HUD Mortgagee Letter 2009-15 REINSTATED!!
Let the whiplash continue! You’ll recall that HUD Mortgagee Letter 2009-15 was issued earlier this month and then repealed. It’s now been reinstated. The policy allows the home buyer to use the $8,000 tax credit as collateral for a loan used for closing costs, pre-paids, and down payment. To secure repayment of the amount advanced, the buyer would grant a second mortgage to the lender in the amount of the credit advanced. Essentially, it lets the borrower tap into the $8,000 at closing, rather than wait for the credit when the borrower receives his tax refund. A link to HUD’s website and the letter is http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-15ml.doc
–Russ DeMott
June Charity Luncheon for Habitat For Humanity
We will be having our June charity luncheon on Wednesday, June 3 from noon until you all get enough to eat. Our sponsored charity will be Habitat for Humanity. Pete and I have worked with Habitat home buyers for several years. We’ve seen first hand what great work this charity does. Please bring a donation of whatever you can afford.
Pete will be serving his famous barbeque, and we’ll have plenty of other good food as well. We look forward to see you all on the 3rd!
–Russ DeMott
Today, SC Supreme Court Issues New Order Regarding Foreclosure Cases Subject to Modification
The Supreme Court of South Carolina
RE: Mortgage Foreclosures and the Home Affordable Modification Program (HMP)
ADMINISTRATIVE ORDER
On March 4, 2009, the United States Treasury Department (Treasury) issued Guidelines on mortgage loan modifications under the Home Affordable Modification Program (HMP) for residential loans owned, securitized or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).[1] The HMP is part of the Making Home Affordable Program (MHAP).
Subsequently on April 6, 2009, Treasury issued Supplemental Directive 09-01,[2] which provided additional guidance to servicers for adoption and implementation of the HMP for residential mortgage loans that are not owned, securitized or guaranteed by Fannie Mae or Freddie Mac. For this latter category, the HMP is only applicable if the servicer has agreed to participate in the HMP.[3]
If applicable, the HMP requires the temporary suspension of foreclosure actions.[4] The HMP is scheduled to expire on December 31, 2012, and has no application to a mortgage originated after January 1, 2009.
On May 4, 2009, I issued a temporary restraining order (TRO) based on a motion filed by Fannie Mae.[5] This TRO had to be issued on an ex parte basis, and it was anticipated that it would be replaced by a subsequent order.
To insure that eligible homeowners have been afforded the benefits available under the HMP, the procedures for handling issues relating to the HMP are handled uniformly throughout the State, and mortgage foreclosure actions are not unnecessarily dismissed or delayed while HMP issues are resolved, I direct the following:
(1) Actions Filed After May 4, 2009. In all mortgage foreclosure actions filed after May 4, 2009, the complaint (or amended complaint) seeking foreclosure shall contain “a short and plain statement of the facts”[6] regarding the applicability of the HMP to the matter. For mortgages involving commercial property, the complaint may simply allege that the property is commercial and that the HMP is inapplicable.[7]
For mortgages involving residential property, the complaint shall state if the mortgage loan is owned, securitized or guaranteed by Fannie Mae or Freddie Mac, or if the servicer is participating in the HMP. If so as to either, the complaint shall state the facts showing that the loan is not subject to modification under the HMP,[8] or state the facts showing that the HMP modification process specified by the Guidelines or Supplemental Directive has been completed without resulting in a modification.[9] If these allegations are contested by the answer or the judge allows the issue to become contested at some later stage of the proceeding, any dispute regarding the eligibility of the mortgage loan for modification under the HMP or the satisfaction of the requirements of the HMP if it applies, shall be resolved like any other contested issue in a mortgage foreclosure case. Sections (3) and (4) of this order relate to the effect of the HMP determinations made by the judge.
(2) Actions Pending on May 4, 2009. In all mortgage foreclosure actions pending on May 4, 2009, the party seeking foreclosure should have served the affidavit required by the TRO by May 15, 2009. If the affidavit was timely served under the TRO, any counter affidavit asserting that the loan is subject to modification under the HMP or that the requirements of the HMP have not been meet, should be served by May 22, 2009.
If the party seeking a foreclosure did not serve the affidavit by May 15, 2009, as required by the TRO, the matter will be stayed until the party seeking foreclosure serves and files an affidavit regarding the applicability of the HMP to the matter. For mortgages involving commercial property, the affidavit may simply allege that the property is commercial and that the HMP is inapplicable.
For residential mortgages, the affidavit shall state if the mortgage loan is owned, securitized or guaranteed by Fannie Mae or Freddie Mac, or if the servicer is participating in the HMP. If so as to either, the affidavit shall state the facts showing that the mortgage loan is not subject to modification under the HMP, or state the facts showing that the HMP modification process specified by the Guidelines or Supplemental Directive has been completed without resulting in a modification. In the alternative, the affidavit may concede that the matter should be stayed until the HMP modification process is completed. If the affidavit is not served within ninety (90) days of the date of this order, the foreclosure action may be dismissed. If the affidavit is served, any other party to the action shall have ten (10) days to serve a counter affidavit.
A copy of any affidavit or any counter affidavit (whether served before or after this order), along with proof of service, shall immediately be filed with the court where the action is pending.
The judge shall consider the affidavit and any counter affidavit that may be filed to determine if there is any contested issue that must be resolved regarding the eligibility of the loan for modification under the HMP or satisfaction of the requirements of the HMP if it applies. If so as to either, the judge shall resolve this issue like any other contested issue in a mortgage foreclosure action. If a counter affidavit is not timely served, the determination of whether there are HMP issues which need to be resolved before foreclosure is ordered or the sale is commenced shall be based on the affidavit alone unless the judge allows the late service and filing of the counter affidavit or allows the issue to become contested at some later stage of the proceeding. Sections (3) and (4) of this order relate to the effect of the HMP determinations made by the judge.
