March is National Credit Education Month and Doucet & Associates would like to invite you to read some of our articles on improving your credit, keeping track of your credit report, and your rights under the Fair Credit Reporting Act...
First-Knox National Bank applied our clients mortgage payments wrong after they were granted a loan modification with deferred interests and other charges. In this case, we learned that an employee must manually remove deferred interests from a loan when applying a mortgage payment...
Servicemembers Civil Relief Act (SCRA)
The Servicemembers Civil Relief Act (SCRA) protects active duty military personnel and their immediate families from financial hardships and a variety of legal issues. The SCRA protects people involved in the United States armed forces, the national guards, public health services, and other administrative positions. Active duty personnel must request protection services from an armed forces legal assistance office.
Active duty personnel may request reduced interest rates on a mortgage, credit card, automobile loans, or other loans through the SCRA. Interest rates are reduced to at least six percent and are allowed to be applied to monetary obligations obtained before active duty. Credit reporting agencies and lenders cannot use approved SCRA reduced rates in a harmful way to lower a consumer credit score.
People receiving protection through the SCRA are not allowed to be evicted from a rental property without a court order. The average rental property that is protected under these rights are around 3,000 dollars a month and change a little every year. The SCRA also protects the right to judicial relief to postpone a civil court issue at least 90 days with court approval. Active duty personnel may also request a civil court case to be reopened if failing to appear in court due to temporary relocation. Criminal court proceedings are not protected under judicial relief.
People selected for active duty positions requiring deployment more than 90 days have the right to request termination of a property lease without penalties. Residential and business properties are protected and filing for termination can take place before leaving or during active duty if extended. Termination of a car lease is possible if active duty position requires deployment for 180 days.
If an active duty position effects a person’s ability to pay mortgage rates on a housing contract, the SCRA can provide legal assistance to keep a property from foreclosing. Mortgage companies must receive a court order to file foreclosure on the home of military personnel involved in active duty. Automobile companies must also receive a court order to repossess a vehicle for missed payments.
Military personnel required to move from their home state is provided state tax relief under the SCRA. A person may request to continue paying the taxes of their home state on military income and personal property. Military personnel are also allowed to reinstate cancelled insurances without penalties after ending an active duty term. Insurances may include health insurance, life insurance, home insurance and other plans.
Doucet & Associates Co. L.P.A. in Ohio helps people enforce rights based on the SCRA. Please contact us today if you or someone you know needs help.
Truth In Lending Act
The Truth in Lending Act (TILA) is a federal law legislated on May 29, 1968 under the Consumer Credit Protection Act. The TILA was created to protect consumers involved in contracts with credited purchases with creditors and lenders. Essentially the TILA act enforces loan companies and credit card companies to provide all information regarding interest rates and other fees before a consumer agrees to borrow.
TILA covers open-ended credit and close-ended credit. Open-ended credit includes borrowed funds such as credit cards, debit cards and home equity loans. Examples of close-ended credit include auto loans and home mortgages. Information regarding terms of an Annual Percentage Rate (APR), the total amount offered in a loan and the frequency of due dates to repay the loan is now obligatory for the loaner to provide to the consumer under this act. The dispense of required information now allows consumers to be aware of contracts, costs of credit and so-called hidden fees. Consumers are also able to be more confident and comfortable agreeing to credit related contracts because they can use the provided information to compare a variety of loans or borrowed money.
Failure of cooperation by a loaner or creditor to provide the required information to the consumer can result in rescission in certain instances. The loan or credit transaction would be disentangled and canceled, and all fees and paid money would be returned back to the consumer in a rescission. Lenders and credit companies are more disposed and willing to provide the required information based on TILA due to the amount of loss which could generated during a rescission.
You can find out more information about the Truth in Lending Act (TILA) regarding home owners and foreclosure by reading 23 Legal Defenses to Foreclosure: How to Beat the Bank by Troy Doucet.
What is the difference between bankruptcy and a loan modification?
Bankruptcy is a section of federal law that enables people who owe money from having to pay it back. Bankruptcy is actually mentioned in the Constitution, and is recognized as a way for people to obtain fresh starts, usually after some catastrophic life event caused them to acquire significant amounts of debt. Studies have consistently shown the leading cause of bankruptcy is due to significant medical bills, job loss, business failure, or family turmoil.
Bankruptcy is the process of having your debts organized and either discharged (legally forgiven), or having them repaid in an organized way over time, or a mixture of both.
