Orange County Bankruptcy Lawyers Analyze Mortgage Modifications in New York
The options available to persons needing bankruptcy relief to restructure their debt and who also want a loan modification are (i) government programs, (ii) internal mortgage industry programs, and, (iii) where provable against the lender, in connection with the settlement of litigation for exceptional mortgage origination fraud or significant mortgage servicing abuse. (Mortgage-related litigation is not discussed further here.)
Bankruptcy court loss mitigation
Although bankruptcy judges cannot enter orders modifying home mortgages except in a Cram Down/Strip Down situation, they can and do restructure them to permit the borrower(s) to cure and reinstate pre-bankruptcy mortgage defaults over a period of up to 5 years in a Chapter 13 Bankruptcy. In addition, Bankruptcy Judges in the Southern District of New York oversee a bankruptcy court-sponsored loss mitigation program to permit debtors and creditors to attempt to work out a mortgage default with greater transparency and accountability than is often available through mortgage industry loss mitigation programs outside of bankruptcy. The principal loss mitigation/loan modification programs being handled by mortgage servicers inside and outside of bankruptcy currently are those created by the Obama administration, namely HAMP Tier 1, HAMP Tier 2 and the Second Lien Modification Program (“2MP”).
HOME AFFORDABLE MODIFICATION PROGRAM (“HAMP”)
This program is administered by the U.S. Treasury, through its agents Fannie Mae and Freddie Mac, and offers subsidies to mortgage servicers for modifying mortgages. HAMP is available to home borrowers outside of bankruptcy, and inside bankruptcy at the mortgage loan servicer’s discretion. A successful HAMP Tier 1 modification results in an interest rate reduction generating monthly mortgage payments of 31% of the borrower(s) monthly gross income (the “Tier 1 Target”). If the Borrower is not eligible for a Tier 1 Modification, a successful HAMP Tier 2 Modification results in interest rate adjustment so that the monthly mortgage payment is not less than 25% nor more than 42% of the borrower’s gross monthly income (the “Tier 2 Target”). If the loan is an adjustable rate mortgage (“ARM”) or an interest-only loan, it converts into a fixed rate, amortizing mortgage. Interest is capped at the Freddie Mac conventional mortgage interest rate as of the date of the modification, or the rate producing the Tier 1 Target or the Tier 2 Target, whichever is greater. Principal reduction is available to reach the Tier 1 Target or Tier 2 Target, but only at the option of the servicer. (Principal reduction is expected to be a very rare occurrence.) The Second Lien Modification Program (“2MP”) provides a mechanism for the modification of second mortgages as well.
To be eligible for the federal subsidies and incentives made available to mortgage loan servicing companies (‘servicers’) under HAMP, a servicer must enter into a written agreement with the government. That agreement and the guidance to servicers by the Treasury set the parameters for the administration’s loan modification program. Servicers that have not signed a written agreement with the government may also use the program’s loan modification guidelines.
The HAMP process
When a borrower applies for a home mortgage loan modification and the servicer has signed up for HAMP, the servicer must collect extensive financial information from and concerning the borrower. The process resembles the processing and underwriting of a new full-documentation mortgage loan. Tax returns and credit reports are obtained, employment and permanent income are verified, an appraisal is conducted, and the servicer then analyzes whether the loan holder will do better by modifying the loan than by denying the modification and going forward with foreclosure. This is called the net present value (“NPV”) test. If the NPV is higher by modifying the loan under the HAMP guidelines than by foreclosing, then the borrower(s) is/are offered a 3-month trial modification. If all payments required under the trial modification are made in full and on time, then a permanent modification is offered to the borrower(s). Failure to make any of the payments required under the 3-month trial modification in full and on time (received and posted within 30 days of the due date) means the modification will be rejected. Only one HAMP Tier 1 modification is ever available on any loan.
HAMP establishes a step-by-step process, referred to as the “HAMP Waterfall”, to reduce monthly mortgage payments:
Basic Eligibility Requirements for All HAMP Modifications
- The Borrower must own the 1-4 unit property that is secured by the mortgage;
- The Borrower must establish that they are suffering a financial hardship;
- Their mortgage must have originated on or before Jan. 1, 2009;
- Their unpaid mortgage balance must be less than $729,750.00 for a single family residence (NOTE: this sum escalates to $1,403,400.00 for 4-unit properties);
- The Borrower must submit their Modification package to the servicer before December 31, 2013.
Specific Eligibility Requirements for HAMP Tier 1
- The mortgage has not previously been modified under HAMP;
- The mortgage is delinquent or a default is reasonably foreseeable;
- The Borrower must use the property as their primary residence;
- The monthly mortgage payment must exceed 31% of the Borrower’s gross monthly income;
Specific Eligibility Requirements for HAMP Tier 2
- The Borrower meets the above referenced Basic Eligibility Requirements For All HAMP Modifications, but failed to receive a Tier 1 Modification;
- The property is the Borrower’s primary residence, OR the property is “rental property” that is either (1) occupied by a tenant as their principal residence; (2) occupied by a family member of Borrower, or (3) vacant but available for renting;
- The mortgage has not received a prior Tier 2 Trial Period Plan (“TPP”) or permanent modification.
