Mortgage Modification Options
A loan workout describes any one of the following methods listed below, utilized by a borrower and a lending/servicing institution to avoid the foreclosure of property securitized by a delinquent mortgage. New York has adopted the following definitions relating to loan workouts and other loss mitigation options and alternatives (3 NYCRR 419.1):
(a) Authorized representative means a person designated by the borrower in a written authorization signed by the borrower, including an attorney, employee or agent of a not-for-profit housing counseling or legal services organization, provided that nothing herein shall restrict the ability of a servicer to share information and communicate verbally with a person acting on behalf of a borrower following a tape recorded or other verifiable verbal consent by the borrower.
(b) Home Affordable Mortgage Program or HAMP means the program established by the U.S. Department of the Treasury pursuant to sections 101 and 109 of the Emergency Economic Stabilization Act of 2008, as section 109 of the act has been amended by section 7002 of the American Recovery and Reinvestment Act of 2009.
(c) Loan modification means waiver, modification or variation of any material term of the mortgage loan, irrespective of whether the duration is short-term, long-term or life-of-loan, that changes the interest rate, forbears or forgives the payment of principal or interest or extends the final maturity date of the loan.
(d) Loss mitigation option means an alternative to foreclosure, including loan modification, reinstatement, forbearance, deed-in-lieu and short sale.
(e) Servicer means a person engaging in the servicing of mortgage loans in this State whether or not registered or required to be registered pursuant to paragraph (b-1) of subdivision two of Banking Law section 590.
(f) Qualified written request means, as set forth in RESPA, 24 C.F.R. section 3500.21(e)(2), a written correspondence (other than notice on a payment coupon or other payment medium supplied by the servicer) that includes, or otherwise enables the servicer to identify, the name and account of the borrower, and includes a statement of the reasons that the borrower believes the account is in error, if applicable, or that provides sufficient detail to the servicer regarding information relating to the servicing of the loan sought by the borrower.
(g) RESPA means the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. section 2601 et seq. and regulations adopted thereunder, also sometimes known as regulation X, and found at 24 C.F.R. part 3500.
All of the options serve the same purpose, to stabilize the risk of loss the lender (investor) is in danger of realizing. The different options are available to homeowners to try getting the homeowner to perform or pay timely and cure the potential loss the lender/investor projects incurring through the foreclosure process and auction sale of the property.
Different Kinds of Loan Workouts:
- Loan modification: This is a process whereby a homeowner's mortgage is modified and both lender and homeowner are bound by the new terms. The most common modifications are lowering the interest rate, reducing the principal balance, fixing adjustable interest rates, increasing the loan term, forgiveness of payment defaults and fees, recapitalization of accrued outstanding principle, interest, and fees, or any combination of these.
- Short sale: This is a process whereby a lender reduces the principal balance of a homeowner's mortgage in order to permit the homeowner to sell the home for the actual market value of the home. This specifically applies to homeowners that owe more on their mortgage than the property is worth. Without such a principal reduction, the homeowner would not be able to sell the home.
- Short refinance: This is a process whereby a lender reduces the principal balance of a homeowner's mortgage in order to permit the homeowner to refinance with a new lender. The reduction in principal is designed to meet the Loan-to-value guidelines of the new lender (which makes refinancing possible).
- Deed in lieu: A Deed in Lieu of foreclosure (DIL) is a disposition option in which a mortgagor voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL of foreclosure may not be accepted from mortgagors who can financially make their mortgage payments.
- Cash-for-keys negotiation: This is a variation of the deed in lieu of foreclosure. The difference is that the lender will actually pay the homeowner to vacate the home in a timely fashion without destroying the property. The lender does this to avoid incurring the additional expenses involved in evicting such homeowners.
- Special Forbearance: This is where you will make no monthly payment or a reduced monthly payment. Sometimes, the lender will ask you to be put on a repayment plan when the forbearance has been finished to pay back what you missed, while other times they just modify your loan.
- Partial Claim: Under the Partial Claim option, a mortgagee will advance funds on behalf of a mortgagor in an amount necessary to reinstate a delinquent loan (not to exceed the equivalent of 12 months PITI). The mortgagor will execute a promissory note and subordinate mortgage payable to United States Department of Housing and Urban Development (HUD). Currently, these promissory or "Partial Claim" notes assess no interest and are not due and payable until the mortgagor either pays off the first mortgage or no longer owns the property.
