Advice for homeowners on loan modification
By Patrick Casey
Lombardo
&
amp; Gilles
Last month’s article was about the alternatives to doing a loan
modification. However, there are certain circumstances in which a
loan modification really is appropriate for some people. There are
a number of factors in determining whether a person will be
eligible for a loan modification.
Advice for homeowners on loan modification
By Patrick Casey
Lombardo & Gilles
Last month’s article was about the alternatives to doing a loan modification. However, there are certain circumstances in which a loan modification really is appropriate for some people. There are a number of factors in determining whether a person will be eligible for a loan modification.
The first point to understand is that there are no hard and fast rules about who is eligible for a loan modification. It is completely at the lender’s discretion as to whether or not to approve a loan modification for an individual. Each lender has set different standards to approve a loan modification. In addition, since almost all residential loans have been sold to investors by the banks that originally made the loans, the final loan modification approval must come from the investor who now owns the loan. This adds one more challenge to obtaining a loan modification approval.
The Obama Administration instituted the Make Home Affordable program to provide an incentive to lenders to enter into loan modifications. If a homeowner meets certain eligibility requirements as defined in the program, then the federal government will share with the lender/investor the cost of reductions in monthly payments from 38 percent of the homeowner’s monthly income to 31 percent of the homeowner’s monthly income. In other words, the federal government will reimburse the lender/investor for some of the lost income if the lender/investor approves the loan modification. The program has helped to standardize the criteria that a lender will use to evaluate a home loan modification if that lender wants federal government reimbursement under the Make Home Affordable program.
In order for a lender/investor to consider a loan modification under the Make Home Affordable program, the homeowner must meet the following criteria: (i) the loan must be originated before January 1, 2009; (ii) the loan must be a first priority loan on an owner-occupied property with an unpaid principal balance up to $729,750; (iii) the homeowner must fully document all income and provide two recent paystubs, the most recent tax return and an affidavit of hardship; (iv) the property must be the homeowner’s primary residence: no investor owned or vacant properties will qualify; (v) there is an incentive to lenders to modify for borrowers that have not yet defaulted in their payments (but the program does apply to homeowners that are currently in default); and (vi) modifications can start from now through December 31, 2012, but a homeowner only qualifies for one loan modification under the program.
There are several key points that a homeowner must understand in reviewing these standards. First, the property must be the homeowner’s primary residence. The reason is that all the government programs are designed to keep people in their homes, not to allow people to keep investment properties that turn out to be bad investments.
The second point is that the homeowner is only entitled to one loan modification. If a homeowner successfully obtains a loan modification, then they need to stay current with those revised payments. If the homeowner defaults in making the payments, then the Make Home Affordable program does not provide any incentive to the lender to do another loan modification. However, if a homeowner applies for a loan modification and is denied, that does not prevent the homeowner from applying again for a loan modification. In other words, an unsuccessful loan modification application is not held against the homeowner for purposes of the Make Home Affordable program.
If a homeowner meets these qualifications, then the lender/ investor will consider approving a loan modification based upon a net present value test. In brief, it looks at the ratio of the loan payment, property taxes, insurance and homeowners association dues as compared to the homeowner’s total income. It analyzes this ratio both before and after the proposed loan modification. If the homeowner meets the ratio standards, then there is a good chance that the loan modification will be approved if the homeowner meets all the other criteria.
It is important to note that a lender only needs to follow the criteria of the Make Home Affordable program if it wants the federal government to subsidize part of the amount of the reduced loan payment. Most of the large lenders such as Chase (which has all WaMu loans) and Bank of America (which has all Countrywide loans) want the federal reimbursement and follow these criteria. However, some smaller banks, and certainly private money lenders (ie. meaning anyone other than a bank,) do not follow the Make Home Affordable program requirements. Therefore, there is no set standard by which all lenders evaluate a proposed loan modification application.
There are two more points to consider. First, any lender will not consider a loan modification if it is highly unlikely that the homeowner will be able to make the reduced payments. For example, if the homeowner has been unemployed for 9 months and is not likely to obtain a job in the foreseeable future, then the lender has no incentive to do a loan modification because the homeowner really cannot afford any monthly payment. The second point is that the homeowner must have a compelling story as to why he or she is in this situation. These stories typically include factors such as significant pay cuts at work, large reductions in home values with an inability to refinance, divorce, large unexpected medical costs and other such items. The homeowner must try to show that there were factors beyond the homeowner’s control that resulted in the homeowner needing a loan modification.
A loan modification is an excellent (and sometimes the only) way for a homeowner to stay in their home. A person considering applying for a loan modification needs to thoroughly understand the lender’s requirements and procedures to obtain a loan modification before applying for such a modification.
This column is the work product of Lombardo & Gilles, LLP, which has offices in Hollister and Salinas. Patrick Casey is an attorney with Lombardo & Gilles, LLP. You may contact the author at (888) 757-2444 or [email protected]. Mail your questions to Patrick Casey, It’s the Law, c/o The Pinnacle, 380 San Benito St., Hollister, CA 95023.
