Crow's Guide to Mortgage Modification and Other Delinquency Solutions
So, you're a hardworking American who slugs through your 40 hour week, but no matter what you do the economy just keeps on raining on you. You lost your job or had drastic cuts to your income. You went through a messy divorce and now the other half of your income has suddenly gone *poof*. You've run yourself ragged draining your savings or going further into debt just to make your bills on time.
And you own a house. You own a house that is probably worth a hell of a lot less than it used to be. In fact, you may have already tried to sell your home and downsize, but there's no way you can get an offer that would pay off the bank. Perhaps you've now fallen behind on your mortgage and you've tried to "negotiate" a loan modification or anything to lower your payments.
Well, let me try to help a little. My name's Crow and I've worn a lot of hats in the last few years. I've been a "Housing Counselor", a "Foreclosure Prevention Specialist", a "Foreclosure Intervention Counselor", a "Negotiator", and "Legal Assistant". These are all the same job: I help people to work with the banks to obtain relief from mortgage delinquency. I've been doing this for three years, am HUD certified (all over the place) and I have developed, implemented and run two programs which were both adopted in large part as national "Best Practices". I currently work for one of the five major mortgage servicers as a regional representative who provides outreach and guidance to borrowers seeking assistance.
DISCLAIMER: The information contained in this post is for informational purposes only. I'm attempting to provide basic information to individuals who can barely get a word of explanation from big bad banks like Bank of America or Wells Fargo. One of the largest issues in this whole mess is that no one provides education to homeowners, and when you speak to a bank rep their level of understanding is usually only marginally better than your own. In addition, I want to be clear that this information is provided under the assumption that you're looking for relief from an economic hardship. This is not to be used as a means to lower your payment if you don't need it. In fact, if you don't need help, you're most likely not going to get anything.
Now, it is very, very important to remember that every mortgage servicer is different, and that this is an often quickly-changing field. I'll do my best to update this post, but be warned that information can sometimes go out of date very quickly and that just because you read it here doesn't mean that your bank even offers the program/option. We haven't even begun getting into investors yet, either.THIS IS PERHAPS THE MOST IMPORTANT PART OF THE ENTIRE POST: There are numerous non-profit, no-cost agencies out there who can assist. These range from nationally-spanning, large organizations to small neighborhood agencies. Please contact HUD to find an agency near you. Do it now, like, right now.http://www.hud.gov/offices/hsg/sfh/hcc/fc/index.cfmWhat's a Re-Modificationfinanceforbearance?
There are a number of different programs that a loan's servicer may employ in order to provide assistance to a homeowner. These options, together, are generally referred to as "Workouts". The process, itself, is often called a variation of "Loss Mitigation" or "Home Retention". While some are far more common than others, it's important to know exactly what a loan servicer is trying to do to help.Loan Modification
: The bread and butter of any loss mitigation program, a Loan Modification is when a mortgage's terms (interest rate, maturity date, principle balance and therefore payment amount) is changed without doing a full refinance. There are stand-alone agreements that "modify" the original loan documents and are also the most common and effective way of finding a "workout".Forbearance
: This is an option where the mortgage servicer will offer to provide temporary relief from an unaffordable payment through a short term agreement that "defers" a portion of the monthly payment making the payments more affordable for a set period of time (usually 3-6 months). These aren't too common anymore, as they work great for people who know they can go back to their old payment in a few months. In fact, I haven't seen one of these in almost a year.Refinance
: The classic is to simply get a new loan at those great interest rates we have now. Unfortunately, that's far from an option for most people due to poor credit or the home's value being less than the amount owed on the loan.Reinstatement
: This is what the banks what you to do. Fork over everything you owe (with penalties! because we all know that charging people money because they don't have money is a grand idea).
I know what you're thinking, "Woah, Crow! Servicer? Investor? Bank? What's going on here!"
Well, there are a lot of people with their hands in the pot, so I'll try to define a few terms/parties involved. Now, in short, when you take out a new mortgage wherever you borrow from will front the cash for the purchase. But, if you think about it, if they just fronted the cash and then waited to have it paid back month by month, they'd run out of money pretty quick. So, in a very complex transaction, the loan is then sold to investors. Investors are a great mystery in my world, and they will remain so. The investor then contracts with a servicing company (usually an arm of one of the big banks like Bank of America or Wells Fargo, etc.) to act as the middle-man. Servicers collect payments and send out letters and are there to answer questions or make demands. They used to be, essentially, big collections and payment processing centers. Now a lot of their work, which they were never prepared for, is helping to facilitate a workout between the homeowner and investor.What Is the Process?