Benefits:The most common benefit to the homeowner is the prevention of foreclosure because loss mitigation works to either relieve the homeowner of the mortgage obligation or create a mortgage resolution that is financially sustainable for the homeowner. Lenders benefit by mitigating the losses they would incur through foreclosing on the homeowner. Immediate foreclosure creates a tremendous financial burden on the lender. Loss mitigation allows the lender to take a lesser loss right now in order to avoid the much greater losses caused by such foreclosures.
History & Causes:
Loss mitigation has been a tool used by lenders for decades, but experienced tremendous growth since late 2006. This rapid expansion was in response to the dramatic increase in foreclosures nationwide. Prior to late 2006, early 2007; Loss Mitigation was a tiny department within most lending institutions. In fact, the run up prior to the near collapse of the entire mortgage industry shows loss mitigation was almost nonexistent. The ten-year period prior to 2007 spurred rapid year over year increases in home prices caused by low interest rates and low underwriting standards. loss mitigation was only needed for extreme cases due to the homeowner’s ability to repeatedly refinance and avoid defaulting.
Beginning in 2007, the mortgage industry nearly collapsed. Large numbers of lenders went out of business and the rest were forced to eliminate all the loan programs that were most prone to foreclosure.
These foreclosures were mostly caused by the packaging and selling of sub-prime and other risky mortgages. The transfer of ownership from mortgage lender to third party investor proved to be disastrous. Lenders wrote risky loans and sold them without being directly affected by the borrower’s inability to pay. This practice prompted mortgage lenders to lower the requirements of mortgage approval to the lowest levels in history. This resulted in millions of unqualified people obtaining mortgages. Lenders sold pools of these loans to investment firms who packaged and resold them to the public in the form of bond issues a/k/a real estate mortgage conduits (REMIC’s), mortgaged backed securities (MBS’), securitized loan trusts, and collateralized debt obligations (CDO’s).
When the homeowners started to default on their mortgages and the bonds began to be considered too risky for investment, the investment houses could no longer sell the bonds. When the bonds stopped selling, the investment companies stopped purchasing newly originated mortgages. Lenders being unable to sell off the new mortgages, coupled with investment firms demanding that lenders buy back the bad loans previously sold, halted the regeneration of capital necessary to maintain the business of lending money. Well over 200 mortgage companies were either forced to close or go bankrupt. This crisis was dubbed the “Credit Crunch” and the sub-prime mortgage crisis.
With the surviving lenders faced with mounting losses from foreclosures, lenders were forced to tighten lending guidelines. This means people that were able to previously qualify for loans are now unable to do so. Many of these people are in risky sub-prime, adjustable rate and negative amortization loans are falling victim to dramatic payment increases. Without the ability to refinance out of these loans, the only answer for many is default and foreclosure or loss mitigation.
The decrease in home values (housing correction) created a market with fewer qualified borrowers than homes for sale. When there is less demand the prices drop. Home values were at highly inflated levels prior to this due to historically low interest rates and the steady decline of credit requirements for the homeowner to qualify for a mortgage. This has led to a real loss of equity for every homeowner in the country. With less equity homeowners are less likely to qualify for a loan that will refinance them out of a risky loan; with less equity less homeowners are able to qualify for home equity line of credits or a second mortgage in order to pay for financial emergencies.
For many homeowners the loss of equity has been extreme enough to cause negative equity. Negative equity is when the home is worth less than the amount owed by the homeowner. This has created a situation for homeowners wherein their home, which was previously their most valuable asset, is no longer an asset at all. Such homeowners are more and more frequently ‘walking away’ from their mortgage obligations and letting the home go into foreclosure.
Government Plan to Help At-Risk Homeowners:
Under legislation passed during February of 2009, the federal government enacted a voluntary program to encourage mortgage lenders to modify mortgages for “at risk homeowners”. The Home Affordable Modification Program allowed homeowners to apply to their mortgage lender to renegotiate the terms of their loan under the program. The monthly payment could be lowered by lowering interest and extending the loan term; mortgage lenders could but, were not required to reduce the principal of the loan. Part of the original proposals for this legislation that did not pass the Senate was proposed legislation to allow bankruptcy judges to forcibly modify mortgages if a mortgage lender refused reasonable proposals to do so. The federal HAMP program expired December 31, 2016.
Currently, the only loan modification programs available to homeowners are those permitted under the guidelines set forth by the investor holding their mortgage loan.