In the foreclosure context, Chapter 13 bankruptcy is the tool that enables homeowners to force their mortgage company to accept repayment and causes their loan to become current over time. You basically begin making your normal mortgage payment immediately, plus an extra amount to pay back the accumulated arrears. You will make these payments pursuant to a formal plan overseen by the bankruptcy court, over a period of several years. Once you complete all your payments, the plan is done and your loan is current. You then continue with just your normal mortgage payments.
On the flip side, a loan modification is where you and your mortgage company agree privately to terms that enable you to begin repaying the loan. The process is not part of any formal bankruptcy filing, nor is it overseen by a judge. Instead, a loan modification usually comes from your mortgage company realizing you are facing financial hardship and thus deciding to offer you (or is forced to offer you by the government) a lower interest rate or longer repayment period, which lowers your payment. Alternatively, a loan modification could mean you pay a higher payment for a period of time to repay any arrearages. It could be any combination of a series of terms and is only limited to everyone’s imagination and the existing consumer laws.
In any event, a loan modification is the result of an agreement reached directly between you and your mortgage company, rather than a bankruptcy filing, which is overseen by the bankruptcy court system.
About MHA and HAMP – Obama’s Plan, the Home Affordable Modification Program
The Making Home Affordable Program (MHA) provides mortgage relief to help homeowners avoid foreclosure. MHA programs are designed to reduce rates of foreclosure by offering mortgage modifications, interest rate reductions, refinancing, and deferred payments.
The largest and MHA program is the Home Affordable Modification Program or HAMP. HAMP is a set of loan modification guidelines designed to help homeowners who are already behind, or are in danger of falling behind on their mortgage payments. includes reducing interest rates, extending loan terms, deferring repayment, and, in very rare cases, principal forgiveness. The program also offers reduced or suspended payment options to qualified unemployed homeowners.
Loan servicers–companies which manage loan accounts by receiving and processing mortgage and escrow payments–offered their own modification programs, but with very little success. According to Bloomberg News, the average loan modification in the first quarter of 2011 defaulted more often than previous modifications: services failed to lower payments enough to provide the relief that homeowners needed.
Even in the third quarter of 2011, servicers using their own modification programs reduced payments by only 24 percent ($384/month).
Typically, servicers used principal reduction–reducing the remaining balance on the mortgage–as the primary form of modification. These modifications failed, because servicers did not consider the homeowner’s ability and willingness to repay a modified mortgage. Conversely, HAMP guidelines directly address homeowners’ ability to make timely modified mortgage payments.
Money set aside for HAMP is used only when a homeowner shows that he or she can make payments under a proposed modification. This requires two-step process. First, the servicer offers a three-month Trial Period Plan (TPP) describing the terms and conditions of the modified loan. This plan is accepted when the borrower makes the first payment. Second, if the homeowner is current at the end of the trial plan, then the loan is permanently modified. Thereafter, for making on-time payments under the modification, homeowners will receive additional principal forgiveness of $1000 each year for up to five years.
Revamped for Underwater Mortgages The federal government updated HAMP to allow underwater homeowners–those with mortgage balances higher than the present value of their homes–to refinance. This permits homeowners to take advantage of current record-low interest rates (normally, underwater homeowners owning more than their homes were worth were restricted by loan-to-value requirements–the value of the home versus the amount owed).
This adjustment for underwater homeowners does not include reducing mortgage principal. This refinance program is available to homeowners with a minimum 620 FICO score.
Modification Program For FHA/VA A program (FHA-HAMP) also exists for homeowners with FHA/VA loans. Under this program, the only aid offered is a permanent principal reduction–up to 30 percent of the loan’s remaining balance. The amount of principal reduced becomes an interest-free second mortgage (which also includes missed payments, unpaid taxes and insurance, but not late fees or default charges) and is due only when the first mortgage is repaid, or when the home is sold. Unlike HAMP, homeowners must be at least 30 days past-due.
Modification Program For Unemployed Homeowners HAMP also provides assistance to unemployed homeowners (HAMP-UP) who are unemployed at the time they apply. They must be eligible for unemployment benefits. The program allows servicers to reduce homeowners’ mortgage payments to 31 percent of homeowners’ income, or suspend payments for 12 months or more. Servicers must consider unemployed homeowners for HAMP-UP prior to consideration for standard HAMP. If a homeowner is eligible for HAMP-UP, the servicer may still offer HAMP, if doing so is a better loss mitigation strategy.
