Attorney specializing in mortgage loan modification, dedicated to saving properties facing mortgage default.

Mortgage modifications seek to prevent foreclosure by absorbing mortgage arrears, lowering monthly payments, and improving mortgage terms.

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What is a “Mortgage Loan Modification”?

A permanent change to the conditions of your initial mortgage loan is called a mortgage loan modification. Its goal is to lessen the strain of your mortgage terms or monthly payments, which frequently results in a lower monthly payment. Changes to a home loan modification typically include modifications to the interest rate, length of the loan, and possibility of deferring or forgiving past-due payments. After your loan modification is approved, you will have to complete a trial period plan. During this time, you will need to show that you can manage the new modified payment by making on-time payments every month for a few months.

For additional information on what is a “Mortgage Loan Modification” please visit: https://www.consumerfinance.gov/ask-cfpb/what-is-a-mortgage-loan-modification-en-269/#:~:text=A%20mortgage%20loan%20modification%20is,a%20type%20of%20loss%20mitigation.&text=Modifications%20may%20involve%20extending%20the,or%20reducing%20your%20principal%20balance.

History of Mortgage Loan Modifications

Negotiations with mortgage lenders was always an option for homeowners having difficulty with their mortgage. Mortgage loan modifications were always one of the options for borrowers in arrears but until the recession of 2008-2014, this was not a popular option, that was routinely suggested and frequently offered by lenders. Therefore, it was not  a regular option for borrowers in arrears until the severity of the last recession, which was mortgage loan driven, and caused the Federal government and lenders to offer Mortgage Loan Modifications as regular options to be considered in most mortgage loan foreclosures. In early 2009 due to what was clearly a foreclosure crisis, the federal government enacted the Making Homes Affordable Program (“HAMP”) and other related programs to encourage private mortgage lenders to modify the mortgage loans of qualified homeowners undergoing hardship with their mortgage payments. Most mortgage lenders incorporated the HAMP program and reviewed a loan for a modification under HAMP criteria. Also, because of political pressure on banks and mortgage lenders,  and because the HAMP programs were complicated by government administrative requirements and oversight, many banks had instituted their own “in-house”, non-HAMP mortgage modification programs, in addition or instead of HAMP.

The goal of Mortgage Loan Modifications was to avoid foreclosure by restructuring the mortgage to combine it with the arrears and allow for an affordable, resumed monthly payment. The method of accomplishing this goal was to combine the principal of a loan with the arrears on the loan in order to absorb the missed payment arrears and join them with the principal resulting in a larger loan balance with better terms:  a lower interest rate,  a longer loan duration and with possibly some arrears deferred till the end of the loan. Under legislation passed during February of 2009, the Federal government had enacted a voluntary program to help homeowners facing “hardship” in paying their mortgage: The Home Affordable Modification Program (“HAMP”), was enacted to encourage mortgage lenders to modify mortgages for the “at risk” homeowner. The HAMP program expired on December 31, 2016, but it inspired lenders to expand their similar “in-house” modification programs which were more within their control and less subject to government regulation.

Under HAMP and the “in-house” Modification programs the arrears on a mortgage would be combined with the remaining principal balance, with the interest reduced and the loan term extended, effectively creating a larger loan where the monthly payments are less. Because the HAMP program had expired on December 31, 2016, and has has been largely replaced by the system of non-HAMP private bank modifications that almost every major lending institution offers, borrowers no longer need to first be screened for a potential HAMP modification and only if they did not qualify for HAMP would the in-house modification be considered. Now the “in-house” options offered by the particular lender are the only modification options available.

The HAMP program expired at the end of December 2016, but it inspired lenders to expand their similar “in-house” modification programs which were more within their control and less subject to government regulation. Under HAMP and the “in-house” Modification programs the arrears on a mortgage would be combined with the remaining principal balance, with the interest reduced and the loan term extended, effectively creating a larger loan where the monthly payments are less. Because the HAMP program had expired at the end of 2016, and has has been largely replaced by the system of non-HAMP private bank modifications that almost every major lending institution offers, borrowers no longer need to first be screened for a potential HAMP modification and only if they did not qualify for HAMP would the in-house modification be considered. Now the “in-house” options offered by the particular lender are the only modification options available.

