Explanation of the latest mortgage loan modifications as they relate to bankruptcy

Explanation of the latest mortgage loan modifications as they relate to bankruptcy

The Feds announced new mortgage loan modification programs in late March 2010. These programs are designed to help homeowners get help dealing with unemployment and/or decreased property values. The Feds pushed these programs through because major lending institutions failed to modify a meaningful number of mortgages in 2009. (The money for the programs is coming from money previously allocated for the Troubled Asset Relief Program (TARP)–it’s not technically new debt for our grand kids to payoff.)

This week my clients have come to me with a ton of questions about these programs. The ink is not yet dry, and most provisions of the programs do not start until June 1, 2010. Consequently, there are a lot of unknowns as to whether these programs will work as planned.

But, here’s what I can tell you about the Five Options I see for my clients:

First Option–HAMP Modification

The original “Home Affordable Mortgage Program” (HAMP) has had a significant change that affects you if you are considering filing bankruptcy. Beginning June 1, 2010 you will not be disqualified from getting a loan modification if you’ve filed, or plan to file, bankruptcy. In fact, if you are in an active Chapter 7 or 13, your lender must consider you for a HAMP modification (upon request) before foreclosing on your propert

This is much needed reform–and I am glad to see it. The issue remains however, whether you’ll ultimately qualify for a HAMP modification–or if the modification will be enough to give you a meaningful fresh start.

I write this because a successful HAMP modification means that your mortgage is reset to no more than 31% of the gross income of the homeowners who are on the note. The HAMP modification won’t save you from credit card debt, car notes, and other debts that I deal with for you in bankruptcy.

Therefore, HAMP alone may not be enough to give you a fresh start–you should call my office to understand how the rest of your debts would be affected by filing.

There are other caveats to getting a permanent HAMP modification: You must reside in the property, and there is a debt limit. A permanent HAMP modification is not for those who have lost their jobs–it is for those those who are making less money, or who have had an interest rate reset as a result of a variable or interest-only mortgage.

Second Option–Temporary forbearance followed by HAMP modification

Under the Temporary Assistance for Unemployed Borrowers, homeowners who become unemployed can seek to have 3-6 months of forbearance. During this time they pay no more than 31% of their gross income (including unemployment compensation)–and continue to look for work. One trick is that the homeowner must qualify for unemployment compensation–you can’t have been fired for cause, or otherwise be ineligible for unemployment compensation.

The other trick is that the homeowner must apply for the help within 90 days of mortgage delinquency. This won’t help you if you’re already more than 3 months behind on your mortgage.

At the end of the forbearance period, the lender will attempt to qualify the homeowner for a permanent modification using the homeowners income from his or her new job . But, this won’t help if you haven’t yet found a job (many of my clients have been looking for many more than 6 months–this won’t help them.)

Third Option–Home Affordable Refinancing

This program is aimed at homeowners who have loans that are underwritten by Fannie Mae or Freddie Mac–and aims to get them under FHA loans. This program is designed to offer refinancing options (better interest rates) to so-called ‘good’ borrowers who are underwater on the value of their property and who simply can’t refinance to lower interest rates because of the real estate implosion. [So, if you’ve got other debts that you’re behind on, you likely won’t qualify.]

You are not eligible if you’ve been behind on your mortgage once in the previous 12 months–and you’re not eligible if you already have an FHA loan.

This program is voluntary on the part of your lender. The lender must agree to write-down your first (and possibly second) mortgage by at least 10% of the original lien and the result must be a loan that is no more than 115% of the current value of the property.

Fourth Option–Second Lien Modification following a HAMP modification

Here, a homeowner gets a permanent loan modification through HAMP for the first mortgage and then uses that adjustment to modify the second mortgage. The adjustment consists of stretching out the term from 30 to 40 years, and/or adjusting the interest rate on the loan.

There are other restrictions and caveats that you can read about here.

My message to you if you’ve read this far is that you definitely need to call me so I can explain to you how I might be able to strip your second mortgage in a Chapter 13 bankruptcy. Going back to what I wrote about earlier in this post–bankruptcy seeks to solve all of your problems holistically. You need to be educated about how much ammo you’ll need to really get a fresh start.

Fifth Option–Home Affordable Foreclosure Options

This is my least liked aspect of the new programs. Here, lenders give you $3,000 to leave your property and agree to short-sell or complete a deed-in-lieu of foreclosure (!).

I could really go on and on and on about why this is probably not going to help you get a fresh start–and how this is really helping your lender’s books, not your family.

But, I’ll save my thoughts on that for when we meet.

Call Attorney McDuffie at (404) 418-8879 to set up your free consultation.