If there's one piece of advice I can give that makes all the difference, it would be to quote Jerry Durham, Bank of America's VP of Loss Mitigation at an event I attended back in 2009: "Negotiation is a misnomer; there is no negotiation". What this means is that you, as a homeowner, have pretty much minimal say in whatever workout a servicer may offer you. As I like to remind my clients, the only thing that matters is red and green numbers numbers numbers. This is, when it comes down to it, a process that hinges on 1) document submission, and 2) communication. Every bank is different, but the actual process usually looks something like this:Know your own situation.
It can be immensely helpful to know where you, yourself, stand before speaking to a servicer about a loan modification. Without getting into mortgage calculations or other financial numbers, this means simply pegging down what your income and expenses are, to the best of your knowledge. These are numbers that will be used throughout the entire process, so being consistent is a good idea and will prevent delays.
First sit down and make a monthly budget. Now, this isn't a "everything I spend ever" budget, but a realistic budget that focuses on necessities. I'm not saying under-report yourself, but there are some things that help and others that do not. Generally, you'll want the following at a minimum:
* Credit debt/other debt
* Out-of-pocket insurance and medical costs
* Groceries/home supplies
* Child care
Next you'll want to get a firm handle on your monthly income. There are a few more common pay-schedules with simple formulas to calculate. In almost every case, a servicer will calculate income based off of both 1) your stated income, and 2) your Year-to-Date earnings. In every case, you'll be looking for both your gross income (before taxes) and your net (take home).
It has become increasingly an industry practice to use a borrower's Federal Tax Returns to confirm sources of income. When collecting income proof to be submitted with your workout package, take a moment to go through your most recent Tax Return and look for any sources of income you may miss. For example, line 16 on the 1040 concerns with pension and annuity income. Individuals frequently enough collect small amounts of income through these sources (including dividends, etc.) which must be proven. Save yourself the time and effort and provide these income proofs initially. This goes for anything on the Tax Returns such as K-1 income, 1099 or Schedule C. No matter how small, they'll want to see proof.
For a wage-earner, grab your latest paystub and take a look at the period-end date. You're going to want to find out exactly how far through the year you're at, so I'll work off an example:
John Homeowner is paid bi-weekly, but because he receives commission as a large part of his earnings his paychecks range from small to large. Some months he brings home the bacon, others he has to dip into the savings from previous months to get by. His paycheck from September 12th shows his YTD gross earnings as $32,814.
Now, this number shows payments through the 12th of September, so we have 8 full months of pay plus a partial portion of the month of September. Now, we need to find out exactly what portion of September is included, so we take the paydate of the 12th and divide that by the number of days in the month, 30, to get 0.4.
If you're still following, this means that the YTD gross income is for 8.4 months of the year (January to August is 8 months, plus 0.4 months of September). Now simply divide that YTD number by 8.4 to get $3,906. There's the monthly income.
As a note, often you're given a gross income year-to-date figure, but not one for net (take home) income. If that's the case, just divide your net income on a single paycheck by the gross to figure out your tax rate which can then be used to multiply by the monthly gross determined by the above method. Example: John shows a gross income of $6,102 on his most recent paycheck, and a net of $5,003. 5003 divided by 6102 equals ~0.82. That means that about 18% of John's paycheck goes toward deductions, and that his monthly gross of $3,906 multiplied by 0.82 equals a rough net income of $3,202.
Now, if you're contract or self-employed you'll need to put together at least a three month "profit and loss" statement and back it up by bank statements. eHow has a pretty simple explanation
, and every servicer wants things a little differently, so that's a good place to start.
When this is all said and done, the last thing you want to do is take a look at your budget's surplus/deficit. Quickly speaking, you'll want to avoid relative extremes. Showing a huge surplus won't help and neither will showing a huge deficit. Always remember that despite what flat-tax advocates might say, if you're making $2,000 a month smaller numbers will be extreme as opposed to someone making $10,000 a month. This generally scales to the size of the current mortgage payment.Call the servicer and get instructions for how to apply for a workout.
Pretty simple. Call your servicer and tell them you want to apply for a loan modification. Be careful about who you talk to. Avoid anyone in a "collections department" (actually, always avoid collections departments) and be certain to always ask what department you're working with. Most likely your servicer will go over your verbal information about income, expenses, liabilities, etc. and will then send out a package of documents you need to fill out and return. Just be certain you're speaking to someone who isn't in collections.
As a general note, the people you speak to will, inevitably, be call-center representatives with little to no training in actual mortgage finance (though sometimes they surprise you!). Take everything you're told with a grain of salt. I often, myself, call back after having a conversation to confirm with another representative what I was told by the previous. While I can smell something fishy, you may not be able to at first. Always err on the side of caution.
