Government Guidelines for Loan Modifications
Upfront Fees for Loan Modifications are illegal in the State of California
On October 11, 2009, Governor Schwarzenegger signed Senate Bill 94 (Calderon), and the legislation took effect immediately upon his signature. Thus, California law now prohibits any person, including real estate licensees and attorneys, from demanding or collecting an advance fee from a consumer for loan modification or mortgage loan forbearance services affecting 1 – 4 unit residential dwellings.
Treasury Releases Guidance for Loan Modifications under the “Home Affordable Modification Program” (HAMP)
November 12, 2009 – The latest Treasury Department guidelines for Loan Modifications have been distributed to loan servicers. Below is a set of Questions and Answers regarding Borrower Eligibility.
Q: Does the reason for the default have to be resolved before a borrower is eligible for a Home Affordable Modification?
Servicers should encourage borrowers to resolve the cause of a mortgage default, when appropriate, including providing referrals to HUD-approved housing counselors. However, a servicer cannot require a borrower to resolve the reason for the default as a condition of a Home Affordable Modification if the borrower meets HAMP eligibility requirements.
Q: How should borrowers who contact their servicer be handled with respect to HAMP if the servicer does not yet have the proper documents or is not yet equipped to evaluate the borrower’s situation?
Participating servicers are required to validate the homeowner’s eligibility for HAMP and capacity to pay. Participating servicers should begin the process of collecting the required documentation from the homeowner and the information necessary to establish an escrow account on non-escrowed loans. Based on the servicer’s understanding of the homeowner’s ability to pay, a servicer may place a homeowner on a forbearance plan pending its ability to execute a HAMP modification. Foreclosure actions (with the exception of those in Georgia, Hawaii, Missouri and Virginia), including initiation of new foreclosure actions, must be postponed for all borrowers that meet the minimum HAMP eligibility criteria.
Q: Can a loan be modified to a monthly mortgage payment ratio below 31 percent?
Servicers must apply the specified modification steps until the borrower’s monthly mortgage payment ratio is reduced as close as possible to 31 percent, without going under 31 percent. A servicer may modify below 31 percent, subject to applicable contractual agreements, but incentive payments will be made based only on modification terms that reflect a 31 percent monthly mortgage payment ratio.
Q: Are home equity loans that are in first lien position eligible for modification under HAMP?
First lien home equity loans or lines of credit are eligible for modification under HAMP provided that the borrower and loan meet the basic HAMP eligibility criteria and (i) the servicer has the capability within its servicing system to clearly identify the loan as a first lien and (ii) the servicer has the ability to establish an escrow for the loan as required by Supplemental Directive 09-01. Servicers whose systems do not provide the required functionality are strongly encouraged to complete system upgrades that will allow modification of first lien home equity loans.
Any HAMP modification of a first lien home equity line of credit must result in a modified loan that is a fixed rate, fully amortizing loan that does not permit the borrower to draw any further amounts from the line of credit.
Q: Can a servicer issue an offer under HAMP to a borrower whose mortgage is secured by a condominium or co-op unit if the servicer does not have current association fee information?
No. A servicer may not issue an offer under HAMP to a borrower whose mortgage is secured by a condominium or co-op unit if the servicer does not have the current association fee information. A component of the monthly mortgage payment ratio calculation is condo or co-op association fees. Current information on the amount of the association fees is necessary to accurately complete the monthly mortgage payment ratio calculation. The servicer can contact the borrower via telephone or email to obtain this information on a stated basis, complete the necessary monthly mortgage payment ratio calculation and then issue an offer under HAMP. Documents verifying the condo or co-op association fee information, such as a copy of the payment statement, a copy of a letter from the association or a copy of a collections letter indicating the fee amount, must be submitted by the borrower with other required documentation to determine HAMP eligibility.
Q: If a borrower is delinquent and currently has a front end monthly mortgage payment ratio less than 31 percent, but capitalization of the delinquent amounts will cause the monthly mortgage payment ratio to exceed 31 percent, does the borrower qualify for HAMP?
No. The borrower will only qualify for HAMP if the verified income documentation confirms that the monthly mortgage payment ratio prior to the modification is greater than 31 percent and provided that the borrower is eligible for at least a 1/8th percent drop in the interest rate without the modified monthly mortgage payment ratio going below 31 percent.