(3) Determination that the HMP is Applicable But the HMP Process Has Not Been Completed. If a judge determines that the HMP is applicable but that the process to determine if a modification will be made under the HMP has not been completed, the foreclosure action shall not be dismissed but shall be stayed until the HMP process is completed (including any trial period before a modification becomes effective). If the action is stayed, the party seeking foreclosure will advise the court of the status of the matter every thirty (30) days; the failure to do so may result in dismissal of the action. If the loan is modified under the HMP, the parties shall immediately notify the judge so that the mortgage foreclosure action can be dismissed. Nothing in this order shall be construed as preventing the party seeking foreclosure from voluntarily dismissing the foreclosure action.[10]
(4) Determination that Mortgage Loan is Not Subject to Modification under the HMP. If a judge determines that the HMP is either inapplicable to the mortgage loan or that the HMP requirements have been satisfied without resulting in a modification, the foreclosure action may continue. This includes the consummation of any sales conducted on or prior to May 4, 2009.
(5) TRO Rescinded. The TRO previously issued by me on May 4, 2009, is hereby rescinded. Instead, the provisions of this Administrative Order shall govern foreclosure actions potentially affected by the HMP.[11]
(6) Judicial Sales in Mortgage Foreclosure Cases. Nothing in this order shall be construed as preventing a judge from setting additional sales days under S.C. Code Ann. §15-39-680 (2005). Further, where an order of foreclosure was issued on or before May 4, 2009, nothing in this order shall be construed as preventing the judge from directing the advertising of the property for sale so long as any issue regarding the HMP is resolved before the sale occurs.
For the purpose of this order, the term “judge” shall include a circuit court judge, master-in-equity and special referee. If this order requires service of an affidavit or counter affidavit upon a party, service shall be accomplished as provided by Rule 5(b)(1), SCRCP, and service shall be made on all parties to the action.
IT IS SO ORDERED.
| s/Jean Hoefer Toal Jean H. Toal Chief Justice |
Columbia, South Carolina
May 22, 2009
[1] The guidelines are available at www.ustreas.gov/press/releases/reports/modification_program_guidelines.pdf. In addition to contacting the servicer to determine if the loan is owned or guaranteed by Fannie Mae and Freddie Mac, homeowners can also use the links on the following website to determine if their loans are owned or guaranteed by Fannie Mae or Freddie Mac: http://makinghomeaffordable.gov/loan_lookup.html.
[2] Available at www.hmpadmin.com/docs/Supplemental_Directive_09-01.pdf.
[3] A list of those servicers who have agreed to participate may be found at http://makinghomeaffordable.gov/contact_servicer.html.
[4] The Guidelines state:
Any foreclosure action will be temporarily suspended during the trial period, or while borrowers are considered for alternative foreclosure prevention options. In the event that the Home Affordable Modification or alternative foreclosure prevention options fail, the foreclosure action may be resumed.
In relevant part, the Supplemental Directive states:
To ensure that a borrower currently at risk of foreclosure has the opportunity to apply for the HMP, servicers should not proceed with a foreclosure sale until the borrower has been evaluated for the program and, if eligible, an offer to participate in the HMP has been made. Servicers must use reasonable efforts to contact borrowers facing foreclosure to determine their eligibility for the HMP, including in-person contacts at the servicer’s discretion. Servicers must not conduct foreclosure sales on loans previously referred to foreclosure or refer new loans to foreclosure during the 30-day period that the borrower has to submit documents evidencing an intent to accept the Trial Period Plan offer. Except as noted herein, any foreclosure sale will be suspended for the duration of the Trial Period Plan, including any period of time between the borrower’s execution of the Trial Period Plan and the Trial Period Plan effective date.
[5] This order and the motion are available at www.sccourts.org/whatsnew/displaywhatsnew.cfm?indexID=526.
[6] Rule 8(a), SCRCP.
[7] For example, the complaint could simply state: “Since this foreclosure action involves a mortgage on a commercial office building, the Home Affordable Modification Program is inapplicable.”
[8] Despite the fact that the loan is owned, securitized or guaranteed by Fannie Mae or Freddie Mac, or the servicer is participating in the HMP, there are numerous other requirements that may prevent the loan from being eligible for modification under HMP. For example, modification under HMP is not available if the property is not a single family 1 – 4 unit property, the property is not the primary residence of the homeowner, the mortgage originated after January 1, 2009, the unpaid principal balance exceeds certain specified amounts, the property is vacant or condemned, or the loan has been previously modified under the HMP. For specifics on these and other requirements, the Guidelines and Supplemental Directive should be consulted. For homeowners, there is an interactive website to assist them in determining if the mortgage loan is potentially subject to modification under the HMP: http://makinghomeaffordable.gov/modification_eligibility.html.
[9] If the HMP is applicable and the modification process has not been completed, the action should not be filed.
[10] I am concerned that there may be a significant number of actions that may be stayed while the HMP process is completed. I expect the party seeking foreclosure to complete the process and make a determination if the mortgage loan will be modified in a prompt and diligent manner. If this is not done and the number of cases stayed reaches an unacceptable level, this order may be modified to allow for the dismissal of actions which are stayed and not resolved in a reasonable period of time.
[11] In response to the TRO, six law firms (the Scott Law Firm, P.A.; Rogers, Townsend, Thomas, P.C.; the Finkel Law Firm, L.L.C.; Fleming & Whitt, P.A.; the Korn Law Firm, P.A.; and the Weston Adams Law Firm) have filed a motion seeking a state-wide scheduling order. The South Carolina Department of Consumer Affairs, South Carolina Legal Services, the law firm of Harrison & Radeker, P.A., and the South Carolina Appleseed Legal Justice Center have filed returns to the motion. In addition, the six law firms have filed a reply and an amended reply. These filings have been considered in issuing this order.
