New Washington Laws effective June 7, 2012 to help homeowners in crisis?

Well, the banks are at it again folks.  Washington has passed new legislation that is designed to further assist homeowners in crisis, but as far as I can tell the investors holding our notes gain more than than the homeowner.

Starting June 7, 2012, all beneficiaries of a note secured by owner-occupied real property in Washington who intend to release a deed of trust (typically in a short sale or via deed-lieu of foreclosure) must state in writing to the borrower whether it reserves or waives the right to collect full payment of the secured debt. They must also state that the letter does not preclude the borrower from negotiating with the beneficiary for a full release of the outstanding debt. In other words, not much of a change from what is currently going on in short sale or deed-in-lieu transaction since most beneficiaries will not waive the right to collect full payment absent negotiations to obtain the waiver.  This is why working with an experienced and skilled short sale negotiator is important when asking a beneficiary of a note to release its deed of trust or mortgage.

Under this new Act, real estate agents will be required to disclose in their Law of Real Estate Agency pamphlet that the decision of a beneficiary to release its secured interest in the property does not automatically relieve the seller of the obligation to pay any debt or costs remaining at closing, including real estate commissions.  While I like the idea that homeowners are further informed that the remaining loan balance could survive closing, I will not be surprised to see more beneficiaries (and maybe some agents) seeking payment from sellers at closing to cover costs and commissions that up until now have for the most part been paid out of the sale proceeds. Having a strong short sale negotiator and not being afraid to let the beneficiary take the home in foreclosure will go a long way towards working out a full settlement of the debt with little or no cost to the struggling homeowner in a short sale.

Another change that I am not too happy about is that the beneficiaries will no longer be required to have an in-person meeting with the homeowner prior to sending out a Notice of Default, even if the homeowner requests the in-person meeting in writing.  Starting June 7, 2012, beneficiaries can attend an in-person meeting either in person, over the telephone or by video conference. Because they are given a choice, I predict that most, if not all, beneficiaries will elect to hold the "in-person" meeting over the telephone. I think the next distressed property legislation should require all beneficiaries to send the homeowner a photograph of their decision-maker so the homeowner can tape the photo to their phone and at least get some semblance of the in-person meeting that is anything but that.

The only real benefit of this new legislation in my opinion is that Washington homeowners will have more time to meet with a certified HUD counselor or attorney to discuss how they can delay or stop foreclosure of their primary residence through mediation.  Previously, a homeowner lost the right to be referred into a Foreclosure Fairness Act mediation once a Notice of Trustee Sale was recorded.  This new Act will give homeowners up to 20 days AFTER a Notice of Trustee Sale is recorded to have a counselor or attorney refer them and the beneficiary of their note into mediation.  While mediation is not a guarantee that a homeowner will be able to keep their home, it is designed to work out an alternative to foreclosure, such as a loan modification, short sale or deed-in-lieu of foreclosure, and it requires the beneficiary to negotiate in good faith.

If you are struggling to make a mortgage payment or want information on how you can improve your loan terms or how to gracefully exit ownership with as little damage as possible, talk to an experience real estate attorney who specializes in distressed properties.  Unless you want to file for bankruptcy, do not meet with a bankruptcy attorney unless they also specialize in other foreclosure alternatives and have done so for at least 5 years or more. If they have never negotiated a loan modification or a short sale or do not work with another attorney who has done so for years, call someone else. I cannot tell you how frustrating it is to meet with homeowners who have received misinformation from bankruptcy attorneys who know very little about loan modification, short sales, deeds-in-lieu of foreclosure or even Washington laws affecting distressed properties, not to mention the credit and tax implications of debt forgiveness outside of bankruptcy.  I would rather see a homeowner talk to an experienced short sale agent than a lawyer who is dabbling in distressed properties just to bring in bankruptcy clients.

Get educated. Get help. Do not let lenders or anyone else take advantage of your situation. 

