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Mortgage Modifications and Loss Mitigation

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 government programs, proprietary mortgage industry programs.

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 most desired result for a debtor is to obtain an affordable mortgage loan modification.

What is a mortgage loan modification?

A loan modification is simply a change that lenders make to the terms of an existing mortgage in order to make the loan current.  A modification can lower your interest rate, extend the time you have to repay your balance and/or change your loan type (i.e., from adjustable to fixed).  Achieving a more manageable monthly payment is the debtor’s goal, with obtaining a performing loan being the lender’s goal.

Who can qualify for a mortgage modification?

Homeowners behind on their payments, or in danger of falling behind, are the top candidates for a mortgage modification, particularly if their financial peril is the result of a demonstrable financial hardship.  A non-exclusive list of contributing factors include:

  • Loss of income, including unemployment
  • Increased cost-of-living expenses
  • Large medical or health-related bills
  • Divorce or separation
  • Death or disability of a family member

Types of loan modification programs

Government loan modifications programs include:

  • Fannie Mae and Freddie Mac:  The Home Affordable Modification Program (HAMP) expired at the end of 2016.  Its successor is the Flex Modification Program, available to homeowners with conventional mortgages overseen by Fannie Mae and Freddie Mac, who are federally backed home mortgage companies who buy and guarantee mortgages on the secondary mortgage market.  If your mortgage is backed by Fannie or Freddie you may qualify.
  • FHA Loans: The FHA offers a variety of modification programs, including the FHA Home Affordable Modification Program (HAMP), to homeowners with FHA insured mortgages.
  • VA Home Loans: Modification programs are offered to veterans, active service members and surviving spouses who have VA mortgage loans.

Non-Government loan modification programs:  Many mortgage lenders also have their own internal, proprietary modification programs, many of which seem to follow the protocols of the expired HAMP Program.  While not universally true, in their quest to come up with an affordable mortgage these proprietary programs seem to (1) calculate the borrower’s monthly income, (1) capitalize all arrearages to obtain a new unpaid principal balance, (3) reduce the interest rate, and (4) if necessary, extend the repayment term of the modified mortgage.

The bankruptcy court loss mitigation process

Bankruptcy debtors who wish to pursue loss mitigation 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.

The documentation and information you will be asked to provide includes, among other things:

  • A Loss Mitigation Application:
  • Proof of income, including pay stubs, profit and loss statements (for the self-employed), tax returns, bank statements and valuations of investment assets;
  • Itemization of monthly expenses;
  • An affidavit (or letter) of hardship, explaining why you fell behind on your mortgage payments.

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, 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.

For more information about methods of addressing the problem of defaulted mortgages, you are encouraged to examine our more detailed treatments of:

Contact the bankruptcy team at Hayward, Parker & O’Leary today

For reliable legal assistance related to mortgage modifications and the HAMP programs, contact the experienced attorneys at Hayward, Parker & O’Leary today. Their office is located in Middletown, NY.

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    225 Dolson Avenue,Suite 303
    Middletown, New York 10940
    Phone: 845-343-6227
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