In its return, Consumer Affairs points out that, in addition to HMP, other parts of the MHAP may provide relief to homeowners. This includes Fannie Mae and Freddie Mac allowing refinancing of mortgage loans that they own or that they placed in mortgage backed securities where homeowners are current on their loans, Short Sales/Deeds-in-Lieu Program and the Home Price Decline Protection Incentives. While these programs are beyond the scope of this order, the following links provide information about those programs: www.freddiemac.com/sell/factsheets/relief_refi.html; www.efanniemae.com/sf/mha/mharefi/pdf/refinancefaqs.pdf; http://makinghomeaffordable.gov/refinance_eligibility.html; www.treas.gov/press/releases/docs/05142009FactSheet-MakingHomesAffordable.pdf.
Mirror, Mirror on the Wall…
Photo by Michael Mulligan
When negotiating contracts, be mindful of the “mirror image rule.” The rule can be found in the Restatement (2nd ) of Contracts, §59, which provides: “A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter offer.”
In plain English this means that if your client gets an offer, he has two options. The client can accept the offer as written thereby forming a contract, or he can change the terms by adding additional or different terms thereby rejecting the offer and making a counter offer. Even the slightest change results in rejection. The rule can be a harsh and unforgiving trap for the unwary.
In fact, because of the harshness of the rule, the drafters of section 2-207 of the Uniform Commercial Code (“UCC”) modified it substantially as to merchants selling goods (but the definition of “goods” excludes all real estate). Learning the ins and outs of section 2-207 of the UCC is the bane of every first-year law student.
However, as to real estate, which is what this blog is all about, we are stuck with the mirror image rule. Real estate agents should understand the rule and know the difference between offers being accepted and offers being rejected with a counter offer. This does not mean that rejecting by making a counter offer is bad, of course. It does, however, mean the agent should give sound advice to the client before the client rejects the offer by insisting on some slight, insignificant change. True, the other party may accept the counter offer. But the counter offer may also sour the deal and prompt him to reevaluate his interest in the property.
–Russ DeMott
HUD Mortgagee Letter 2009-15 REPEALED
I recently posted HUD’s mortgagee letter 2009-15. The letter was dated May 11, 2009. It stated that the $8,000 first-time home buyer credit (that’s, of course, not just for first-time home buyers) could be used as collateral allowing the buyer to borrow against the tax credit for the down payment. HUD has taken the letter off its website. My best guess on this is that borrowing against the tax credit violates longstanding FHA rules on that issue. Borrowers must come up with their downpayment on their own.
To avoid confusion I have deleted the letter from my blog. I suspect FHA rules will be quickly modified to allow the borrower to tap into the credit at closing. The $8,000 is a great incentive, but those who would typically qualify for this program tend to need cash for the downpayment. If they will be getting the credit when they file their taxes for that year, what harm would be caused by allowing them to access those funds when they really need them?
Hopefully, the letter will be quickly reinstated with some guidance from HUD and FHA. This reminds me of the saying, “We’re from the governrment and here to help.” Wouldn’t it be nice if it helped more than corporate America? But I digress…..
–Russ DeMott
Home Affordable Modification Program (HAMP) Outline
Photo by Michael Mulligan
Below I have reproduced an outline done by my colleague, O. Max Gardner, on the Home Affordable Modification Program. As usual, Max has done a great job at distilling important information. I hope you find it useful.
The HAMP and HARP Programs
O. Max Gardner III
PO Box 1000
Shelby NC 28150
April 27, 2009
Home Affordable Modification Program (HAMP):
General Eligibility:
The eligibility limitation to Fannie/Freddie loans is only on the refinancing program (HARP), not the modification program. HAMP will apply to all mortgages originated before January 1, 2009. No loans originated after that date will be eligible. New borrowers will be accepted until December 31, 2012. Program payments will be made for up to five years after the date of entry into the HAMP. Monitoring, however, will continue for the life of the loan.
General Qualification Terms:
- 1. The home must be owner-occupied, single family 1 to 4 unit property (including condominium, cooperative, and manufactured home affixed to a foundation and treated as real property under current state law).
- 2. The home must be the primary residence (verified by tax return, credit report, and other documentation such as utility bills).
- 3. The home may not be investor-owned.
- 4. The home may not be vacant or condemned.
- 5. Borrowers in a current bankruptcy case are not automatically eliminated from consideration for HAMP.
- 6. Borrowers in active litigation regarding the mortgage loan can qualify for a modification without waiving any legal rights.
- 7. First lien loans must have an unpaid principal balance (prior to capitalization of the arrears) equal to less than:
- a. 1 Unit—$729,750
- b. 2 Units–$934,200
- c. 3 Units–$1,129,250
- d. 4 Units–$1,403,400
Pending Foreclosures:
Any foreclosure action will be temporarily suspended during the trial HAMP period, or while borrowers are considered for alternative foreclosure prevention options. In the event that HAMP or the alternative foreclosure prevention options fail, the foreclosure action may be resumed.
For HAMP borrowers, there is no minimum or maximum Loan to Value (LTV) ratio for eligibility purposes. Borrowers, however, can only exercise one modification of their mortgage under HAMP. If the HAMP modification fails, then there are no additional HAMP options.
Debt to Income Ratios:
Front-End DTI is the ratio of the Principal, Interest, Taxes and Insurance Payments (PITIA) to the Monthly Gross Income. PITIA is defined under the program as principal, interest, taxes, insurance (including homeowners insurance and hazard and flood insurance) and homeowners association and condominium fees. Mortgage insurance premiums (PMI Insurance) are excluded from the PITIA calculation.
The Front-End DTI Target is 31%. The Standard Waterfall step that results in a Front-End DTI closest to 41%, without going below 31%, will satisfy the Front-End DTI Target. There is no restriction on reducing Front-End DTI below 31%, but any portion of the reduction below 31% will not be covered by the Payment Reduction Cost Share offered by the Treasury.