- The Borrower previously lost “good standing” under a Tier 1 permanent modification, and (1) at least 12 months has passed since the date of the prior modification, OR (2) the Borrower has experienced a “change in circumstances”;
- The Borrower previously defaulted on a prior Tier 1 TPP;
- The mortgage loan was denied a HAMP modification prior to June 1, 2012;
- If the property is Borrower’s principal residence, the mortgage loan is delinquent or a default is reasonably foreseeable. However, if the property is “rental property” the mortgage loan must be in default.
Additional Factors Impacting HAMP Eligibility
- Being in active litigation regarding the mortgage does not affect eligibility;
- A balloon mortgage that has already matured is eligible for HAMP, subject to investor guidelines;
- Business entities such as corporations, partnerships, LLC’s, etc., are not eligible for HAMP;
- A Borrower who rejects a HAMP modification offer is not eligible for a future modification unless there is a “change in circumstances”;
- The income from all Borrowers on the loan must be used, even if one of the Borrowers does not occupy the property;
- Borrowers in active Chapter 7 or Chapter 13 cases are eligible for HAMP;
- Borrowers who have previously received a Chapter 7 Discharge are eligible for HAMP.
Monthly Mortgage Payment Ratio (Tier 1 & Tier 2) and the “HAMP Waterfall”
The term Monthly Mortgage Payment includes the Borrower’s monthly payment of principal, interest, property taxes, hazard insurance, flood insurance and homeowner’s association (HOA) fees. The term Monthly Gross Income refers to Borrower’s monthly income prior to payroll deductions and includes wages, salaries, overtime pay, commissions, fees, tips, housing allowances and other compensation, including Social Security and disability benefits, pensions and rental income.
- In order to be eligible for a HAMP Tier 1 Modification the Borrower’s Monthly Mortgage Payment must exceed 31% of the Borrower’s Monthly Gross Income. The goal of a Tier 1 Modification is to reduce the Monthly Mortgage Payment Ratio so that it does not exceed 31% of the Borrower’s Monthly Gross Income (the “Tier 1 Target”).
- For a HAMP Tier 2 Modification to be granted the post-modification Monthly Mortgage Payment must be successfully adjusted so that the Monthly Mortgage Payment Ratio is not less than 25% nor more than 42% of Borrower’s Monthly Gross Income (the “Tier 2 Target”).
HAMP establishes a step-by-step process, referred to as the “HAMP Waterfall”, to reduce monthly mortgage payments in order to reach either the Tier 1 Target or the Tier 2 Target, as follows:
STEP ONE: Calculate Borrower’s Monthly Gross Income and Monthly Mortgage Payment.
STEP TWO: Capitalize the Arrearages. The lender/servicer will add to the unpaid mortgage balance (technically referred to as “capitalizing”) the past-due interest, unpaid property taxes and insurance premiums, escrow advances (i.e. if the lender had paid property taxes or insurance premiums for the applicant) and other out-of- pocket servicing expenses, excluding late fees owed to the lender/servicer. With this new mortgage balance, the goal is to reduce the Monthly Mortgage Payment Ratio to the Tier 1 Target of 31% or, for those not eligible for Tier 1, to the Tier 2 Target of 25% to 42 %.
STEP THREE: Interest Rate Reduction. With the goal of reducing the monthly mortgage payment for the remaining term of the loan to the Tier 1 Target, the interest rate will be reduced incrementally to as low as 2% to achieve this. If the modified interest rate is less than the “market rate” at the time (it frequently will be), after 5 years the modified interest rate will increase at a rate of 1% per year until the “market rate” is reached, where it will remain for the remaining term of the mortgage. To reduce the Tier 2 Target, the interest rate will be adjusted to the “market rate” at the time of the modification, where it will stay for the remaining term of the modified mortgage.
STEP FOUR: Extend the Term. If the target Monthly Mortgage Payment Ratio cannot be reached just by reducing the interest rate, the term of the loan can be extended up to 40 years from the Modification Date, providing the contract between the servicer and the mortgage holder permits such an extension. If not, the loan can have a monthly payment based upon a 40-year amortization, with a balloon payment due on the note’s original maturity date.
STEP FIVE: Principal Forbearance. If the target Monthly Mortgage Payment Ratio cannot be achieved by the above steps, the lender/servicer can defer, or forbear, a portion of the unpaid mortgage balance, interest-free, which would become due as a balloon payment when the applicant transferred the property, paid off the note, or the note matured.
STEP SIX: The Net Present Value (“NPV”) Test. Whether a proposed loan modification is acceptable to the lender/servicer is determined by the NPV Test, which involves an analysis of the benefit to the lender/servicer of entering into a loan modification versus proceeding with a foreclosure. If the lender/servicer determines (using a mathematical formula) that modifying the loan will produce a greater value to them, they will modify it. If they determine that foreclosure produces the greater value to them, they will deny the modification and proceed with foreclosure.
