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Responses to the Foreclosue Crisis: Current Loan Modification Programs

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by Lorray S.C. Brown, MPLP Consumer Law Attorney

A national foreclosure crisis and the alarming and expanding movement of homeowners into the ranks of the newly homeless have spawned an array of new loan modification programs. While it seems that new programs are announced every day, in the waning days of 2008, options available to homeowners and their advocates include, among others:

Hope for Homeowners Program: The Hope for Homeowners program was authorized by the Housing and Economic Recovery Act of 2008. The program began October 1, 2008 and ends September 30, 2011. The program allows FHA to refinance homeowners into 30-year fixed rate FHA mortgages. Mortgages eligible for refinancing under this program must have originated on or before January 1, 2008. By design, the program assists homeowners who cannot afford to make their monthly mortgage payments, but who nevertheless have made at least six full payments, and have not intentionally defaulted on a mortgage or other debt. Homeowners with convictions for mortgage fraud in the past 10 years are ineligible. Eligible homeowners must also have a mortgage debt to income ratio that was greater than 31% as of March 1, 2008. The maximum loan amount is determined by an individualized assessment of the homeowner’s ability to make mortgage payments, but in no case will the loan amount exceed $550,440, or 90% of the appraised value of the property.

The 90 % of appraised value limitation means that a homeowner will have 10% of equity at the time of the loan. Under the program, access to that equity is phased in over a five year period as part of an equity sharing system between the homeowner and FHA. In addition to equity sharing, upon sale or disposition of the home, FHA will be entitled to 50% of any appreciation in the value of the home. Mortgage holders are required to waive all prepayment penalties and fees related to default or delinquency; and are required to fund an upfront premium that equals 3% of the original mortgage amount, to be paid from the proceeds of the refinance through reduction of the payoff for the original mortgage. Homeowners are required to pay an annual premium of 1.5% of the principal balance of the new mortgage.

In November 2008, the Hope for Homeowners program was modified to allow more families to participate in the program. For example, the changes increased the loan to value ratio to 96.5% and allowed mortgage holders to extend mortgages from 30 years to 40 years. This program is completely voluntary. Mortgage holders or servicers are not required to participate in this program. So it is of no surprise that housing counselors are reporting that most mortgage holders are declining to get involved – except when they originated the existing loan. For more details on the Hope for Homeowners program, see http://www.hud.gov/news/release.cfm?content=pr08-150.cfm and
http://www.hud.gov/news/release.cfm?content=pr08-178.cfm

Streamlined Modification Program (SMP): The Federal Housing and Finance Agency has developed a streamlined loan modification program. This program applies to Freddie Mac and Fannie Mae loans. The SMPs are designed to reduce monthly mortgage payments to an amount equal to 38% of the borrower’s monthly gross income by reducing the mortgage loan interest rate or providing for a principal forbearance. Eligible borrowers must have missed at least three monthly payments on their existing mortgages, and the home must be the borrower’s primary residence. The loan to value ratio must be 90% or more, and the property cannot be abandoned, vacant or condemned. Loan terms can be up to 40 years. Borrowers meeting the SMP eligibility requirements are then placed into a trial period during which borrowers are required to make timely payments for three consecutive months before a borrower’s loan can be modified under the SMP. For more details on the Streamlined Modification Program see http://www.efanniemae.com/. Finally, in connection with the SMP, Fannie Mae and Freddie Mac have suspended all foreclosures and evictions scheduled to occur from November 26, 2008 through January 9, 2009. On December 14, 2008, Fannie Mae announced that it will offer renters in foreclosed properties month-to-month leases until the property is sold.

Other Streamlined Modification Programs: Several lenders, such as Chase, WaMu, CitiMortgage, Bank of America, and IndyMac Federal, either as a result of legal settlement or FDIC take-over, have also created their own loan modification programs. Typically, to be eligible for these programs, borrowers must show that they cannot afford the current payment. The debt to income ratio ranges from 31% to 41%. Also, the new monthly payment must be sufficient to pay off the loan by extending the term of the loan to 40 years or deferring some of the principal until the loan is refinanced or the home is sold. For more details on these programs see http://www.bankrate.com/brm/news/mtg/20081211-getting-mortgage-modification-a1.asp?prodtype=mtg
For IndyMac Federal Loan Modifications see http://www.fdic.gov/consumers/loans/modification/indymac.html

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