Home Valuations:
The Servicer may use, at its discretion, either one of the government sponsored enterprises’ (GSEs) automated valuation models (AVM)-provided that the AVM Renders a reliable confidence score-or a Broker Price Opinion to determine the Property Value for the DTI Test.
As an alternative, the servicer may rely on the AVM it uses internally provided that (I) the servicer is subject to supervision by a Federal regulatory agency, (ii) the servicer’s primary Federal regulatory agency has reviewed the model and/or its validation and (iii) the AVM renders a reliable confidence score.
If the GSE or servicer AVM is unable to render a value with a reliable confidence score, the servicer must obtain an assessment of the property value utilizing a property valuation method acceptable to the servicer’s Federal regulatory agency, e.g., in accordance with the Interagency Appraisal and Evaluation Guidelines (as though such guidelines apply to loan modifications, or a Broker Price Opinion (BPO).
In all cases the property valuation may not be more than 60 days old.
Verification of Income:
The borrower’s income will be verified by requiring a signed Form 4506-T (Request for Transcript of Tax Return) and obtaining the most recent tax return on file for each borrower on the note. For wage earners, the two most recent pay stubs for each wage earner on the note will also be required. For self-employed borrowers or for non-wage income borrowers, the borrower’s income will be verified by obtaining other third-party documents that provide reasonably reliable evidence of income. Borrowers must also represent and warrant that they do not have sufficient liquid assets to make their monthly mortgage payments.
Monthly Gross Income:
The borrower’s Monthly Gross Income (MGI) is the amount before any payroll deductions and includes wages and salaries, overtime pay, commissions, fees, tips, bonuses, housing allowances, other compensation for personal services, Social Security payments, including Social Security received by adults on behalf of minors or by minors intended for their own support, annuities, insurance policies, retirement funds, pensions, disability or death benefits, unemployment benefits, rental income and any other income.
Monthly Net Income (MNI) can be used for preliminary screening and qualifications. If used, the servicer will need to multiply net income by 1.25 to get an estimate of Monthly Gross Income (MGI).
Back-End DTI:
The Back-End DTI is the ratio of the borrowers’ total monthly debt payments (such as Front-End PITIA, any mortgage insurance premiums, payments on all installment debts, monthly payments on all junior liens or mortgages, alimony, car lease payments, aggregate negative net rental income from all investment properties owned, and monthly mortgage payments for second homes) to the borrower’s MGI. The servicer must validate each monthly installment payment, revolving debt and secondary mortgage debt by pulling a credit report for each borrower or a joint report for a married couple. The servicer must also consider information obtained from the borrower orally or in writing concerning incremental monthly obligations.
Borrowers who otherwise qualify for the modification under this program, but who would have a post-modification Back-End DTI greater than or equal to 55%, will be provided with a letter stating that they are required to work with a HUD-approved counselor and the modification will not take effect until they provide a signed statement indicating that they will obtain such counseling.
Reasonably Foreseeable/Imminent Default:
Every potentially eligible borrower who calls or writes in to their servicer in reference to a modification must be screened for a hardship. This screen must ascertain whether the borrower has had a change in circumstances that causes financial hardship, or is facing a recent or imminent increase in the mortgage payment that is likely to create a financial hardship (e.g., payment rate shock). If the borrower reports a material change in circumstances, the servicer must ask about current income and assets, and current expenses as well as the specific circumstances relating to the claimed financial hardship. Each of these elements shall be verified through documentation.
If the servicer determines that that a non-defaulted borrower is facing a financial hardship is in Imminent Default and will be unable to make his or her mortgage payment in the immediate future, the servicer must apply the NPV Test.
The NPV Test:
A Standard NPV Test will be required for each loan that is in Imminent Default or is at least 60 days delinquent under the MBA delinquency calculation. This NPV Test will compare the net present value (NPV) of the cash flows expected from a modification to the net present value of cash flows expected in the absence of a modification. If the NPV of the modification scenario is greater, the NPV result is deemed positive.
The NPV Test applies to the Standard Waterfall only and does not require consideration of principal forgiveness. However, the servicer may choose to forgive principal if the servicer determines that principal forgiveness improves the likelihood of loan performance and the value of the modification. Required parameters for the NPV Test will be published in a few weeks.
If the NPV Test generates a positive result when applying the Standard Waterfall, the servicer is required to offer a HAMP to the borrower. If the NPV Test generates a negative result, modification is optional, unless prohibited by the service contracts. The monthly payment reduction incentive is available for any HAMP, whether or not NPV is positive, that meets the eligibility requirements and is performed according to the Waterfall described below.
If the NPV Test result is negative and a HAMP is not pursued, the lender/investor must seek other foreclosure prevention alternatives, including alternative modification programs, deed-in-lieu and short sale programs.
Loan Modification and Standard Waterfall:
Servicers will follow the Standard Waterfall described below to reduce the monthly payments to 31% Front-End DTI Target defined below. The initiative will reimburse lenders/investors for one half of the costs of reducing monthly mortgage payments from a level consistent with a 38% Front-End DTI Ratio (or less, if the unmodified DTI is less than 38%) down to a level consistent with a 31% Front-End DTI Ratio. This Payment Reduction Cost Share can last for up to five years from the HAMP modification effective date.
HARP Program:
Services will be required to consider a borrower for refinancing into the HARP Program when feasible. Servicer incentive payments will be paid for HARP refinances.
If the underwriting process for a HARP refinance would delay eligible borrowers from receiving a HAMP offer, servicers will use the Standard Waterfall to begin the HAMP process and work to complete the HARP refinance during the Trial Modification Period.
Consideration for HARP should not delay eligible borrowers from receiving a HAMP offer and beginning the Trial Modification Period.
