Loan Modification
Is 2012 Your Last Chance For Short Sale Or Loan Modification That Involves Principal Reduction?
Posted by: Kenny Tan
January 28, 2012
For many homeowners, getting their principal reduced on their mortgage on an "upside down" home makes a lot of sense both for the homeowner and lender. You would think that. However, for years lenders for whatever reasons are very resistant to giving principal reduction to borrowers as a way to make the loan modification process work for the borrowers.
This seems obvious. Yet lenders had approved less than 5% of the applications for loan modification to included a principal reduction. Is it the disdain for borrowers who just refuse to make their mortgage payments despite having the ability to do so because they don't want to throw good money after bad and having entered into a contract to make these payments? Or is there somehting going on between the servicers and the investors that we don't know about? I'm not sure why.
Lenders Are Doing A Much Better Job With Short Sales And Loan Modifications
But change is here - at least we're some signs of it being here. This is in part due to the robo-signing debacle in October 2010 which prompted a settlement between the 50 attorneys general and the 5 major banks which puts pressure on them to work with borrowers to avoid foreclosure and in part the servicers and lenders own realization that at the end of the day, it makes business sense to allow more short sales to folks who just can't seem to qualify for any kind of loan modification programs and approve more loan modifications to folks who can - even if it means reducing a portion of the principal.
Tax Relief Measure Will Expire In 2012
2012 has arrived. Is 2012 the last chance for folks who desperately need to have their loans modified in order to avoid foreclosure? I can't say it is. But it seems banks are picking up their pace foreclosing people's homes in the last quarter.
The Obama's HAMP program is due to expire on December 31 2012. It's unclear if it will be extended. Though the program has been a big disappointment in meeting its goal of helping the number of people it was intended to, to some extent it did its job and it is my view that it is better to have it than not. However, the Republicans have threatened to pull the plug on it early. So for now it seems unlikely that it will be extended.
So will the temporary tax relief programs for short sales and principal reduction on loan modification. The federal and state governments passed law to temporarily allow borrowers to have their mortgage debt reduced and not have it treated as a discharge of debt which is taxable under the tax code before these tax relief measures were passed to encourage short sales and loan modifications that include forgiven debt .
After 2012, borrowers that want to do short sales or loan modifications that involve forgiven debt would be wary of tax consequences of these transactions and should consult their accountants before they proceed.
So while we're seeing an increase in lenders approving short sales to borrowers, we may be seeing less borrowers wanting to do short sales due to tax considerations- unless the governments decide to extend the benefits under the current tax relief measures.
So for many borrowers who desperately need to avoid foreclosures, 2012 may be their last chance.
Accepting Unsolicited Loan Modification Can Affect Your Credit Report or May Have Tax Implications? Ask Before You Accept
Posted by: Kenny Tan
July 31, 2011
Banks are making more and more unsolicited loan modifications lately.
But they are not doing this out of generosity. In most cases, the borrowers to whom they've offered unsolicited loan modifications are people with option ARMs. Banks are concerned about holding on to too many "toxic" loans and finally more willing to convert these option ARMs into fixed rate loans. Banks consider the option ARMS "toxic" loans. Unless these loans are modified, they are very likely to end up in their REO department.
Chase is one such bank.
Before you decide to accept the banks' generous offers, make sure you ask them questions about the effect of the loan modification onyour credit scores and tax implications after your loans are modified.
Check out this blog on bankrate.com that explains how in some cases.
Essentially how the banks report the loan modifications may in some cases reduce your credit rating or cause you to be denied a car loan or a lease due to the reporting. (see my blog on a woman who said to the bank "Please don't modify my loan" but they did it anyway).
How the bank reports the loan modification may mean a world of difference. For instance, if the bank does not reduce the principal balance or forgive any past owed installments, the report may show as an "increase in principal balance" on that account which tends to reduce your credit rating.
Under the current tax exemption law which is expected to sunset in 2012, any forgiveness in debt such as the case of principal reduction gets reported as a discharge of debt which is the same thing as an income which gets reported on 1099. Also, as the tax exemption law only applies to principal residence, if the mortgage pertains to a rental property for instance, there's no tax exemption regardless of the year in which the loan modification is obtained.
Ironic But Real: Chase Modified Her Loan Even After She Repeatedly Told Them NOT TO
Posted by: Kenny Tan
July 12, 2011
giant insurance company from collapsing with bailouts. Taxpayers bailed out the big financial institutions during this tough times with TARP money.
Lately we've read news articles on lawsuits filed against lenders for not allowing permanent loan modification after homeowners diligently paid the installments during the trial period under HAMP. Recently a U.S. District Court denied Bank of America's motion to dismiss a class action filed by homeowners in a class action in Massachusetts for that reason.