Q: Must servicers suspend foreclosure or not initiate foreclosure for all borrowers who are potentially eligible for HAMP?
To ensure that a borrower currently in foreclosure or at risk of foreclosure has the opportunity to apply for a HAMP modification, servicers should not proceed with a foreclosure sale until the borrower has been evaluated for the program. Additionally, servicers are strongly encouraged not to initiate foreclosure until a borrower has been evaluated and determined to be ineligible for the program or the borrower fails to respond to a HAMP offer that has been made by the servicer.
Q: Is there any guidance on the imminent default analysis for the non-GSE program?
No additional guidance is being provided at this time with respect to determining whether a non-GSE loan is in imminent default under HAMP. However, with respect to non-GSE loans, servicers may follow the imminent default guidance provided by either GSE as long as that guidance conforms to the servicer’s applicable contractual agreements and accounting standards. Servicers are reminded that for GSE loans, Supplemental Directive 09-01 requires servicers to follow the guidelines published by the particular GSE with respect to its loans.
Q: Is a loan that secures a property owned by an inter vivos (living) revocable trust eligible for HAMP? What additional information or documentation, if any, should be obtained?
A loan secured by a property owned by an inter vivos revocable trust is eligible for HAMP as long as the borrower (i) is a trustee of the trust, (ii) is a primary beneficiary of the trust, and (iii) occupies the property as his or her primary residence. The borrower must sign all HAMP-related documents in both an individual capacity and as trustee of the inter vivos revocable trust. For document requirements, servicers should refer to the “Other Pertinent Information” section of the document summary for the Home Affordable Modification Agreement (Fannie Mae/Freddie Mac Uniform Instrument, Form 3157) (the “Home Affordable Modification Agreement”), which is available at www.HMPadmin.com.
Q: Are audited profit and loss (P&L) statements required when verifying income for HAMP?
Audited P&L statements are NOT required for HAMP.
Q: If a borrower makes the existing contractual monthly payment rather than the trial period payment during the trial period, should the servicer accept the higher payment from the borrower, depositing the difference in a suspense account?
All payments made by the borrower must be applied in accordance with the existing loan documents. However, if the borrower makes a payment that is greater than his or her trial period payment, the servicer must review investor guidelines to determine if the borrower remains eligible for HAMP and, if making the contractual payment could jeopardize eligibility, notify the borrower in writing that making payments in excess of the trial period payment may impact the borrower’s eligibility for a HAMP modification.
Q: Can a borrower qualify for HAMP if the mortgage loan is currently in the redemption period after a foreclosure sale?
The answer to this question is dependent on the amount of time remaining in the redemption period and other legal requirements of the state in which the property is located. When permissible under state law, the servicer should, on a case-by-case basis, seek prior investor approval prior to evaluating a borrower for HAMP during a redemption period.
Q: If borrowers who are unrelated by marriage, civil union or similar domestic partnership under applicable law purchased their home together and one borrower has vacated the property, is the occupying co-borrower eligible to apply for HAMP?
Yes, the occupying co-borrower may pursue HAMP if a quitclaim deed evidencing that the non-occupying co-borrower has relinquished all rights to the property has been recorded. Servicers must refer to investor guidance to determine which parties are required to sign the HAMP documents.
Q: Supplemental Directive 09-07 requires a servicer to use a recent credit report to verify that the property securing the mortgage loan is the borrower’s primary residence. Is it acceptable to confirm the borrower’s primary residence with other forms of documentation besides the credit report?
In all cases, a servicer must obtain a credit report to verify that the property securing the mortgage is the borrower’s primary residence. If the credit report does not support the borrower’s certification that the property securing the mortgage loan is the borrower’s principal residence, the servicer must use other documentation, such as a federal income tax return or utility bill, to reconcile the inconsistency. This additional due diligence on the part of the servicer must be documented in the loan file/servicing system for compliance review purposes.
For a copy of all Directives issued by the Treasury Department related to the Home Affordable program, go to: https://www.hmpadmin.com/portal/programs/directives.html
Treasury Releases Guidance for the Home Affordable Foreclosure Alternatives (HAFA) Program
Q: Are there any alternatives offered under the Home Affordable program if a borrower does not qualify for a Home Affordable Loan Modification?
Yes, the borrower may consider a short sale under the guidelines in the newly released Directive 0909 https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf
Coldwell Banker offers more information on Short Sales, Click Here for the details