The Standard Waterfall Process:
- 1. Request MGI from borrower.
- 2. Validate total first lien debt and monthly payments (PITIA). For purposes of making a provisional modification offer during the Trial Modification Period, the borrower’s unverified income and debt payments can be used. Provisional information and modification terms will be verified in a timely manner.
- 3. Capitalize the arrearage. Servicers may capitalize the accrued interest, past due real estate taxes and insurance premiums, delinquency charges paid to third parties in the ordinary course of servicing and not retained by the servicer, any required escrow advances already paid by the servicer and any required escrow advances by the servicer that are currently due and will be paid by the servicer during the Trial Period. Late fees are NOT capitalized.
- 4. Target a Front-End DTI of 31%. The lender/investor shall follow steps 5, 6 and 7 below to reduce the borrower’s payment to the level corresponding to the Front-End DTI Target.
- 5. Reduce the contract interest rate to reach the Front-End DTI Target (subject to an interest floor of no less than 2%). The note rate should be reduced in increments of 0.125%, and should begin the monthly payment as close as possible to the Front-End DTI Target without going below 31%. If the resulting modified interest rate is at or above the Interest Rate Cap, this modified interest rate will be the new note rate for the remaining term of the mortgage loan. If the resulting modified interest rate is below the Interest Rate Cap, this modified interest rate will be in effect for the first five years, followed by annual increases of 1% (100 basis points) per year or such lesser amount as may be needed until the interest rate reaches the Interest Rate Cap, at which time it will be a fixed mortgage rate for the remaining loan term.
- 6. If the Front-End DTI Target has not been reached, extend the loan term of the loan up to 40 years. If term extension is not permitted, then extend amortization. The 40-year term begins at the start of the modification (after the borrower completes the Trial Period). Note that the servicer should only extend to a term that is necessary to reach the Front-End DTI Target; there is no requirement to extend to a 40-year term.
- 7. If the Front-End DTI Target has not been reached, forbear principal. If there is a principal forbearance amount, a balloon payment of that forbearance amount is due on the maturity date, upon sale of the property, or upon payment of the interest bearing balance. If the modification does not pass the NPV Test and the servicer chooses to modify the loan, the modified balance must be no lower than the current property value.
Principal Reduction Option:
There is no requirement to use principal reduction under HAMP: however, servicers may forgive principal to achieve the Front-End DTI Target.
Principal forgiveness can be used on a standalone basis or before any step in the Standards Waterfall process. If principal forgiveness is used, subsequent steps in the Standard Waterfall may not be skipped. If principal is forgiven and the rate is not reduced, the rate will be frozen at its existing level and treated as a modified rate for the purposes of the Interest Rate Cap.
In the event of principal forgiveness, the Repayment Reduction Cost Share continues to be based on the change in the borrower’s monthly payment from 38% to 31% Front-End DTI Ratio and is limited to five years.
Modification Terms:
Interest Rate Floor: THE IRF for modified loans is 2%.
Interest Rate Cap: The modified interest rate must remain in place for five years, after which time the interest rate will be gradually increased by 1% (100 basis points) per year or such lesser amount as may be needed until it reaches the IRC. The IRC for a modified loan is the lesser of the fully indexed and fully amortizing original contract rate or the Freddie Mac Primary Mortgage Market Survey rate for 30-year fixed rate conforming mortgage loans, rounded to the nearest 0.125%, as of the date that the modification document is prepared. If the modified rate exceeds the Freddie Mac Primary Mortgage Market Survey rate in effect on the date the modification document is prepared, the modified rate will be the new note rate for the remaining loan term.
Principal Forbearance: No interest will accrue on the forbearance amount. If the option to forbear principal is selected, the servicer shall forbear on collection the deferred portion of the Capitalized Balance until the earlier of the maturity of the modified loan, the sale of the property, or the pay-off or refinancing of the loan.
Redefaulting Loans: A loan will be considered to have redefaulted when the borrower reaches a 90-day delinquency status under the MBAS delinquency calculation. Redefaulting Loans will be terminated from the program, and no further payments of any kind will be made to the lender/investor, servicer, or borrower. Redefaulting Loans should be considered for other loss mitigation programs prior to being referred to foreclosure.
Trial Period Required. Successful completion of the Trial Modification Period and entry into program agreements between the Servicer and the Treasury’s financial agent are prerequisites for any payments to the lender/investor, servicer or borrower.
Modification is effective on the first calendar month following the successful completion of the Trial Period. Successful completion means that the borrower is current (under the MBA delinquency calculation) at the end of the Trial Period.
Borrowers in foreclosure restart states will be considered to have failed the Trial Period if they are not current at the time the foreclosure sale is scheduled.
No payments under the program to the lender/investor, servicer or borrower will be made during the Trial Period. No payments under the program to these parties will be made if the Trial Period is not completed successfully. NO payments under the program to these parties will be made unless and until the servicer has entered into the program agreements with the Treasury’s financial agent.
Length of Trial Period: The Trial Period will last for 90 days (three payments at modified terms) or longer if necessary to comply with investor contractual obligations in the Pooling and Servicing Agreements. The borrower must be current at the end of the Trial Period to obtain the HAMP modification.
Escrows: Servicers are required to escrow for modified borrowers’ real estate taxes and mortgage-related insurance payments immediately if they have the capability of processing these payments or are already using a third-party vendor for this purpose. Servicers who do not have this capacity must implement an escrow process within six months of the program agreement.
Counseling Requirements: For borrowers with a Back-End DTI of 55% or higher, the servicer must inform the borrower of the availability and advantages of counseling and provide a list of local HUD-approved counselors. The servicer must provide the borrower with a letter stating that counseling is a requirement of the modification terms. The letter may be required by counselors in order to begin counseling. The modification will not take effect until the borrower represents in writing that he or she will obtain counseling.