Taskforce Against Modification Scams A special federal taskforce exists to prevent HAMP-related mortgage modification scams. The Treasury Department cautions homeowners to remember that:
- No third party person or company can approve or deny a modification; only the servicer.
- No third-party services are needed to obtain a modification. The homeowner may seek a HAMP modification on his or her own or through a Housing and Urban Development (HUD) approved housing counselor.
- No upfront fee is required to apply for or accept a modification; beware of persons or companies offering money-back guarantees.
Homeowners may verify the authenticity of a third party that claims affiliation with HAMP or the U.S. government by calling the HOPETM Hotline (number).
Deadline for Entry The HAMP program (and entry into three-month trial modification) expires on December 31st, 2012. The refinance program for underwater homeowners expires on December 31st, 2013. (Both Extended into 2014)
How to Qualify
- You occupy the house as your primary residence.
- You obtained your mortgage on or before January 1, 2009.
- You have a mortgage payment that is more than 31 percent of your monthly gross (pre-tax) income.
- You owe up to $729,750 on your home.
- You have a financial hardship and are either delinquent or in danger of falling behind.
- You have sufficient, documented income to support the modified payment.
- You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.
First lien–The mortgage loan is a first lien mortgage loan originated on or before January 1, 2009. This includes mortgages secured by:
- Cooperative shares,
- Condominium units, and
- Manufactured housing (the first lien mortgage loan must be secured by the manufactured home and the land, both of which must be classified as real property under applicable state law).
Not previously HAMP modified–The mortgage loan has not been previously modified under HAMP.
- Delinquent or in imminent default–The mortgage loan is delinquent or default is reasonably foreseeable. Loans currently in foreclosure are eligible.
Owner-occupied, single family property–The mortgage loan is secured by a one- to four-unit property, one unit of which is the borrower’s principal residence. Additionally, a loan may be considered for HAMP if:
- The property was originally non-owner occupied, but the servicer can verify that it is currently the borrower’s principal residence.
- The borrower is temporarily displaced (e.g., military service, temporary foreign service assignment, or incarceration) but was occupying the property as his or her principal residence immediately prior to his or her displacement, intends to occupy the property as his or her principal residence upon his or her return and the current occupant is not a tenant.
Not vacant or condemned–The property securing the mortgage loan is not vacant or condemned. Financial hardship–A borrower has documented a financial hardship and represented that he or she does not have sufficient liquid assets to make the monthly mortgage payments. Minimum monthly mortgage payment ratio–The borrower’s monthly mortgage payment (including principal, interest, taxes, insurance, and when applicable, association fees, existing escrow shortages) prior to the modification is greater than 31 percent of the borrower’s verified monthly gross income.
Escrow account established–The borrower agrees to set up an escrow account for taxes and hazard and flood insurance prior to the beginning of the trial period if one does not currently exist. Unpaid principal balance limits–1 Unit $729,750 2 Units $934,200 3 Units $1,129,250 4 Units $1,403,400
Program cutoff date–The servicer has received a timely first trial period payment from the borrower on or before December 31, 2012. (extended into 2014)
Additional Qualification Guidelines No waiver of legal rights–The servicer may not require a borrower to waive legal rights as a condition of HAMP.
No up-front contribution–A borrower in active litigation regarding the mortgage loan is eligible for HAMP
Redemption rights following foreclosure–Whether a borrower can qualify for HAMP if the mortgage loan is currently in the redemption period after a foreclosure sale is dependent on the amount of time remaining in the redemption period and other legal requirements of the state in which the property is located. When permissible under state law, the servicer should, on a case-by-case basis, seek investor approval prior to evaluating a borrower for HAMP during a redemption period. Balloon loans–Balloon loans that have matured or that mature during the HAMP trial period are eligible for HAMP subject to investor guidelines.
Inter vivos Revocable Trust–A loan secured by a property owned by an inter vivos revocable trust is eligible for HAMP as long as the borrower:
- Is a trustee of the trust,
- Is a primary beneficiary of the trust, and
- Occupies the property as his or her principal residence.
The borrower must sign all HAMP-related documents in both an individual capacity and as trustee of the inter vivos revocable trust.
Subordinate Lien–HAMP does not require extinguishment of subordinate lien instruments as a condition of modification. However, servicers must follow investor guidance to ensure first lien priority.