While the HAMP program provided advantages of government oversight and financial subsidies, and while it started at low rates of interest 2-3% with stepped up interest over time, they where mired in more regulations and paperwork and layers of administration. In many ways the present non-HAMP, private “in-house” modifications are more direct and quicker in some instances, but lack the federal government over sight that was helpful in some cases with the HAMP process. However, just as the HAMP program was ended at the end of 2016, the bankruptcy courts were seeing a surge of Chapter 13 and 11 cases featuring “loss mitigation” plans as central to their reorganizations; these “loss mitigation” bankruptcy cases provided judicial oversight to the modification process. Given the new circumstances due to the Covid-19 economic downturn, many more homeowners are expected to fall behind with their mortgages, and new, additional government and private efforts may be needed to address a potential new foreclosure crisis that may need new solutions.

Basic Requirements to Qualify for a Mortgage Modification

The basic requirements to qualify for most “in-house’ modifications is similar to the qualification for the former HAMP modifications and are as follows:
• The modification applicant needs to be liable for the mortgage lien and preferably an owner of the real property;
• The mortgage loan must be in default or in imminent default; and
• The loan default must be due to a hardship faced by the borrowers but the borrower’s finances need to be able to now sustain a payment level that is usually only slight less than the original monthly payment.

How Mortgage Loan Modifications May Help a Homeowner

The methods by which lenders may help homeowners under “in-house” modifications are as follows:

Mortgage Arrears Absorbed into Principal – Mortgage arrears (including escrow arrears and the costs/fees from any legal proceedings if applicable) are absorbed into the principal balance creating a new loan that is larger in its new principal amount than the original loan, but is no longer in arrears. The New Modified Loan Has Better Terms – The Modification usually has better terms as to interest (which is lowered) and the duration of the loan term (which is extended), resulting in a monthly payment that is usually slightly less than what the borrower paid prior to their default.;
Loan Duration – Lenders may extend the loan term up to a term of 40 years; and/or
Arrears Deferment – Lenders may provide for deferment of some loan arrears in the form of a large balloon payment at the end of the loan term.

Most institutional lenders, offer several “in-house”programs, which are often modeled after the former HAMP program, but are less regulated than HAMP.  Because navigating through these programs and dealing with the lenders’ bureaucracy can be difficult, successful modifications usually involve the client retaining a qualified professional, working on their behalf, and a concerted and a persistent campaign to urge the lender to modify a particular mortgage loan.

Different Forums and Modes of Applying For a Mortgage Loan Modification 

There are different forums that can be used to modify a mortgage as follows:

Direct Modification Negotiations with Lender  – Borrowers can deal directly with the lender. By dealing directly with a lender, you can resolve the delinquency immediately and avoid foreclosure. This process must be started immediately to avoid your lender from hiring an attorney to start a state action against you and repossess the collateral property. 

State Court Foreclosure Settlement Conferences – Modifications and can be reviewed during the beginning stages of a foreclosure litigation (at foreclosure settlement conferences) where the Supreme Court Judge assigned to a case or their clerk reviews with the party’s attorneys progress toward settlement and/or modification and encourages both sides to engage in good faith negotiations. 

Bankruptcy “Loss Mitigation” Hearings –  The benefit of requesting a loan modification through a bankruptcy chapter 13 or 11 case is that both sides need to regularly at “loss mitigation” hearings report to the bankruptcy court progress in seeking a modification and/or other settlement. Lenders therefore have less of an ability to act in bad faith because of this close supervision. The Bankruptcy Judge assigned to the case will give both the lender and the borrower a timeline to produce all documentation. The lender is usually on its best behavior and  are less likely to be arbitrary or to make a mistake in fear of being sanctioned by the judge. 

Streamline Modifications – These modifications are offered without an application by the Borrower and are simply the Lender reaching out on its own with a modification offer.

Special Mortgage Loan Modification Programs – Some lenders, like government backed mortgage loans, such as FHA, have special applications and requirements and criteria. For additional information on FHA modifications you can visit https://www.hud.gov/sites/documents/23699_PANEL_II-HASS.PDF Further information about FHA loans can be found at the HUD website https://www.hud.gov/program_offices/housing/sfh/nsc/lossmit

Who to Apply To?