Assumable: If the solidified loan was assumable prior to modification, a HAMP modification cancels this feature.
Modification Fees: There are NO Modification fees or charges born by the borrower.
Reimbursable Fees and Charges: Modification fees and charges to the servicer will be reimbursable by the investor. These include notary fees, property valuation and other required fees. Servicer reimbursement by the investor will take place within the normal process between the servicer and the investor.
Unpaid Late Fees: Unpaid late fees will be waived for the borrower. These include late fees prior to the start of the Trial Period and accrued during the Trial Period.
Credit Report: The servicer will cover the cost of the credit report.
Servicer Compensation: Upon modification following a successful Trial Period, and contingent on signing the program servicer agreement, the servicer will receive an incentive fee of $1,000 for each eligible modification meeting HAMP guidelines. Servicers will also receive Pay for Success fees payable each 12 months for three years at $1,000 per year. Servicers will not receive Pay for Success fees for Redefaulting Loans. For loans modified while still current under the MBA delinquency calculation, the Servicer will receive a Current Borrower One-Time Incentive of $500 following successful completion of the Trial Period. Lenders that service their own (portfolio) loans are eligible for these incentives. The term servicer means the party that is responsible for performing the modification activities. Similar incentives will be paid under the HARP Program.
Borrower Cash Contributions: The investor may not require the borrower to contribute cash for eligibility or execution of a Trial or Permanent modification.
Lender/Investor Compensation: Lenders/investors will be compensated only in the event that the Front-End DTI Target or a lower Front-End DTI is achieved. Lenders/investors will follow the Standard Waterfall specified above to reach a monthly payment that satisfies the Front-End DTI Target. As described above, Treasury will provide compensation based on one half of the dollar difference between the monthly payment for a 31% Front-End DTI Ratio and the lesser of (i) the monthly payment for a 38% Front-End DTI Ratio or (ii) the borrower’s current monthly payment. This compensation will be provided for up to five years or until the loan is paid off.
Upon a modification becoming effective following successful completion of the Trial Period by a borrower who was current prior to the start of the Trial Period, lenders/investors will be paid a $1,500 Current Borrower One-Time Incentive, subject to certain de minimis constraints (discussed below). No monthly lender/investor payments will be made during the Trial Period. Monthly lender/investor payments will begin after the Trial Period is successfully completed, the servicer signs a service agreement with Treasury, and formal modification begins. No monthly lender/investor payments will be made if the Trial Period is not completed successfully.
Borrower Compensation: Borrowers will be eligible to accrue up to $1,000 each year in Pay-for-Performance Success Payments for up to five years, a total of up to $5,000 over five years, subject to certain de minimis constraints (discussed below). Accruals are based on on-time payment performance. The first annual principal balance reduction will be effective 12 months after entering the Trial Period as long as the borrower is not terminated from the program. In any given month, the borrower’s mortgage payment must be made on time, accounting for standard servicer grace periods, in order to accrue the monthly Pay for Performance Success Payment. The borrower will receive information on a monthly basis regarding the accrual of these payments.
The payment will be directed to the servicer, who will reduce the principal balance by the payment amount (but not by more than $1,000 per year) for five years if the borrower continues in the program. Payments are to be applied directly and entirely to reduce the principal balance, and any applicable prepayment penalties on partial principal prepayment made by the government must be waived. The equivalent of three months of Pay-for-Performance Success Payments will be made upon successful completion of the Trial Period, contingent upon the servicer signing a service agreement with the Treasury.
Borrowers who are terminated from the program lose their right to outstanding accruals.
De Minimis Constraint: To qualify for servicer Pay for Success payments and borrower Pay for Performance Success Payments, the modification must reduce the monthly payment by a minimum of 6 %. The monthly payment is the PITIA payment, as used in defining DTI, with the loan fully indexed and fully amortized.
When paid, servicer annual Pay for Success payments and borrower Pay for Performance Success Payments will be the lesser of (i) $1,000 or (ii) half the reduction in the borrower’s annualized monthly payment.
The de minimis constraint does not apply to the up-front Servicer Incentive Payment, the Payment Reduction Cost Share, or the Home Price Depreciation Reserve Payment.
Disclosure: When promoting or describing loan modifications, servicers should provide borrowers with information designed to help them understand the modification terms that are being offered and the modification process. Servicers also must provide borrowers with clear and understandable written information about the material terms, costs, and risks of the modified mortgage loan in a timely manner to enable borrowers to make informed decisions.
Fair Lending: Servicers’ modifications under this program must comply with the Equal Credit Opportunity Act and the Fair Housing Act, which prohibit discrimination on a prohibited basis in connection with mortgage transactions. Loan modification programs are subject to the fair lending laws, and servicers and lenders should ensure that they do not treat a borrower less favorably than other borrowers on grounds such as race, religion, national origin, sex, marital or familial status, age, handicap, or receipt of public assistance income in connection with any loan modification. These laws also prohibit redlining.
Consumer Inquiries and Complaints: Servicers should have procedures and systems in place to be able to respond to inquiries and complaints relating to loan modifications. Servicers should ensure that such inquiries and complaints are provided fair consideration, and timely and appropriate responses and resolution.
Home Price Depreciation Payments. To encourage lenders/investors to modify more mortgages, compensation will be provided to partially offset probable losses from home price declines. This will be structured as a simple cash payment on each modified loan while the loan remains active in the program.
Payments for Short Sales and Deeds-in-Lieu: Compensation will be provided to servicers and borrowers in order to facilitate short sales or deeds-in-lieu in those cases in which borrowers either fail the net present value (NPV) test (described above) or fail to qualify for, or default under, the modification program.
Second Line Elimination Payments: To reduce the borrower’s overall indebtedness and improve loan performance, additional incentives will be provided to extinguish junior liens on homes with first-lien loans that are modified under the program.