HUD Counseling–Borrowers with back-end ratios of 55 percent or more must agree in writing to obtain HUD-approved counseling as a condition of receiving a permanent modification, even if they recently completed counseling. See Section 6.7 for more information.
Continued Eligibility–A borrower who has been evaluated for HAMP, but does not meet the minimum eligibility criteria or who meets the minimum eligibility criteria, but is not qualified for HAMP by virtue of a negative NPV test result, excessive forbearance or other financial reason, may request reconsideration for HAMP at a future time if they experience a change in circumstance. Servicers must have an internal written policy which defines what the servicer considers a change in circumstance and outlines when a borrower will be reevaluated for HAMP. Servicers may limit the number of reconsideration requests in accordance with its written policy and must apply the policy consistently for all similarly situated borrowers. The servicer’s policy must allow a borrower to request re-evaluation based on a change in circumstance at least one time. A servicer may reconsider borrower multiple times if the borrower claims multiple changes in circumstance. Servicers must continue to allow a borrower to request re-evaluations based on disputed NPV inputs. Any determination regarding whether a change of circumstance has or has not occurred must be communicated to the borrower and documented in the mortgage file and/or servicing system.
A servicer’s obligation to offer the borrower a modification is considered satisfied, and the borrower is not eligible for a subsequent offer, if (1) the borrower received a modification and lost good standing (as defined in Section 9.4); (2) for TPPs with effective dates on or after June 1, 2010, the borrower received a TPP offer and failed to make one or more payments by the last day of the month in which it was due; or (3) for TPPs with effective dates prior to June 1, 2010, the borrower received a TPP offer and either (i) failed to make all required payments by the end of the trial period, or (ii) failed to provide all required documents by the end of the trial period.
Borrower Incorrectly Denied HAMP– If a servicer determines, as the result of an escalation, through the servicer’s internal quality control process or through an MHAC review, that a borrower was incorrectly denied a TPP, the servicer must offer the borrower a TPP based on the status of the borrower and the loan at the time of the servicer’s initial evaluation and must, to the greatest extent possible, put the borrower in the same position as he or she would have been in if the servicer had offered the borrower the TPP in accordance with MHA guidelines. A servicer may not back date the TPP to satisfy this requirement. If a servicer is unable to put the borrower in the same position as he or she would have been if the servicer had offered the borrower the TPP in accordance with MHA guidelines, the servicer must document the reasons for such inability in the mortgage file and/or servicing system.
Co-Borrower–An occupying co-borrower may be considered for HAMP if a quitclaim deed evidencing that the non-occupying co-borrower has relinquished all rights to the property has been recorded. Non-Occupant Co-Borrower–Income of both a borrower and co-borrower must be used for HAMP evaluation, even if the co-borrower is not an occupant of the property. Each borrower and co-borrower is eligible for only one HAMP modification even if the co-borrower owns and occupies another property that secures a loan that otherwise would be eligible for HAMP consideration. If a servicer can discern from other income documentation, that a nonoccupant co-borrower has a loan on his or her principal residence, the servicer should notify the co-borrower that he or she is only eligible for a HAMP modification on one loan. In the event of a failure of a TPP on a loan where a non-occupant co-borrower’s income was used, the co-borrower remains eligible for HAMP consideration on his or her principal residence.
Unemployed Borrower–A borrower who is currently receiving unemployment benefits should be evaluated for UP. If a borrower who is eligible for UP declines an offer for an UP forbearance plan, the servicer is not required to offer the borrower a modification under HAMP.
Borrowers in Bankruptcy–Borrowers in active Chapter 7 or Chapter 13 bankruptcy cases are eligible for HAMP at the servicer’s discretion in accordance with investor guidelines, but servicers are not required to solicit these borrowers proactively for HAMP. Notwithstanding the foregoing, such borrowers must be considered for HAMP if the borrower, borrower’s counsel or bankruptcy trustee submits a request to the servicer. However, if the borrower is also unemployed, the servicer must evaluate the borrower for UP, subject to any required bankruptcy court approvals, before evaluating the borrower for HAMP.
Borrowers Discharged from Chapter 7 Bankruptcy–Borrowers who have received a Chapter 7 bankruptcy discharge in a case involving the first lien mortgage who did not reaffirm the mortgage debt under applicable law are eligible for HAMP.