Lastly, you should keep a log of your conversations and communications. This is very important, as often you may get conflicting information or be told things that just don't make sense. It can be essential to keep a good narrative of the process for your own records.How Can I Qualify?
Most servicers aren't going to tell you anything substantial about how to qualify for a loan modification. In general there are three approaches to the process on the servicer-side. Remember that "verbal information" I spoke of above? in many cases a servicer will be able to input your information into a computer system and see if it spits out a "pre-approval" for a program. This is one of the reasons it's necessary to get your own calculations for income and expenses before speaking to the servicer (a specific example is Select Portfolio Servicing, one of my favorite servicers to work with, who can put together a preliminary plan the first time you call in!). Secondly, many servicers simply use the "send your documents and wait" approach, in which they collect your information and make their own calculations. Thirdly, many smaller servicers like credit unions and local banks often want you to just come in and sit down to see what they could do to assist you.
There are many specific programs out there, and knowing a touch about them can be a boon in the process. The most common program, and nearly always the first program a homeowner is reviewed for, is the Home Affordable Modification Program, or HAMP. This is the "Obama plan" that people talk about. It's really a simple process: They take your gross income and calculate 31%. They then work backwards from there to see if they can provide a new mortgage payment, including taxes, insurance and HoA/Condo fees, equal to the number. This takes a bit of financial judo to calculate, but knowing if your current payment is above or below that 31% is good information to have, as being under that 31% makes you simply ineligible for the program. I'll try to update this with more information later, but the program can be found at www.hmpadmin.org
Secondly, there are what are interchangeably called "in-house" "traditional" or "investor" modifications. These are, generally, for people who do not qualify for HAMP and they are based on 1) affordability, and 2) investor guidelines. In short, they look to see if they can reduce your interest rate in order to give you a payment that leaves you with a budget surplus (remember income and expenses from above?).
An important note is that "Investor Guidelines" are the greased pig of this process. Investors on loans have big books full of what they will and will not allow. Sometimes this is as extreme as "will not allow any modifications, ever", but most commonly they say rather mundane things like "cannot reduce the interest rate lower than 4%" or "will not allow more than 12 months of payments to be capitalized onto the back of the loan". You'll never get to see these, and they govern all programs (including HAMP).
Other specific programs exist (Chase has an "internal" program called "CHAMP" which mirrors the HAMP program), but aside from HAMP their process is a well-guarded secret in most cases.FHA, VA and USDA loans are different (because they are!)
Please note that FHA, VA and USDA loans are different. I'll add an explanation of FHA if necessary (it's long and tedious!), but for VA and USDA loans contact the agencies directly and early.How to Work with a Mortgage Servicer
I've touched on a lot of this already, but I'll try to string this all together in this space.
Servicers are messy beasts. Prior to the crash, they were small operations engaging in the infrequent foreclosure or workout, and they had small staffs devoted to the maintaining and general gear-grinding of taking payments and managing the loans under their care.
This all changed. You've probably read about the thousands and thousands hired by these servicers to deal with the immense pressure of unprecedented workout requests. As a result, your chances of speaking to someone who knows what they're doing is a crap-shoot. You'll be speaking, mostly, to call-center reps and, perhaps, a higher level contact. In nearly every case you will never be allowed to or have the opportunity to speak to anyone who makes a decision. Even escalation processes and supervisors more often than not fall flat.
The most important things, in no particular order, are: 1) Always keep your documents up to date. I suggest that on the first of each month you just send in your most recent bank statement and proof of income, regardless of if they ask for it. Generally documents are considered "good" for 30-60 days, so get ahead of the servicer and give them everything they need. This goes for signatures on documents like a Letter of Hardship or the HAMP Request for Modification Affidavit (don't worry, you'll learn what these are!). 2) If you're confused or think there's bad information being given (and there is bad information all the time), call back and confirm with a different representative. 3) Document everything. Ever piece of mail, every call and every document submission.
Aside from that, patience is important. There is no "timeline" for when these things resolve themselves and it can take as little as 30 days to a year and a half, sometimes, to get a final decision. Most delays are caused by document issues. A rep will request your last bank statement on the 2nd, by the time you send it in, it gets reviewed and accepted it may be 2-3 weeks later and then they'll come back looking for recent paystubs. Rinse and repeat. Always keep documents up to date, and if you send in anything it's always a good idea to submit your most recent paystubs (proof of income) and bank statement if you haven't already.Glossary and Q&A
I've reserved the next two posts for, essentially, Q&A. Please ask questions as this will expand the knowledge-base for all of us!
EDITED 9/21/11 to reflect my current position.
EDITED 7/26/11 to include recent trends of addressing and identifying sources of income via Tax Returns.