Loan Modifications and The "Making Homes Affordable Act"
By: Brett Henson
The Obama administration's recent bailout of the financial services industry now includes aid to homeowners facing foreclosure in their primary residential home. One important aspect of the bailout plan is the establishment of incentives for banks to modify loans through the "Making Homes Affordable" Act (MHA). Many commentators have pointed out that while banks have a method of disposing of REO properties, there are a lack of incentives for banks to complete short sale transactions and loan modifications. MHA seeks to make these transactions more advantageous for both banks and homeowners: mortgage servicers can receive $1,000 for successful completion of a short sale or deed-in-lieu of foreclosure , and $1,500 to borrowers for transferring title back to the bank.
MHA also provides $9.0 million worth of financial incentives to mortgage servicers to modify loans. It requires that the homeowner sign a financial hardship affidavit, and in exchange, the Servicer will decrease the interest rate and lengthen payment periods. The goal of the incentives are to reduce payments to 31% of homeowners' pretax monthly income for residential, single family homes, and in which the principal balance is below $729K. It does not apply to individuals who bought properties for investment purposes. A second component of the plan is to allow for borrowers from Freddie Mac and Fannie Mae to refinance if they owe more than their home is worth, up to 105% of the deficiency between the value of the home and the amount owed. Between these two components, the Obama administration estimates that 1 out of 9 homeowners facing foreclosure will receive aid under the plan.
Since the enactment of MHA in February, mortgage industry analysts have pointed to the successes of loan modifications that reduce the principal amount of the mortgage. According to LPS Applied Analytics, modifications that reduce principal have a 25% lower re-default rate within 6 months than other types of loan modification. Further, Fitch Ratings has found in a recent report that homeowners who receive principal reductions are 20-30% less likely to re-default. At Yesner & Boss, P.L., our attorneys and Short Sale & Debt Negotiation team will work with you and your lender in reaching a favorable modification of the terms of your loan.
U.S. Senate rejects "Cramdown Bill"
On January 14, 2009 we posted an article titled "The Helping Families Save Their Homes In Bankruptcy Act Of 2009." Nearly five months later the U.S. Senate has finally settled the issue by rejecting the bill that was introduced earlier this year by Illinois Senator Dick Durbin. The bill sought to amend certain provisions of the Bankruptcy Code which would have allowed bankruptcy judges to modify mortgage loans on primary residences in a bankruptcy proceeding.
Those who supported the bill hoped that the judicial power of modifying loans would persuade banks to voluntarily modify mortgage loans rather than face the uncertain outcome of a modification in a bankruptcy hearing. However, the U.S. Senate firmly rejected this bills success early this May. Both republicans and democrats sided with the banking industry and against homeowners regarding this proposition including Florida Senator Mel Martinez. On the other side several Senators strongly fought for this bills success in an effort to remedy the current mortgage crisis in the U.S., especially in states such as Florida. Those supporting Senators included Florida Senator Bill Nelson, Dick Durbin who introduced the bill, and the President, Barack Obama.
With the rejection of this proposed amendment to the Bankruptcy Code the power of banks who hold mortgage loans has been reaffirmed. Loan modifications of a primary residence are, as a result, still a voluntary process which banks are not forced to provide and judges are not allowed to do on their own.