What’s Going On In the World of Mortgage Loan Modifications?

If you’ve been following the news lately, you probably know that there are currently two prominent stories circulating in relation to loan modifications. One is that some lawmakers are very disappointed with current loan modification programs and hope to end them. The other is that several modification options are being proposed as a way to pay a $20 billion civil settlement mortgage servicers owe.

With so much going on in the world of loan modifications, there’s plenty of information to explore. So let’s take a look at both of these current issues and how they may affect your own mortgage situation.

Lawmakers Hope to End Loan Modification Programs

Some lawmakers have criticized the large number of loan mod programs in existence, stating that most have been unsuccessful. There’s no doubt that plenty exist, especially for troubled homeowners with underwater mortgages due to lowered home values. Here is a list of some that have formed over the years:

• HOPE for Homeowners Program: The HOPE FHA program was designed to help those with underwater mortgages by having their principal amounts written down to 90 percent of their home’s newly appraised value. This program is currently scheduled to end on Sept. 20, 2011.
• Home Affordable Refinance Program (HARP): This program was created to help 4 to 5 million Fannie Mae and Freddie Mac mortgage holders secure new mortgages with lower rates and more stable term options, despite the decline in their home values. This program was scheduled to expire June 2010 but was extended to June 30, 2012.
• Home Affordable Modification Program (HAMP): HAMP allows homeowners owing less than $729,750 on their first mortgage obtained before Jan. 1, 2009 to acquire a newly-modified mortgage loan. A loan modification requirement, however, is that the payment on the first mortgage must be more than 31 percent of the homeowner’s current gross income and they can’t afford the payment due to a financial hardship like job loss or medical payments.
• Neighborhood Stabilization Program (NSP): This HUD program was authorized by Title III of the Housing and Economic Recovery Act (HERA) of 2008 to stabilize communities that have foreclosed or abandoned homes. Program funds offered neighborhoods money to purchase and redevelop houses then offer home loans to low- and moderate-income people.
• FHA Short Refinance Program: The Short Refinance Program allows for non-FHA borrowers to refinance into an FHA-insured mortgage loan worth no more than 97.75 percent of their home’s value.
• Emergency Homeowners Loan Program: This loan program began in Aug. 2010 and offers up to a $50,000 no-interest loan to homeowners who are unemployed and struggling to pay their mortgages. The assistance lasts for up to two years and offers repayment forgiveness to those who remain in their homes for up to five years.

The main reason why lawmakers have criticized the programs is because they say banks don’t want to offer these options to borrowers. To remedy the issue, lawmakers have sought to end HAMP, the NSP, Emergency Homeowners Loan Program and FHA Short Refinance Program. However, some argue that this action could leave many homeowners with no modification options.

Mortgage Servicers Scandal and Civil Settlement

As lawmakers try to figure out how to help troubled homeowners, mortgage servicers have had their own problems.

In Oct. 2010, a new bill known as the Interstate Recognition of Notarizations Act passed in Congress, which would have required courts to recognize all notarizations of documents filed by big, out-of-state companies. If signed into law, the act would have made it difficult for anyone to challenge the validity of any documents, including those that were “robo-signed” (electronically stamped en masse by computers).

This bill brought to light the issue that mortgage servicers were robo-signing foreclosure documents without following proper procedures. In order to get a grip on the issue, a foreclosure freeze was suggested by the Obama administration for major servicers like Bank of America, GMAC and JPMorgan Chase.

During the freeze, lawmakers determined that many homeowners were likely to lose their homes through unlawful actions on the part of mortgage servicers. To avoid problems associated with mismanaging millions of mortgages, servicers agreed to pay $20 billion in settlement fees.

Many sectors of the government, including the Obama administration, the Department of Justice, state attorneys-general and the Treasury Department have their own ideas on how to handle the settlement. The good news is that all ideas point to giving homeowners another chance to modify their home loans.

Servicers to Provide Loan Modifications in Settlement

Now that lawmakers are looking for ways to develop a cohesive loan modification effort–and mortgage servicers need a way to pay their debt–it’s possible that the $20 billion settlement amount will be used to help homeowners modify their mortgage loans.

A couple of settlement/modification ideas have already been laid on the table:

• Modification with principal reduction: In March, Obama proposed that servicers settle their debt by reducing the principal amounts borrowers owe. No new modification program would be formed. Instead, servicers would be responsible for setting up their own options for borrowers.
• Cash for Keys program: The FDIC proposed its own option known as the Cash for Keys program. Mortgage servicers would issue homeowners $21,000 in cash ($1,000 for financial advice and $20,000 for a new home down payment) in exchange for the keys to their homes, which must be left in good condition to avoid negative consequences.

In addition, Wells Fargo has agreed to offer $2 billion in modifications and another $32 million in restitution to borrowers who have already lost their homes to foreclosure. And JPMorgan Chase has Chase Homeownership Centers in numerous cities to help borrowers stay in their homes.

What If I Need to Modify My Loan Now?

If you are interested in talking to your bank about modifying your loan and are worried that none of the options currently available can help you, consider the following:

• Get a loan modification attorney: Talking to a loan modification attorney is sometimes recommended for those who have already been turned down for a modification but still want help. Lawyers often help you reduce your interest rate and lower your mortgage payments while ensuring your lender hasn’t violated the Real Estate Settlement Procedures Act (RESPA) or the Truth in Lending Act (TILA).
• Negotiate your own modification: If you want to negotiate on your own but don’t feel confident in your abilities, consider reading books like Loan Modification for Dummies (yes, it’s a real book). Also, you might use a loan modification calculator to help with the process.

There is so much going on in the world of loan modifications that it’s hard to keep up. But if you are looking to modify, it’s good to know that there are options on the horizon that may help you meet your goal.