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. 

Home Affordable Foreclosure Alternatives (HAFA) Program

HAFA is part of the HAMP Program and provides financial incentives to servicers and borrowers who utilize a short sale or a deed-in-lieu to avoid a foreclosure on a HAMP eligible loan. Both of these foreclosure alternatives reduce the need for potentially lengthy and expensive foreclosure proceedings. These options help preserve the condition and value of the property by minimizing the time a property is vacant and subject to vandalism and deterioration. Additionally, these options can provide a better outcome than a foreclosure sale for borrowers, investors and communities. The HAFA Program is available for homeowners who meet the HAMP qualifications and:

1. Do not qualify for a trial mortgage modification under HAMP;
2. Do not successfully complete the trial period for their modification;
3. Miss at least two consecutive payments during their modification period; or
4. Request a short sale or deed-in-lieu of foreclosure.

The HAFA Program streamlines both the short sale and deed-in-lieu options to make them easier for a homeowner to work with their servicer. Under the program, an eligible homeowner is evaluated for HAFA within 30 days of the qualifying event, the servicer accepts the short sale payoff in full satisfaction of the mortgage, and the homeowner can receive $3,000 to help with relocation costs.

See changes to HAFA Program in my April 6, 2012 post.

Washington Homeowners – Save Your Home From Foreclosure!

The Washington Foreclosure Fairness Act allows homeowners in Washington State to sit down with lenders and explore options outside of foreclosure.  The Act is designed to stop the endless loan modification process and lost paperwork.  It also gives homeowners more time to sell their home if a loan modification is not possible.   The Act requires lenders to communicate with homeowners about their right to an in-person meeting and mediation before they can issue a Notice of Default.  But, it only applies to a primary residence and to financial institutions that have conducted 250 or more foreclosure sales annually.

So, if you get a notice of your pre-foreclosure options, do not miss out on the opportunity to take advantage of this new law.  Lenders will typically give you 30 days to notify them in writing of your intent to take advantage of the in-person meeting, but ONLY YOUR ATTORNEY OR HUD COUNSELOR can submit your case to mediation so seek out professional advice before your 30 day window expires!

The Foreclosure Fairness Act Timeline:

• Lender must notify the homeowner by phone or letter of their right to an in-person meeting during a 60-day window before they issue a Notice of Default
• The notice must inform the homeowner of their right to request mediation through an attorney or HUD housing counselor up until the Notice of Trustee Sale is issued (which cannot happen in Washington until 30 after a Notice of Default has been issued).
• Once mediation is requested, the foreclosure process stops until mediation is completed.
• The mediation will take place approximately 55 days after the request is submitted.
• 10 days before the mediation, the homeowner must submit a financial statement and last two years of tax returns.  The lender must submit the loan balance, an itemized list of fees and charges, payment history, net present value and loan modification inputs, and other required documents.
• At the mediation, both the lender and homeowner must participate in good faith.
• The mediator will encourage both parties to examine all options, including loan modification, where the goal is to avoid foreclosure.
• If an agreement is not reached, the foreclosure process will proceed.
• If the lender does not participate in good faith, the homeowner can commence legal action to stop the foreclosure sale in court.

Michele  McNeill is a real estate lawyer in Washington State. She works with Sellers, Real Estate Agents and Negotiators on Short Sale and Foreclosure issues.  This blog is intended to cover general topics for informational purposes only and is not intended to be taken as legal advice or to create an attorney-client relationship.  For more information about  your legal rights and options, please call (425) 455-4307. 

ABC's of SHORT SALES

Short sales have become a common means of buying and selling real estate, yet few fully understand the process and potential risks.  This guide is designed to provide a general overview of the short sale process. 

1. Talk to an Accountant

If you are thinking about selling your home for less than what you owe on your mortgage, then the first step should be to discuss potential tax consequences with a certified public accountant (CPA), especially if you are looking to sell investment property or a second home.  In some cases, a short sale can trigger income tax liability if the lender agrees to not collect the balance remaining on your loan(s) above the amount collected from the short sale. Most homeowners selling their primary residence will be shielded from adverse tax consequences under the Mortgage Forgiveness Debt Relief Act of 2007 currently in effect until December 31, 2012.  For additional information on the IRS treatment of cancelled debts, see IRS Publication 4681,  and IRS Form 982..

2. Hire a Short Sale Attorney

Short sale attorneys are trained in negotiations and will typically cost you less than a third party negotiator.  They also do not have a vested interest in the sale, and can protect you from common pitfalls that arise in nearly all short sales. They can also help you locate a real estate agent experienced in short sales.  If you already have an agent who is not experienced in managing short sales, your attorney can educate and work with your agent towards a successful outcome that does not leave you with a large outstanding debt.  Short sale attorneys can provide valuable legal advice that a real estate agent or third party negotiator cannot provide.