If you would like more information on House Bill 2614 and to read the full text, go to:
http://apps.leg.wa.gov/documents/billdocs/2011-12/Pdf/Bills/House Passed Legislature/2614-S.PL.pdf

Changes to HAFA Program Starting March 9, 2012

The Making Home Affordable Program has been extended and expanded, including major changes to the HAFA short sale program beginning March 9, 2012.  The HAFA short sale program now provides the following:

1. There are no occupancy requirements;
2. A servicer is now allowed to accept a full payment if the borrower wants to stay current even though the payment exceeds 31% of the borrower's gross income;
3. A servicer may authorize an $8,500 payment to a subordinate mortgage holder instead of the prior cap of $6,000 in exchange for a lien release and full release of borrower liability on the debt. Investors will continue to be reimbursed one dollar for every three dollars of short sale proceeds paid to a subordinate mortgage holder up to $2,000;
4. Borrower relocation incentives will be limited to HAFA short sales or Deed-in-Lieu transactions where the property is occupied by a borrower or a tenant at the time the Short Sale Agreement or DIL Agreement is executed and who will be required to vacate the property as a result of the sale or DIL. The HUD-1 statement must reflect payment to the borrower or tenant, when appropriate.
5. Credit bureau reporting of HAFA transactions where the deficiency balance is forgiven are to be reported as: "Account Status Code = 13 (Paid or closed account/zero balance) or 65 (Account paid in full/a foreclosure was started), as applicable.
6. A borrower has until December 31, 2013 to submit a Short Sale Agreement or a written request for a consideration for a Short Sale Agreement to be eligible for HAFA.

In California, mortgage holders cannot collect a deficiency debt following a short sale or condition a short sale approval on additional contributions from the seller.  At the moment, Washington does not have such a law, so sellers are still vulnerable to subordinate mortgage holders strong-arming them into signing another note or contributing funds at closing despite the clear government mandate that the HAFA program is designed to relieve the seller of any further obligation on their mortgage debts.

Bank of America Changes Short Sale Procedures

Bank of America recently changed their short sale initiation requirements in order to streamline and expedite the process.  Starting on April 13, 2012, Bank of America will require the following documents when initiating a Bank of America short sale: 

1. Bank of America Third-Party Authorization Form;
2. A signed Purchase and Sale Agreement with Buyers Acknowledgement and Disclosure;
3. IRS Form 4506-T  Request for Transcript of Tax Return;
4. 60-day Estimated HUD-1 (or HUD-1 if closing date is shorter than 60 days);
5. Bank of America Short Sale Purchase Contract Addendum.

For an existing short sale file, all of the above documents will need to be uploaded in Equator before April 13th using  “Upload Supporting Documents.”

Failure to upload all the required documents may result in a full re-submission of all documents or the file/offer being rejected.

Warning to those of you with BECU or Mutual of Omaha Mortgages!

BECU is suing borrowers for non-payment on a 2nd loan even though a short sale is in process and the 1st has not yet initiated foreclosure.  They are simply treating their loans as unsecured debt (which basically is true when dealing with underwater property) and suing their customers for breach of contract (default on the note).  This approach makes a short sale even more difficult, and will make filing for bankruptcy the only real out for many BECU customers.

As for Mutual of Omaha, they are now doing judicial foreclosures in Washington State on their residential mortgages.  This means they are not waiving the right to collect the balance owed on the mortgage in a short sale, and they are not giving up the right to collect the full balance owed by using the non-judicial method of foreclosure.  So, unless you have the money to pay the balance on the note or a chunk of change to try and negotiate down the amount they want at closing or are willing to make monthly payments on a home you will no longer own, then bankruptcy attorneys in Washington will be seeing more of these types of borrowers in the near future as well.  It will be interesting to see what MOO does when it has to sit on some of these properties during Washington's one-year redemption period (applies to principal residences only) while they collect small sums each month from a wage garnishment.  Clearly the eggheads that run MOO think one bird in the hand is NOT worth two in the bush and would rather scoop up bird droppings than let a destitute borrower get out of a bad loan in a bad market.  

Home Affordable Refinance Program (HARP)

The Home Affordable Refinance Program gives borrowers with loans owned or guaranteed by Fannie Mae or Freddie Mac an opportunity to refinance into more affordable monthly payments. This program was recently extended and now expires on December 31, 2013.  The eligibility requirements have also been changed to make it easier for more homeowners to take advantage of this program (big thanks to follower Sara for reminding me to point this out).

