New home loan modification rules coming

House with home application loan, and the word 'modification' stamped on the top
  • All servicers will be required to get financial documentation first.
  • Only 13 percent of trial modifications have become permanent.
  • Servicers that got accurate financial information had higher conversion rate.

If you want to get a modification to prevent foreclosure, soon you will have to supply financial documents upfront -- including paycheck stubs and an income tax form.

The new loan modification requirement is the latest update in the Obama plan to reduce home foreclosure.

HAMP -- the Home Affordable Modification Program -- is designed to help homeowners who can no longer make their mortgage payments. If homeowners meet a long list of eligibility requirements, they can have their mortgages modified with lower monthly payments. Each HAMP modification is done in two stages. First, there is a trial modification that usually lasts three months. If the homeowner makes those three payments on time, and meets all the eligibility rules, the modification is made permanent.

One of the eligibility requirements concerns income. To get a permanent modification, the borrower can't earn too much and can't earn too little. Too much income and a modification is unnecessary because the mortgage should be affordable. Too little income and the borrower can't afford the home loan even with a modification.

Right now, a lot of servicers grant trial modifications based on what the borrower says in a phone call. Many borrowers report their income inaccurately in that phone call. They say that they earn less than they actually make. They get trial modifications based on lowballed income. Later, after they send in paycheck stubs or other proof of income, it turns out that they make too much to be eligible for permanent modifications.

Financial proof required

A few servicers ask for income documentation upfront. Now the federal government wants all servicers to do it that way.

By June 1, mortgage servicers will have to gather income information from borrowers before granting trial modifications. In addition to that, borrowers will have to sign an IRS form, either 4506-T or 4506T-EZ, which authorizes the mortgage servicer to get a transcript of the most recent federal income tax return. Finally, the borrower has to sign a document officially requesting a mortgage modification and explaining the hardship that makes the home loan unaffordable.

Through December, 902,620 homeowners had been given trial modifications, according to the U.S. Treasury. Of those, just 66,465 had been given permanent modifications, and another 46,056 offers of permanent modifications were "awaiting only the borrower's signature." In other words, only 1 in 8 people getting trial modifications had been offered permanent mods. The Obama administration wants to increase that conversion rate.


In recent months, the Treasury has issued report cards showing which servicers had been granting lots of loan mods, and which servicers had been giving few. But the report cards didn't discriminate between servicers that collected all the financial paperwork upfront giving trial modifications, and which servicers granted trial mods based on the borrower's word during a brief phone call.

Thus, companies such as American Home Mortgage Servicing, which has always required the paperwork upfront, looked like laggards because the report cards said they had only a few borrowers in trial modifications. But fewer of those trial mods will go bust because the borrowers weren't given a chance to fudge their income numbers over the phone. The government's new policy is an acknowledgement that getting the documentation upfront was the best policy.

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