HARP:
The] Home Affordable Modification Program will offer assistance to as many as 7 to 9 million homeowners, making their mortgages more affordable and helping to prevent the destructive impact of foreclosures on families, communities and the national economy.
The Home Affordable Refinance Program will be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac. Normally, these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-to-value ratios above 80%. Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan.
GSE lenders and servicers already have much of the borrower’s information on file, so documentation requirements are not likely to be burdensome. In addition, in some cases an appraisal will not be necessary. This flexibility will make the refinance quicker and less costly for both borrowers and lenders. The Home Affordable Refinance Program ends in June 2010.
| Example #1 Meet Brian and Lisa – They need to refinance their mortgageBrian and Lisa have steady jobs – Brian is a high school teacher, Lisa is a nurse. They pay their bills on time, including their monthly mortgage payment. Like many homeowners, Brian and Lisa are unable to refinance to a lower interest rate because the value of their home has declined.
Do Brian and Lisa qualify to refinance to a lower interest rate under the new plan? They may because they meet the following requirements:
Like Brian and Lisa, you may be able to refinance to take advantage of lower interest rates to reduce your mortgage payments. If so, here are the answers to some of the questions you may be asking. How do I know if I have a Fannie Mae or a Freddie Mac loan? How do I know if I am eligible? I have both a first and second mortgage. Do I still qualify to refinance under the program? Your eligibility will depend on whether you are able to make the new payments on the first mortgage. The lender on your second mortgage must agree to remain in the second position. Will refinancing lower my payments? What would my new interest rate be? Will refinancing reduce the amount that I owe on my loan? When can I apply? |
The 13 participating servicers (including affiliates) cover over 50% of the servicing market for prime, Alt-A and subprime, so there’s a good chance you’ll have coverage even if no other servicers participate, although it sounds as if others are in the process of signing up so this coverage should only increase. Whether they can get consistent application to their loans in the private-label deals is uncertain at this point.
| Name | Web Site | Phone |
| Aurora Loan Services LLC | https://myauroraloan.com/ | 1-800-550-0508 |
| Bank of America, N.A. | www.bankofamerica.com/mha/ | 1-800-846-2222 |
| Carrington Mortgage Services, LLC | www.carringtonms.com | 1-888-267-2417 |
| Chase Financial LLC | www.chase.com | 1-866-550-5705 |
| CitiMortgage, Inc. | www.mortgagehelp.citi.com | 1-866-915-9417 |
| Countrywide Home Loans Servicing LP | http://my.countrywide.com/media/hasp.html | 1-800-669-6607 |
| GMAC Mortgage LLC | www.gmacmortgage.com | 1-800-766-4622 |
| Green Tree Servicing LLC | www.gtservicing.com | 1-800-643-0202 |
| Home Loan Services, Inc. | www.viewmyloan.com | 1-800-622-5035 |
| Ocwen Financial Corporation, Inc. | www.ocwen.com | 1-800-746-2936 |
| Saxon Mortgage Services | www.saxononline.com | 1-800-594-8422 |
| Select Portfolio Servicing | www.spservicing.com | 1-888-818-6032 |
| Wells Fargo Bank, NA | www.wellsfargo.com/homeassist | 1-800-678-7986 |
| Wilshire Credit Corporation | https://www.wcc.ml.com | 1-888-502-0100 |
Selling a House in Bankruptcy (Part Two: Ch. 13)
Photo by Michael Mulligan
I recently discussed selling a home in Chapter 7. To review, I explained that when a case is filed, all the debtor’s legal and equitable interests become property of the bankruptcy estate. I also discussed how the home might be exempt property (that is, protected from the reach of creditors), and how the trustee had 30 days from the debtor’s First Meeting of Creditors to object to the debtor’s exemptions. In sum, in Chapter 7, once the exemption process played out with no trustee objection, the house could be sold.
In this article I will discuss how the sale of a home works in Chapter 13. The Bankruptcy Code is found in Title 11 of the United States Code. Title 11 (the Bankruptcy Code) is divided into Chapters. You may hear on the news that a company filed “Chapter 11,” for example. Chapter 11, like Chapter 7 and Chapter 13 are part of Title 11, the Bankruptcy Code.
When a Chapter 13 case is filed, the schedules are prepared just like in a Chapter 7 case. Assets are listed and can be claimed as exempt up to the amount allowed under state law. However, Chapter 13 is a “reorganization” bankruptcy or “payment plan” bankruptcy. Therefore, in addition to the schedules, the debtor files a proposed plan of reorganization and requests that the plan be “confirmed” by the court. As with church confirmation, plan confirmation is a good thing. A confirmed plan is binding on the debtor and creditors. The confirmed plan provides for the rights and duties of the parties to the Chapter 13 case.
Chapter 13 plans provide that the debtor will make regular payments to the Chapter 13 Trustee, usually on a monthly basis for a stated number of months, and that the Trustee will then make specific payments to creditors from those funds. The Bankruptcy Code requires the debtor to pay to the Trustee all of his “disposable income” (all amounts remaining after payment of his necessary living expenses) for a minimum of three years. Generally, chapter 13 plans run from three to five years. This means that, unlike a Chapter 7 case which may be open for a few months, Chapter 13 cases usually remain open for years.
In addition, although property can be claimed as exempt just like in a Chapter 7 case, Chapter 13 is all about the Chapter 13 plan. In South Carolina, we have a form plan like many other districts. In dealing with property of the estate, the form plan provides as follows:
“Upon confirmation of the plan, property of the estate will remain property of the estate, but possession of property of the estate shall remain with the debtor. The chapter 13 trustee shall have no responsibility regarding the use or maintenance of property of the estate. The debtor is responsible for protecting the non-exempt value of all property of the estate and for protecting the estate from any liability resulting from operation of a business by the debtor.”