To be eligible for HARP, a borrower must:

1. Have a mortgage loan secured by the borrower's principal residence or former principal residence;
2. Have a loan that is owned or guaranteed by Fannie Mae or Freddie Mac and sold to those agencies on or before May 31, 2009;
3. Have sufficient income to pay the new mortgage payment;
4. Be current on the mortgage with no missed payments in the last 6 months and no more than one missed payment within the last 12 months;
5. Have not previously refinanced the mortgage under HARP; and
6. The current loan-to-value (LTV) ratio must be greater than 80%.

Lenders may have other criteria depending on whether you want a fixed or variable rate.  To apply, contact your mortgage servicer or any other lender who participates in the program, and ask for a HARP application. To speed up the application process, you should gather the following information and documents before you call:

o    Information about the monthly gross income of all the borrowers on your loan, including recent pay stubs if you receive them, or documentation of income you receive from other sources;

o    Your most recent tax return;

o    Information about any junior lien mortgage on the home;

o    Account balances and minimum monthly payments due on all of your credit cards; and

o    Account balances and monthly payments on all other debts (student loans, car loans, etc.)

Homeowners with mortgage interest rates higher than the current market rate should see a reduction in their payments. Homeowners that are paying interest only, or who have a low introductory rate that will increase in the future, or who face a balloon payment may not see their current payment go down if they refinance to a fixed rate and payment. These homeowners, however, could save money by reducing the amount of interest they will pay over the life of the loan.

Refinancing into a more stable fixed-rate loan product and avoiding future mortgage payment increases will likely improve a homeowner’s ability to sustain their mortgage payments over the long-term.  If eligible for the program, your lender will give you a "Good Faith Estimate" and a "Truth in Lending Statement" that shows the new interest rate, mortgage payment, and the amount that will be paid over the life of the loan.  If the new loan terms are not better than your current loan terms, a refinancing may not be the right option for you.

Both Fannie Mae and Freddie Mac have toll-free telephone numbers and web submission sites that allow homeowners to find out if either agency owns or guarantees their loan.  For more information, go to:

For Fannie Mae:
1-800-7FANNIE (8am to 8pm EST)
www.fanniemae.com/loanlookup

For Freddie Mac:
1-800-FREDDIE (8am to 8pm EST)
www.freddiemac.com/mymortgage

Making Home Affordable Modification Program (HAMP)

Mortgage servicers who participate in the Making Home Affordable Program are required to evaluate homeowners for the Home Affordable Modification Program (HAMP) before evaluating them for other options.  HAMP is designed to lower a first mortgage payment to 31 percent of verified monthly gross income to make payments more affordable.

To be eligible for a loan modification under HAMP, which is currently set to expire on December 31, 2013, the borrower must meet the following criteria:

1. The mortgage loan is secured by a 1-4 unit property, where one unit is the borrower's principal residence.; 
2. Have a mortgage balance equal to or less than $729,750 (or higher if more than one unit);
3. Have a first lien mortgage that originated before January 1, 2009;
4. Have a monthly first mortgage payment (including taxes, insurance, and HOA dues) greater than 31 percent of their gross (pre-tax) income;
5. Have a mortgage payment they can no longer afford due to a financial hardship that can be supported by documentation;
6. Have missed a mortgage payment or can show they are very likely to default on their mortgage soon
7. The mortgage is owned or guaranteed by Fannie Mae or Freddie Mac or is serviced by a HAMP participant (to determine if a loan is serviced by a HAMP participant go here).

Every modification under the program must lower the borrower's monthly mortgage payment to 31% of the borrower's monthly gross income.  To reach the target affordability level of 31%, the loan servicer will first reduce the interest rate to 2%.  If the borrower’s debt-to-income ratio is still above 31%, the loan term is then extended out to 40 years, followed by a forbearance of the principal at no interest until the monthly loan payment reaches the 31% target. The modified monthly payment will then remain in place for five years, provided the borrower remains current. After the first five years, the interest rate gradually increases to the prevailing Primary Mortgage Market Survey rate in place at the time of the permanent modification for the life of the loan.

Part of the HAMP evaluation includes using a standard Net Present Value (NPV) test to determine if the modification, including any government incentive, is economical from the lender's perspective.  If the borrower’s debt-to-income ratio remains too high despite the adjustments covered above or they do not pass the NPV test, then the modification request will most likely be denied. 