An application can be submitted in multiple ways.
A borrower can apply directly with the lender and have discussions directly with the lender. A borrower would need to contact the lender and request to get the application needed for this process. 

A borrower can also submit an application through the lender’s attorney should the case be in front of a judge and during settlement conferences. A borrower would need to contact the attorney handling the foreclosure. The borrower’s attorney handling the foreclosure would need to request for the application needed during the settlement conference part.

Should a borrower be in a bankruptcy, the modification would be submitted through the lender’s attorney handling the bankruptcy. This attorney is different from the foreclosure attorney. The borrower’s attorney handling the bankruptcy would need to request for the application needed after requesting for loss mitigation through the case.

Preparation for Submitting an Application for a Mortgage Modification 

Although the forum may be different, there are specific requirements that all lenders use to qualify a borrower for a home loan modification. Although most lenders have their own internal policies, they all have similar specific criteria in terms of applications, proof of income, proof of expenses, proof of existing debt, and other documentation. There is a need to prepare the “application package” in a manner where it is complete, free of missing/defective documents or information and is optimized by a modification professional in order to maximize the probability of acceptance. Important in assessing how to present the clients application is a strategy which takes into account many criteria used by lenders to evaluate a modification application application including:

A. Housing Ratio (HR) – Borrowers must fall between a very specific Housing Ratio (HR) The Housing Ratio is the percentage of a borrowers monthly gross income goes towards the monthly contractual payment. 

B. Debt to Income Ratio (DTI) – Lenders also calculate a borrowers Debt-To-Income (DTI) to qualify for assistance. The DTI is the percentage of a borrowers monthly gross income goes towards all a borrower’s monthly expenses.  

C.  Loan tor Value Ratio (LVR) – Lenders will also calculate the Loan-to-Value (LTV) An LTV ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage. For example, if you buy a home appraised at $100,000 for its appraised value, and make a $10,000 down payment, you will borrow $90,000.

D. Loan History – Lenders will also take the history of the loan into consideration. For example, most loans must have a minimum of 12 consecutive contractual payments to qualify for home retention after any alteration such as a modification or refinance and after origination. 

E. Number of Modifications – Lenders also have a cap on the number of modifications allowed per the life of the loan. Should a borrower exceed the cap, modifications will not be allowed. 

Initial Review of the Modification Application by the Lender

To be reviewed by the lender an application first of all is looked at for past history and if it was recently denied for a reason that is considered to be a “hard denial”, the application may not make it to a review. Second, the file is assessed for whether all required forms, documents and information were submitted since it needs to be deemed “complete” in order to be reviewed. Third, the file is given for review where the various factors are evaluated according to each lender’s separate criteria.

Some of these criteria, result in different decisions by lenders. For example if a borrower is significantly above the allowable HR or DTI percentages, a lender may decide to deny an application because of lack of hardship, or in the eyes of the bank, the borrower may have defaulted intentionally. To overcome such a denial, proof of hardship must be provided. Depending on the reason for default, documentation to overcome a hardship denial may vary. However, one example would be loss of income. If a borrower claims that the reason for default is loss of employment, a borrower would half to provide either a termination letter from their employer, unemployment award letter or tax returns reflecting the loss of income before and after the initial hardship. 

On the other hand, borrowers who fall below the allowable HR or DTI ratios, may be denied due to insufficient income or excessive obligations. Should a borrower have excessive obligations, a bankruptcy chapter 7 may be beneficial to discharge their unsecured debt. By getting rid of unsecured debt, the borrower may then qualify for a modification as the only secured debt they may have would be the mortgage.

In addition, if a borrower fails to show it can cure the arrears within the acceptable period of the modification loan (usually 30-40 years), an opportunity to modify will be denied. The reason for the denial would be due to the lender not being able to create an affordable monthly mortgage payment in that the modified payment would be higher than the original mortgage payment that the borrower already defaulted on. If the modified payment will be higher than the contractual payment, many Lenders will not allow it; a contractual payment to increase by 10% -15% (monthly income will not be a factor in the decision) could be cause for denial. In order to overcome such a denial, a large down payment must be submitted with the application in efforts to lower the amount the will be capitalized back into the mortgage or deferred.