing the post-modification principal and interest payment for more homeowners across the country.

However, it should be noted that servicers may require a minimum reduction as long as that reduction is not greater than ten percent. Servicers must include this minimum reduction in their written policy if they choose to do so.

Another important clarification is the modification of loans prior to the loss of good standing. If a homeowner would like to modify an already HAMP-Tier 1-modified loan and is not in default on that loan, he or she may be eligible for HAMP Tier 2 if it has been more than five years since the HAMP Tier 1 modification. Once a homeowner accepts a HAMP Tier 1 loan modification, he or she cannot obtain another one in the future if that loan goes into default again. HAMP Tier 2, however, would still be available to this homeowner as a loan modification option (even if the property is a primary residence) as long as it has been more than five years since the original HAMP Tier 1 modification date. Since the Home Affordable Modification Program is the federal program to help homeowners cure their default, it always has priority over Lender in-house modifications.

Also included in this Supplemental Directive are updated guidelines regarding post-modification counseling, assistance for homeowners with limited English proficiency, and notice of interest rate step-ups. Although these guidelines are important as well, it is crucial that real estate agents focus on the new HAMP Tier 2 guidelines, especially if their clients own rental properties that are in risk of default or are currently in default. The more knowledgeable you are able these guidelines, the more your clients will trust you in other aspects of real estate.

Again, these updated guidelines will be effective July 1, 2014, and it is important that you understand and prepare for these changes.