The debt-to-income ratio target for loan modifications is typically 31/55 (new mortgage is set at 31% of gross monthly income and the mortgage plus other recurring debts cannot exceed 55% of gross monthly income).  Also, as of July 1, 2010, unemployment benefits and severance pay are no longer acceptable sources of income for HAMP consideration.  If you are receiving unemployment benefits, or will be receiving benefits in the near future, the Home Affordable Unemployment Program may be a better option for you.    

If a borrower requests a loan modification from their mortgage servicer, and it is determined that they are eligible, the borrower will enter into a Trial Period Plan that is typically three months in length, but can be longer.  The trial plan is used to determine if the borrower has the discipline and actual ability to make the new payments in a timely manner and gives the lender more time to thoroughly review the application for approval.  A trial plan does NOT mean the modification has been approved.  The lower payments also typically affect the borrowers FICO score based on the modification not being final and the payments being lower than what the current note requires.

One problem that I have seen with this program arises when the borrower attempts to sell the property in a short sale within the first three years after their loan is modified.  Loan servicers receive a $1,000 up-front fee for each HAMP modification, plus an additional “pay for success” fee of $1,000 each year for up to three years as long as the borrower successfully remains in the program. Some lenders resist approving short sales following a loan modification because they do not want to lose this incentive that ends once the borrower drops out of the program following the short sale. However, when given the choice between a short sale and foreclosure, most lenders prefer short sales.  

Homeowners are also eligible to receive incentives under HAMP.  For every month a borrower makes a payment on time, they will accrue a $1,000 per year incentive that reduces the principal balance on their loan. The incentive is applied directly to the loan balance on an annual basis for up to five years for a total principal reduction up to $5,000. 

If it is determined that a borrower is not eligible for a Home Affordable Modification, the servicer can evaluate the borrower for other alternatives to keep the borrower in their home, such as an internal modification program or a forbearance (payments are put on hold for a period of time). These alternatives do not generally require trial payments and can take months before a decision is made.  Some servicers take so long to make a decision, that the home simply ends up in foreclosure and the borrower is not left with enough time to sell their home before the auction date.  

However, Washington's Foreclosure Fairness Act allows a HUD counselor or attorney to submit a borrower and lender/investor into mediation to work out a loan modification and thereby postpone foreclosure pending the outcome. A borrower must be submitted into mediation BEFORE a notice of foreclosure sale is received, so if you have received a notice of default contact a HUD counselor or attorney immediately to avoid losing the ability to take advantage of this important consumer law.  For more information on Washington's Foreclosure Fairness Act check out my August 21, 2011 post.

updated April 6, 2012

Second Lien Modification Program (2MP)

The 2nd Lien Modification Program (2MP) offers homeowners a way to modify their second mortgages to make them more affordable when their first mortgage is modified under HAMP.  The program is currently set to end on December 31, 2012.

2MP offers homeowners, their mortgage servicers, and investors an incentive for modifying a second mortgage. Servicers and investors may also receive an incentive for extinguishing a second loan by forgiving all of the debt a homeowner owes.

Under 2MP, a mortgage servicer may:

• Reduce the interest rate to 1 percent for second liens that pay both principal and interest (amortizing);
• Reduce the interest rate to 2 percent for interest-only second liens;
• Extend the term of the second lien to 40 years (to match the first mortgage modification).

If part of the principal was postponed through forbearance on the first lien, a servicer must forbear the same proportion on the second lien.

If the principal was forgiven on the first lien, in accordance with the Principal Reduction Alternative program, a servicer must forgive the same proportion on the second lien, although a servicer may, in its discretion, forgive a larger portion or the entire second lien and will receive incentives for doing so.

A second lien is eligible for 2MP if:

o    the corresponding first lien has been modified under the Home Affordable Modification Program and the second lien servicer is participating;

o    the loan was originated on or before January 1, 2009;

o    the unpaid principal balance (at consideration for the modification) is not less than $5,000 or a pre-modification scheduled monthly payment is not less than $100;

o    the loan has not yet been modified under 2MP;

o    it is not subordinate to a second lien or is not a home equity loan in first lien position;

o    it is not a second lien on which no interest is charged and no payments are due until the first lien is paid in full; and

the second lien servicer is in possession of a fully executed 2MP modification agreement or trial period plan by December 31, 2012; or the second lien is not insured, guaranteed, or held by a Federal government agency (e.g. FHA, HUD, VA, and Rural Development).