3. Hire a Real Estate Agent

Successful short sales depend heavily upon the skills of a qualified real estate agent.  The agent is responsible for listing and marketing your property at a fair price that will generate an offer.  If the price is too high, you will not get an offer. If the price is too low, you may get an offer but your lender will reject the price.  The agent is also responsible for communicating regularly with the lender to make sure the lender has everything they need and to provide the necessary prodding that some lenders need to open the file.  The short sale agent sets the stage for a successful sale, and the short sale attorney sees to it that the lender doesn't clutter that stage with language that is more harmful to the seller than a foreclosure.

4. Market the Property at a Fair Price

All short sales begin and end with aggressive yet reasonable marketing.  In a tough market, you will be but one out of thousands of distressed properties for sale.  If you set the price too high, the property will not sell.  If you set the price too low, you might generate lots of offers, but you run the risk of not getting approval from your lender(s). Some people operate under the assumption that the lender will simply counteroffer if the price is too low.  The problem with this tactic is that it will take the lender more time if they have to produce a counteroffer on price and you run the risk of losing the buyer.  The typical turnaround time for lender approval is 60-90 days and could take as long as 6 months depending upon who your lender is.  This alone is enough to scare off some buyers, and the need to haggle over price could add another 30 days to the process.

5.  Purchase and Sale Agreement - Considerations

Once you receive and accept an offer, your agent or attorney will submit the purchase and sale agreement to your lender.  Short sale agreements are typically contingent upon lender approval as the buyer cannot get title to the property clear of the existing loans absent approval from the existing lenders.  However, the agreement should also be contingent upon the lender "waiving the deficiency" that remains after closing, otherwise you could get approval from the lender, close the sale, and then get a letter months later demanding you pay the remaining balance owed on your loan(s).  Just because a lender has approved the sale does not mean they are agreeing to release you from the entire debt.  If the short sale approval letter from the lender does not specifically state that will not to pursue the deficiency or the deficiency amount on the loan is being "waived", then you will still owe the remaining balance on the loan that was not paid out of the short sale proceeds.

6. Documents to Submit to Lender

Once you have an offer in play, the following is typically required by your lender and should be sent together as a short sale package:  (1) Purchase and Sale Agreement signed by buyer and seller;  (2) A hardship letter describing why you are unable to meet your loan obligations;  (3) Tax returns for the last two years;  (4) Bank statements (recent two months); (5) Proof of unemployment or paystubs (recent two months);  (6) Statement of Assets & Liabilities (e.g., Fannie Mae Form 1003A) or Profit/Loss Statement if self employed;  (7) Notarized Authorization to Release Information to listing agent and attorney (needed to negotiate with lender);  (8) Recent Comprehensive Market Analysis (provides activity data in the area for last six months and includes Active, Pending and Sold properties);  and (9) Preliminary HUD (shows net amount that lender will receive from the sale).

7. Keep Buyers in the Loop

Most buyers will agree to a 60 day timeline to obtain lender approval, but will they agree to postpone the closing if the lender takes twice as long? If a buyer is on a tight schedule because they are selling or have sold their own house, the agent and attorney will need to work in tandem to make sure the file gets processed in a timely manner. It is not uncommon for a lender to submit its approval letter the day before closing, and they will even miss the fact that the deal has been lost due to their delay unless they are reminded of key deadlines in a manner that is persistent and firm. If lender approval has not been obtained within 2 weeks of closing, the buyer should be informed that the closing date may need to be pushed out. This is especially true if the seller is still negotiating a waiver of the deficiency.  If the buyers are unable to extend the closing date, inform the lender in writing.

8. Short Sale v. Foreclosure

One of the primary reasons for selling a house short is to avoid foreclosure. One of the primary reasons for a lender to approve a short sale is to avoid foreclosure. Selling a house at foreclosure is almost always a last resort for everyone involved in the short sale process.  However, if the lender will not agree to waive the deficiency, the seller might be better off if the bank foreclosed, especially in a non-recourse state.  Having a real estate attorney explain all the benefits and risks associated with short sales, foreclosures, and even bankruptcy is a small price to pay for peace of mind.

  Additional Resources

http://en.wikipedia.org/wiki/Short_sale_(real_estate) 

http://en.wikipedia.org/wiki/Mortgage_Forgiveness_Debt_Relief_Act_of_2007

Ms.  McNeill is a real estate lawyer in Washington State. She works with Sellers, Real Estate Agents and Negotiators on Short Sale and Foreclosure issues.  This blog is intended to cover general topics for informational purposes only and is not intended to be taken as legal advice or to create an attorney-client relationship.  For more information about  your legal rights and options, please call (425) 455-4307.