As every one knows, the HAMP program has helped significantly less than the 3 to 4 million people that it was intended to.
The major financial institutions have done some strange and interesting things with the HAMP program. Among such things are giving loan modifications to homeowners who didn't ask for one.
That's good thing, right? Well, not always. In some cases, yes but in others, no.
In the case of an Oregon woman whose property was "underwater" but she's not in default on her mortgage, she was rewarded with what the banks call preemptive loan modification. Just out of the blue, Chase wrote her a letter telling her that she qualified for loan modification which cut her principal in half. But there's anything but noble about Chase's gesture. They did because it's actually self-benefiting. Big banks like Chase and Bank of America are beginning to realize that it is more beneficial to them financially to modify certain high-risk loans like the option pay adjustable rate mortgage which was very popular before the market collapsed - than foreclose on it.
How ironic is this? A few years ago, lenders were telling borrowers that they couldn't qualify for loan modifications as long as they're not in default. Back then borrowers didn't get rewarded for staying current on their loans. Some even intentionally default on their loans so they could get their loans modified. Finally people who pay their mortgage on time are getting rewarded. What took them so long?
Here's a bizarre but true and outrageous case. (I've obtained her written consent to blog about it.) This is what she told me about her story.
Unlike that borrower in Florida, she didn't want her loan modified!
The borrower is a female African-American who lives in California. She got married in Nevada in 2006 and she and her husband bought a home in Henderson, Nevada. They took out a loan with Chase around 2006. A couple of years into their marriage, their relationship became estranged and they became separated.
They fell behind on their mortgage while they're separated. Chase commenced foreclosure on the Henderson property. She had moved to California with her toddler child while her husband stayed behind in that house in Henderson.
Her husband decided to apply for loan modification under HAMP while they're separated but still legally married. Unlike her husband, she didn't want the loan modified and would rather let the Henderson property be foreclosed on.
Over her objections, Chase went ahead and processed the loan modification application. During the process, it was clear to her husband - and to Chase as well - from the beginning without her signatures, the application could not be approved.
She has made several phone calls to Chase asking them not to approve the loan modification and instead let the property be foreclosed. But Chase ignored her requests. She's made numerous calls to Chase to tell them she would not sign anything for loan modification.
One thing that was very frustrating to her during the entire process the indifference in their attitude toward her. Once she was called "just a wife". She felt like a nobody. No one at Chase would heed her warning that her husband submitted false pay stubs - which came from his own business. But her warnings fell on deaf ears at Chase.
Her estranged husband continued to text her to get her to sign the application which she repeatedly told him she would not do.
Later she learned that her signatures were forged not only on the application for loan modification but also the loan documents. In 2009 she wrote a couple of letters to Chase to tell them that her signatures were forged on the application and to not approve the loan modification but they ignored her.
Eventually, Chase approved he loan modification and reported to credit reporting agencies an increase in her mortgage balance. She wrote to the credit reporting agency to investigate the false debt but Chase continued to leave the false reporting uncorrected for 7 months.
Meanwhile, she had been denied credit when she applied for a car loan, unable to get an apartment that she wanted, and other credit applications. Reason: Increase in mortgage balance.
They left her no choice but to file a complaint with HUD which asked her to contact the OCC (Office of Comptroller of Currency). That got Chase's attention. In their letter to the OCC, Chase continued to pretend like it didn't know about the forged signatures and the fact that she didn't want the loan modification. Chase is taking the position that the false reporting has caused her no harm. Meanwhile she has to live with the inconvenience of having to explain to her potential creditors about why the debt does not belong to her. Even if she remarries, she would have a hard time getting a loan because of that mortgage which now does not benefit her except her estranged husband who still lives on the Henderson property. Every month she worries if he's going to be late on his payment which is going to affect her credit.
Chase doesn't seem to get it! You would think that after they've paid $25 million to servicemen for wrongfully foreclosing on their homes while they're on active duty that Chase had learned a valuable lesson. It doesn't appear that they have.
Don't Shoot In The Dark. Know Your NPV Before You Submit Your Loan Modification Application Under HAMP
Posted by: Kenny Tan
June 05, 2011
Net Present Value or NPV for short is presumably what lenders base on for approval or disapproval of your application for loan modification under HAMP. Until two weeks ago, there's no way to figure out where you would stand on the NPV before you submit your application for HAMP to the loan servicers. So you're sort of shooting in the dark.
But now, the treasury department has created a website that allows consumers or their counselors to at least have some idea where they stand on the NPV. You should keep in mind that lenders are not bound by the same criteria adopted by the Treasury Department but may implement their own. So you can't really be sure but you can have some idea if your NPV is at least good enough under the Treasury Department's criteria.
That website is called checkmynpv.com.
There are several parameters about the loan and property information that you have to submit online. It is rather user friendly.