Home Affordable Unemployment Program (UP)

The Home Affordable Unemployment Program (UP) provides homeowners a forbearance of their first mortgage, which is a temporary period of time during which your regular monthly mortgage payment is reduced or suspended. The UP forbearance period is for twelve months as of July 2011.  This program is available to eligible unemployed homeowners through participating HAMP servicers.

Participating servicers are required to offer an UP forbearance plan if the homeowner meets the eligibility criteria:

1. The mortgage loan is secured by the borrower's principal residence;
2. The mortgage loan is a first lien mortgage originated before January 1, 2009;
3. You have an unpaid principal balance on the mortgage loan that is equal to or less than:
• 1 Unit: $729,750
• 2 Units: $934,200
• 3 Units: $1,129,250
• 4 Units: $1,403,400
4. The mortgage loan is no more than 3 months delinquent or default is imminent;
5. The mortgage loan has not been previously modified under HAMP, and you have not previously received an UP forbearance period;
6. Be unemployed when you request consideration for UP, and be able to document that you will receive unemployment benefits in the month of the forbearance period effective date. 

Your servicer may also require you to have received unemployment benefits for up to three months before your forbearance period can begin.

During the UP forbearance period, your monthly mortgage payment must be reduced to no more than 31 percent of your gross monthly household income.  You must make these payments in a timely manner or you will jeopardize your eligibility. 

If you get a new job during the forbearance period, you will need to inform your servicer.  Otherwise, 30 days before your forbearance period expires, your servicer will provide you with an Initial Package so that you can request a modification through the Home Affordable Modification Program (HAMP).

Principal Reduction Alternative Program (PRA)

The Principal Reduction Program (PRA) is a deferred principal reduction program that allows a borrower to earn principal reduction over a three-year period by successfully making payments in accordance with the modified loan terms. If the loan is modified pursuant to PRA, the principal reduction amount should be initially treated as non-interest bearing principal forbearance (PRA Forbearance Amount). The PRA Forbearance Amount is separate and exclusive of any other forbearance that may be offered in conjunction with a HAMP modification.

If the borrower is in good standing on the first, second and third anniversaries of the trial period effective date, the servicer must reduce the UPB of the loan on each anniversary date in installments equal to one-third of the initial PRA Forbearance Amount.  A borrower is in good standing as long as they are not three months delinquent in making the monthly modified loan payments.

Under the Principal Reduction Alternative (PRA) guidelines, servicers are encouraged to offer relief to borrowers whose homes are worth significantly less than the amounts owed under their first lien mortgage loans. Under PRA, servicers are required to evaluate the benefit of a principal reduction for every HAMP eligible loan with “high negative equity”, and are encouraged to offer principal reduction whenever the net present value (NPV) of a HAMP modification using PRA is greater than the NPV without a principal reduction. 

If a servicer receives a written request from a borrower (or an authorized representative of the borrower) related to a principal reduction, the servicer must respond to the request within 30 days of receipt of the request. The response, when applicable, must include the reason(s) that a principal reduction was not offered to the borrower.

HUD Emergency Homeowners Loan Program (EHLP)

This program compliments the U.S. Treasury Department’s Hardest Hit Fund by providing assistance to homeowners in hard hit local areas that may not be included in the hardest hit target states. 

The program offers eligible borrowers a declining balance, deferred payment “bridge loan” (zero percent  interest, non-recourse, subordinate loan) up to $50,000 to assist with payments on mortgage principal, interest, mortgage insurance, taxes and hazard insurance for up to 24 months. 
Under the program, eligible borrowers must:

1. Be at least three months delinquent in their payments and have a reasonable likelihood of being able to resume repayment of their mortgage payments and related housing expenses within two years; 
2. Have a mortgage property that is the principal residence of the borrower, and eligible borrowers may not own a second home;
3. Demonstrate a good payment record prior to the event that produced the reduction of income.
4. A reduction in income of at least 15% resulting from involuntary unemployment, underemployment, and/or medical emergency/serious injury;
5. Prior to the reduction in income, be in an income bracket equal to, or less than, the greater of $75,000 or 120 percent of the Area Median Income for a household size of 4 persons; and
6. Have a monthly mortgage payment that is greater than 31% of the borrower's gross monthly income after the reduction in income.