This has the practical effect of undoing the Chapter 7 process whereby the exempt assets “revest” (once again become property of the debtor). In Chapter 13, property of the estate, although it may be exempt, remains property of the estate. What all this means is that the house is not the debtor’s house; it belongs to his bankruptcy estate. His trustee will be interested in the sale, and the debtor must obtain a Bankruptcy Court order approving the sale.
It generally takes about 45 days or so from the filing of the motion to the time the court issues the order allowing the sale. The motion requesting sale approval and proposed order must state the sales price, disclose the amounts of all liens and mortgages being paid off, and list payments to any professionals such as attorneys and real estate agents. The motion must be served on all parties who may have an interest in the sale, and if anyone files an objection within the 20-day deadline, the court will schedule a hearing on the motion. These motions are fairly common, and when they are done correctly, the court usually grants the motion without requiring a hearing.
As an agent representing the seller/debtor, pay attention to the following:
1. Let the buyer’s agent and prospective buyers know that the sale must be approved by the bankruptcy court;
2. Make sure the contract is contingent on the Bankruptcy Court approving the sale;
3. Follow up with the debtor/seller and his attorney, and get any necessary information to the bankruptcy attorney so that he can quickly draft and file the motion for approval to sell the home;
4. Ask the debtor/seller to obtain a copy of the motion and notice of right to object when the documents are filed so all of the parties can see that the motion has been filed and can also see the time frame involved in obtaining the court’s approval;
5. Review the order to make sure you understand what must occur at closing (for instance, the closing agent may be required to send any excess sale proceeds directly to the Chapter 13 Trustee); and
6. After the sale, send a copy of the HUD-1 Settlement Statement to the debtor’s attorney, which will demonstrate that that order has been followed.
Selling a house in Chapter 13 can be done with minimal stress and delay, but it helps if you have an overview of the issues and procedures involved and communicate the requirements to prospective buyers and their agents.
–Russ DeMott
South Carolina Supreme Court Stays Foreclosures
Photo by Michael Mulligan
Yesterday, the South Carolina Supreme Court granted a motion filed by the Federal National Mortgage Association (“Fannie Mae”) requesting that the Court enjoin “all judicial officials in South Carolina conducting foreclosure sales on May 4 (or the next judicial sales date) from dismissing all eligible one to four unit owner occupied properties securing Fannie Mae portfolio mortgage loans and MBS pool mortgage loans guaranteed by Fannie Mae for which there is a foreclosure judgment.” Fannie Mae brought this motion because it wanted cases continued, or stayed, rather than dismissed, pending review to determine medication eligibility under federal programs. (See my May 4 post for a link to these programs).
The temporary restraining order (TRO) prevents foreclosure of any property in which the loan is held or guaranteed by Fannie Mae or Freddie May or held by a servicer who has agreed to participate in the Home Affordable Modification Program (HMP). Justice Toal’s decision to add HMP-participating servicers in the TRO is a big plus for homeowners who might not have Fannie Mae/Freddie Mac loans but who were stuck in the Kafkaesque process of fighting off foreclosure while, at the same time, dealing with a loan modification. In many of these cases, the loss mitigation departments of huge lenders or servicers have promised modification while the foreclosure departments have pressed on with foreclosure leaving home owners with no means of keeping their homes.
Specifically, Justice Jean Toal ordered that:
“By May 15, 2009, the plaintiff in every mortgage foreclosure action stayed by this order shall serve on all other parties to the action (including petitioner and/or Freddie Mac as appropriate) an affidavit setting forth its belief whether the loan is subject to modification under the HMP. If the affidavit indicates that the loan is subject to modification under the HMP, the foreclosure shall be stayed pending a determination if the loan will be modified. If the loan is modified, the foreclosure action shall be dismissed. If the loan is not modified, the foreclosure may proceed.
If the affidavit indicates that the loan is not subject to modification under the HMP, the TRO will be lifted unless petitioner, Freddie Mac or another party serves and files a counter affidavit asserting that the loan is subject to modification under the HMP by May 22, 2009. If a counter affidavit is timely filed, the TRO will remain in effect until the master-in-equity or circuit court judge determines if the HMP is applicable to the loan. The lower court shall insure that these determinations are made in an expeditious manner.
If the loan is determined not to be subject to modification under the HMP, the TRO shall be lifted and the foreclosure may continue. If the lower court determines that the loan is subject to modification and the loan is modified, the foreclosure action shall be dismissed. If the lower court determines that the loan is subject to modification but the loan is not subsequently modified, the TRO shall be lifted and the foreclosure may continue.”
For those of us who have dealt with disorganized, non-responsive lenders and servicers on these issues, this is a welcome development. Interestingly, the federal government (Fannie Mae) requested this relief. Over half of all U.S. home loans are backed by Fannie Mae and Freddie Mac, so the effect of the order will be to temporarily halt the vast majority of foreclosures in South Carolina.
As I have said repeatedly, modification saves lenders money. Modification is good for the homeowner, the lender, the neighborhood, and the taxpayer. Any loss of revenue in modification pales in comparison to the loss the lender will have if the home is foreclosed.
–Russ DeMott
Mortgage Modification Programs (Useful Program Links)
Here’s a link to the National Consumer Law Center website which lists current loan modification programs. NCLC is a top notch group, and I subscribe to their publications. The website, in turn, has links to all program websites. http://www.consumerlaw.org/issues/financial_distress/loan_modification.shtml
–Russ DeMott
Mortgage Modification Article from The Nation (“More Mortgage Madness”)
This article is fascinating and explains why mortgage modification is so difficult. It also illustrates the need for the Bankruptcy Code to provide for “cram down” of mortgages to the value of the home. As counsel for Ocwen states, modification is actually good for lenders. Far less costly than foreclosure. But the system is engineered for failure.
-Russ DeMott
http://www.thenation.com/doc/20090518/wright