First Lien Home Equity Loans and Lines of Credit–Servicers must consider for modification all first lien home equity loans (HELs) and home equity lines of credit (HELOCs) that meet the basic HAMP eligibility criteria so long as the servicer has the:
- Capability within its servicing system and/or mortgage file to clearly identify the loan as a first lien; and
- Ability to establish an escrow for the loan as required by this Handbook.
- Servicers that have servicing systems that do not provide the required functionality are strongly encouraged to complete system enhancements that will allow modification of first lien HELs and HELOCs. Any modification of a first lien HELOC must result in a modified loan that is a fixed rate, fully amortizing loan that does not permit the borrower to draw any further amounts from the line of credit.
Federally Declared Disaster (FDD) Relief–Borrowers not able to make monthly mortgage payments due to a FDD who are (1) in the process of being evaluated for a TPP; (2) in a TPP; or (3) in a permanent modification should be considered for an FDD forbearance plan in accordance with industry practice and investor guidelines. Servicers should, in accordance with investor guidelines, offer a minimum of three months of forbearance to a borrower with a loan that is eligible for HAMP who requests forbearance as a result of an FDD and meets the following minimum eligibility criteria:
- The borrower suffered a hardship, such as a loss of employment, reduction in income or increase in expenses, or has been displaced from his or her home and cannot make the monthly mortgage payments as a result of an FDD.
- The location of either (i) the property securing the loan; or (ii) the borrower’s principal place of business or employment is located in an area designated by the Federal Emergency Management Agency (FEMA)
Loan-to-value (LTV) Ratio–Servicers may not refuse to evaluate an otherwise eligible borrower based on the LTV ratio of the mortgage loan except to the extent it impacts the NPV evaluation or the principal forbearance limit.
Failure to file Tax Return–A borrower is eligible for HAMP even if the borrower did not file a tax return, as long as the borrower documents the reason for not filing. The servicer must review and approve the borrower’s rationale. A borrower is not eligible for HAMP if the borrower was required to file a tax return but failed to do so.
What HAMP Get You—A Waterfall Servicers must modify mortgage loans in a stated order of succession (waterfall) to reduce the homeowner’s monthly payment to 31 percent of his or her gross monthly income. If the servicer cannot reduce the monthly payment to 31 percent, then the modification is ineligible for HAMP participation.
Step 1–Capitalization. Servicer will capitalize all amounts current in arrears including accrued interest, past-due escrow amounts, and other costs and expenses incurred in the ordinary performance of servicing obligations and covered by the security instrument (i.e. foreclosure fees and third party costs). Administrative expenses including modification recording and title fees, late fees, and junior lienholder subordination fees (if applicable). A prior forbearance amount may be included in accordance with applicable laws. Homeowners may choose to pay these amount before entering the trial period.
Step 2–Interest Rate Reduction. Next, the servicer reduces the current interest in increments of .125 percent to reach the 31 percent payment target, but no lower than a final rate of 2 percent. The starting interest rate for an adjustable-rate mortgage is the current rate or the rate at the nearest reset, within 120 days. If the resulting rate is below the Interest Rate Cap, then it becomes the modified rate for the first five years. It will then increase in annual increments of 1 percent per year until it reaches the Interest Cap Rate, where it will remain fixed for the remaining term.
Step 3–Term Extension. The servicer can then extend the term of the loan and amortize the mortgage by up to 40 years from the date of its origination. If the current loan term before modification exceeds 40 years, then the servicer will skip the term extension step, and proceed to the principal forbearance step.
Step 4–Principal Forbearance. If the combination of prior steps fails to reach the 31 percent target, then the servicer will provide principal forbearance in the amount necessary under HAMP. The amount of forbearance becomes a non-interest bearing non-amortizing balloon payment due upon sale of the underlying property, payoff of the interest bearing unpaid balance, or upon maturity of the loan.
Teir 2 Loan Modifications In 2014, HAMP expanded under several GSE participants to include a tier 2 program where previous declines and higher income individuals could apply.
References: http://www.mortgagenewsdaily.com/01282010_hamp_guidelines_updated_to_improve_loan_modification_conversion_rate http://www.bloomberg.com/news/2011-12-21/mortgage-redefaults-fall-in-third-quarter-after-larger-payment-reductions.html http://www.mortgagenewsdaily.com/03152011_hamp_termination.asp http://www.housingpredictor.com/2011/underwater-refinancing-program.html https://www.hmpadmin.com/portal/programs/up.jsp