mortgage

Mortgage Modification Rules Change | Bankrate.com

Highlights
  • Homeowners may get lower payments and loan balances.
  • Principal reduction may reduce repeat defaults on modified loans.
  • Write-offs will be made in equal installments over three years.

More homeowners may see their monthly mortgage payments drop, thanks to changes to a government mortgage modification program.

The government is offering increased incentives to lenders to reduce mortgage balances for borrowers who qualify. However, not all borrowers are eligible, and the new rules come with some restrictions and caveats.

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Borrowers who want a mortgage reduction should call their loan servicer or a housing counselor and ask questions now, even though the answers may not be known until the program rolls out over the next few months, says Rich Call, grants administrator for housing programs at Apprisen Financial Advocates in Columbus, Ohio.

"Patience is going to be a virtue," he says.

How it works

The changes are described as "enhancements" to the government's Home Affordable Modification Program introduced one year ago.

Loan servicers now will be required "to consider an alternative modification approach which includes write-down of some principal for loans that are over 115 percent of the current value of the property," according to the official FAQs on the MakingHomeAffordable.gov Web site.

The standard approach includes principal reduction, but only after the interest rate is cut and the term of the loan is extended to reduce the payment to 31 percent of the borrower's income.

The new alternative approach may help to prevent repeat loan defaults because homeowners will get an affordable payment and a "more equitable" loan, says Faith Schwartz, executive director of Hope Now, a mortgage outreach alliance in Washington, D.C.

The principal reduction will start out as forbearance, which means repayment of a portion of the loan amount will be deferred. The deferred amount will then be forgiven (i.e., written off) in three equal portions over three years if the borrower stays current on the payments.

Who might qualify?

To qualify, borrowers must meet the existing HAMP qualifications, which include owner-occupancy of the home, payments that exceed 31 percent of the borrower's income, a financial hardship and a loan balance less than $729,750.

The loan servicer also must be a HAMP participant. A list of participating servicers is posted on the MakingHomeAffordable.gov Web site.

Servicers will continue to apply a net present value, or NPV, test to determine whether a loan modification yields a greater financial benefit to the lender than foreclosure. The NPV test is an analysis that predicts whether the loan modification will be economically favorable for the lender. This analysis has been a hurdle for some borrowers who otherwise might have received a modification.

The government hopes the incentives will tip the balance of the analysis in favor of more modifications and fewer foreclosures. Loan servicers must consider the alternative approach, but principal reduction "isn't mandated," Schwartz says.

The guidelines state that loan servicers will contact borrowers who qualify for the expanded program.

Loan modification and bankruptcy

Another change is that borrowers who are in an active bankruptcy will be considered for a HAMP loan modification if the borrower (or his or her attorney) contacts the loan servicer and makes that request. This change remedies a procedural matter that hindered lenders efforts' to discuss a loan modification with borrowers who had filed for bankruptcy protection.

"It puts the burden on the servicer that if (the borrower) contacts them, they need to run them through the math," Schwartz says.

Borrowers who have a loan insured by the Federal Housing Administration can obtain a loan modification through FHA-HAMP, introduced in August 2009, according to Lemar Wooley, a spokesman at the U.S. Department of Housing and Urban Development. This program includes deferral of principal, but the FHA is barred by statute from principal forgiveness. Deferred principal must be repaid at the end of the loan term or when the loan is refinanced or the home sold.

While a mortgage modification can help some borrowers keep their home, it's not a perfect solution, even for those who benefit. One drawback is that a loan modification typically will hurt the borrower's credit score since the debt wasn't repaid according to the original loan agreement.

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