Information that relates to your loan that the program asks for includes the date of origination, the term, whether the interest rate is fixed or variable, current interest rate, if adjustable, the reset date and reset rate, principal balance, current outstanding balance etc,
Information that relates to your property includes its zip code and current value.
Of the information, the one that may vary that you have control of in terms of its source is the value of the property. If one source gives you more favorable NPV in terms of the property value, you might want to consider using that source.
So know your NPV before you submit your application for loan modification. Don't shoot in the dark.
Is There Anything You Can Do To Improve Your Chances Of Getting Approved For HAMP?
Posted by: Kenny Tan
May 21, 2011
Nationally there are 3.7 million homeowners that are 90 days or more behind on their mortgage payments. Congress has voted to kill the foreclosure prevention programs some of which were intended to save homes from foreclosures through federally-funded loan modification programs such as the HAMP (Home Affordable Modification Program). HAMP is expected to be eliminated by 2012 if not sooner.
Under HAMP, homeowners may be able to extend the term of their mortgages up to 40 years at a very low interest rate of 2% to start for the first year, increasing incrementally 1% per year until it reaches a maximum of 5% and staying at that rate for the remainder of the term of the loan. Getting approval for HAMP is not automatic even if you're eligible. That is because servicers have certain discretion in the decision-making process even under HAMP and not servicers' own loan modification programs.
In deciding whether to modify a loan, servicers have the investors'-not the borrowers- best interests in mind. If it is more financially advantageous for the investors to modify loans than to foreclose, servicers are more likely to approve the loan modifications than to foreclose on the homes.
Generally speaking servicers base their decisions on a parameter called Net Present Value (or more commonly known as NPV). The NPV is a conglomerate of a bunch of assigned values which get input into some computer models or spreadsheets. There's some level of secrecy in how the loan servicers develop their formulas and there is a lack of transparency in the determination process; though Fannie Mae has provided some guidelines on how the NPV should be formulated, servicers are not required to completely follow them.
What Exactly Does The NPV Measure?
NPVs allow servicers to gauge the cash flows for the investors and help the servicers determine whether or not it makes sense financially, investment wise that is, to modify loans as opposed to foreclose on it. It boils down to which option gives the best rate of return for the investors. Again, let me emphasize that the borrowers' interest to stay in their homes is not the primary consideration, if a consideration at all.
Typically when a homeowner applies for HAMP, the servicer first determines the homeowner's elibility under the program. If the homeowner is eligible, the servicer will send package to the homeowner informing the homeowner that he's approved to participate in a trial modification, generally 3 months in duration, while the lender evaluates him for permanent modification. Servicer may still deny the homeowner permanent loan modification based on the NPV.
When a loan modification is denied, the servicer typically sends a letter to the homeowner telling him that it is denied based on the NPV.
In that letter, the servicer will provide the data input into the NPV model so the homeowner is able to see them.
The homeowner gets an opportunity to challenge the denial. To do so, the homeowner should review the data and compare them to the application to make sure the information that was provided by the homeowner such as gross income and monthly expenses have been accurately input into the computer. If there's an error that involves understating of gross income for instance, the detection of this error and the correction of it may make a difference in the determination of the NPV and ultimately the outcome of the HAMP application.
Even if you're not able to find any errors in the input values, don't give up. Re-evalute the information you'd submitted and see if there's anything in the original application that you could've changed to improve your NPV. Servicers often will allow you further opportunity to show them why you should have gotten a better NPV.
The determination of NPV is not entirely an objective process. There's a quite a bit of subjective elements to it. Many of the input values are not subject to much manipulation. But some are within your control. The hardship letter is a good example.
Write A Persuasive Hardship Letter
The hardship letter is a required item in your loan modification application packet.
Do not underestimate the importance of the hardship letter. Servicers read the hardship letters and assign values to them in determining the NPV.
Understanding what the servicers look for in the hardship letters may make a huge difference between approval or denial in your HAMP application.
Statistically about a third of the people peviously defaulted on their loans, got loan modifications, and re-defaulted. So re-default possibility is one reason why servicers may not approve you for HAMP even if you're eligible.
It's therefore important for you to convince servicers through your hardship letter that you're not a re-defaulting candidate should they approve your loan modification.
You need to demonstrate in your hardship letter that you're a responsible borrower who's having difficulty paying his mortgage because you had suffered some temporary financial setback but are now fully recovered financially but for the mortgage arrears and would like to be given an opportunity to get caught up.
Servicers don't want strategic defaulters (people who have the abilty to pay the mortgage but don't want to pay it because they've made a bad investment and their house is underwater) applying for loan modification even if the risk of re-default is low.
So the bottom line is there are two types of borrowers who servicers don't want to see applying for loan modification - the strategic defaulters and the re-defaulters.