There is no requirement that a lender/servicer forgive principal under HAMP, although they are free to do so at their discretion.
The monthly payment in a HAMP-modified first mortgage must include an escrow payment for property taxes and hazard insurance, but not for homeowners’ association (HOA) fees.
A modification under HAMP Tier 1 will not be granted if the resulting principal and interest component of the modified monthly payment exceeds the pre-modification principal and interest component of said monthly payment.
SECOND LIEN MODIFICATION PROGRAM (“2MP”)
If your first mortgage has already received a permanent HAMP modification, the holder of your second mortgage (“2MP Servicer”) must (1) offer to modify or extinguish its second mortgage and (2) dismiss any pending foreclosure action on said second mortgage, providing:
- The second mortgage lender / servicer is participating in the 2MP Program; and
- You have not missed 3 consecutive payments on your HAMP modification.
The terms of the HAMP-modified first mortgage will be used to determine the terms of the 2MP second mortgage modification. 2MP Servicers are not required to verify any of the financial information previously provided in the HAMP modification, and are not required to perform an additional NPV analysis on the second mortgage.
2MP Servicers have their own step-by-step process, or “waterfall”, that must be employed when a second mortgage modification is being considered:
STEP ONE: Capitalize the Arrearages. This process is virtually identical to Step Two of the “HAMP Waterfall”.
STEP TWO: Interest Rate Reduction. For Amortizing Second Mortgages (payment includes both principal and interest), the 2MP Servicer reduces the interest rate to 1%. For “Interest Only” Second Mortgages, in accordance with investor and regulatory guidelines, the 2MP Servicer can either: (1) convert the “interest only” payments to amortizing payments at 1% interest; or (2) retain the “interest only” payment schedule and reduce the interest rate to 2%. Regardless of the option exercised, at the end of 5 years the modified interest rate is re-set to the then current interest rate in the HAMP-modified first mortgage, and will thereafter ere-set on the same terms and schedule as the modified first mortgage.
STEP THREE: Extend the Term. If the original term of the second mortgage is shorter than the remaining term of the HAMP-modified first mortgage, the 2MP Servicer must extend the term (length) of the second mortgage to at least the term of the HAMP-modified first mortgage. For Amortizing Second Mortgages the 2MP Servicer in most circumstances must amortize the modified unpaid balance over the extended term. For “/aop/foreclosure-process-in-new-york/” (1) that are “interest only” for the entire term under the original documents, amortization on the 2MP-modified second mortgage must begin after 5 years, or (2) where the original documents call for amortization after a specified period of time, amortization on the 2MP-modifed second mortgage must begin either at the time specified in said original documents OR after 5 years, whichever is later. In either event, if authorized by investor and regulatory guidelines, the 2MP Servicer may (not “must”) extend the term of the second mortgage or the amortization period of the second mortgage up to 40 years, regardless of the term or amortization period of the first mortgage.
STEP FOUR: Principal Forbearance or Forgiveness. If there was principal forbearance or forgiveness on the HAMP-modified first mortgage, there must be principal forbearance or forgiveness on the 2MP-modified second mortgage in at least the same proportion, interest free, which would become due as a balloon payment when the applicant transferred the property, paid off the note, or the note matured.
When permitted by investor guidelines and subject to their discretion, in certain circumstances 2MP Servicer’s may elect to either fully extinguish or partially extinguish their second mortgage. When extinguishment occurs, the investor’s receive a lump sum incentive payment from the government.
The bankruptcy court loss mitigation process
Bankruptcy debtors who wish to pursue loss mitigation1 in their Chapter 7 or Chapter 13 case may do so by filing a request with the Bankruptcy Court for the Southern District of New York. Unless an objection to the loss mitigation request is filed and granted, the Bankruptcy Court will enter an order directing that loss mitigation go forward and setting deadlines for the accomplishment of certain tasks, including the designation of loss mitigation contact persons, the delivery of an information request to the debtor, and the delivery of the requested information by the debtor to the lender’s contact. The order also sets a period during which loss mitigation is to be completed, subject to later requests for extension, and a hearing date for a status conference on loss mitigation.
It is not unusual for a servicer to need 60 days to review and make an initial determination on a debtor’s loss mitigation request. Additional information is often requested of the debtor and should be supplied as soon as possible.
Although loss mitigation is not intended to be used as a defense to a lender motion to lift the automatic stay in bankruptcy (see our discussion of the automatic stay elsewhere on this website), during the time that loss mitigation is proceeding, the Bankruptcy Court will not entertain lender motions to lift the automatic stay to permit the commencement or continuation of a state court mortgage foreclosure action.
The feature that sets loss mitigation in the Bankruptcy Court for the Southern District of New York apart from loss mitigation outside of bankruptcy is the provision in the General Order that established the process requiring all parties to participate in good faith and subjecting those who do not to possible sanctions. That is not to say that mortgage servicers do not generally participate in good faith, but rather that the good faith requirement is an incentive for the adequate and timely response to the debtor(s)’s loss mitigation request