Loan Modifications Are Going To Be Made Easier

Lenders have been very inefficient with handling paperwork. Borrowers report that lenders ask for paperwork repeatedly, with lost or missing papers being the reason for modification confusion, and subsequent modification denials.

In addition, there have been issues with one arm of a lender not knowing what the other arm is doing. There have been far too many stories of “modification in process” notices from the loss mitigation department, while “notice of default” filed notices from the foreclosure department for the same borrower.

The big lenders, such as Wells Fargo, Bank of America, JP Morgan Chase, are all reporting that while they have been a bit slow in getting their acts together, they are finally getting more organized and are now successfully getting loans modified.

The big problem now is that these “trial modifications” are not being converted to permanent modifications because borrowers are unaware that they must send in more paperwork, during the trial period, in order to have the trial made permanent. Currently only approximately 17,000 trial loan modifications have been made permanent

Laurie Maggiano, policy director at the U.S. Treasury Department’s Office of Homeownership Protection, said the government is introducing a new, streamlined application with just two documents to be signed, acknowledging the original paperwork was onerous.

Speaking at a session of the conference in San Diego, Maggiano said the government also intends to have the Internal Revenue Service use its formidable computer system to process these applications and get a "yes" or "no" answer back to servicers in two days.

For those home owners who are already in the “trial” period, they will be given an additional two months to complete the paperwork required for the permanent approval.

Nevertheless, there is still the bigger issue here that home owners who need a modification because of loss of employment are not being helped by the HAMP (Home Affordable Modification Program) program, because it was not designed for unemployed borrowers.

HAMP was designed to help borrowers with sub-prime mortgages where mortgage rates were being adjusted up due to the short term nature of the loans. But the bigger issue now is unemployment which is causing a flood of foreclosures for those who have lost their jobs and do not qualify for a HAMP trial modification.

This new flood of foreclosures is causing housing values to continue to fall, which in turn is leading to a new class of foreclosures, called “strategic defaulters.” Strategic defaulters are those who have good credit and enough income to pay the mortgages, but are walking away from their houses because they no longer want to pay a mortgage on a house they can buy for half the price in the same neighborhood.

Then there are the pay option ARM loans which are starting to re-set. These were the loans with the low (as low as 1%) teaser rates which were deferring principal from the first payment. These loans were very popular for qualifying borrowers for higher priced homes than they could have otherwise purchased, and for investors who wanted low payments so rents could paper out for them.

Now as these loans are re-setting to conforming rates, these borrowers have increased principal balances due to the deferred principal, coupled with falling property values. It is anticipated that we could see an additional 4.9 million new foreclosures in 2010 just on this type of loan alone.

The administration is scrambling to find ways to handle all the issues they are facing regarding loan modifications.

Two of the options that are being considered are principal forgiveness. Currently only 5 of the loans modified under the HAMP program have forgiven any principal. The other option that is gaining some steam is payment forbearance, which is being urged by the FDIC.

Stay tuned. This problem is not going away, but administration officials are aware of all the shortcomings of all the programs out there, and are working as quickly as possible to find solutions. The good news is that , according to Tim Geithner, US Treasury Secretary, the rate of loan modifications has now bypassed the rate of new foreclosures.

Written by Shelby Bateson