Module 5 Flashcards
negative amortization
an increase in the principal balance of a loan caused by monthly payments that do not cover the interest due
the unpaid interest is added to the unpaid principal balance, causing the loan to grow over time
can occur when an ARM has a payment cap that results in monthly payments that are not high enough to cover the interest due
subprime lending
loans to borrowers with poor credit
typically charge higher interest rates to insure against losses
teaser rates
an initial temporary interest rate on an adjustable-rate mortgage that results in lower mortgage payments
to attract borrowers, the rate is typically lower than the market rate, but only remains in effect for a short period of time before increasing, which in turn increases mortgage payments
can be a sign of predatory lending
Consumer Finance Protection Bureau
- est by Congress as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act
- protects consumers by carrying out federal consumer financial laws
- supervises companies and restricts unfair, deceptive, or abusive acts or practices
- takes consumer complaints
- promotes financial education
- monitors financial markets for new risks to consumers
dual tracking
a process that occurs when the servicer moves forward with foreclosure while simultaneously working with the borrower to avoid foreclosure
restricted by the CFPB mortgage servicing regulations
Hardest Hit Fund (HHF)
- est by the Department of Treasury in Feb. 2010
- provides $7.6 billion to District of Columbia and 18 states hardest hit by the foreclosure crisis to develop locally-tailored programs to assist struggling homeowners in their communities
- designed and administered by each state’s Housing Finance Agency (HFA). Most aimed at helping unemployed homeowners remain in their homes while they search for new employment and those who owe more on their mortgages than their homes are worth
- have until the end of 2020 to utilize funds allocated under HHF
Making Home Affordable Program (MHA)
- created in 2009 by Treasury and HUD to help homeowners avoid foreclosure, stabilize the country’s housing market, and improve the nation’s economy
- standardized process for requesting mortgage assistance for the unemployed, and financial assistance to transition out of the home when necessary
- most programs under MHA expired in 2016; however, counselors may have clients with modifications whose payment amounts will increase after five years
robo-signing
the process in which important documents that require careful review are signed automatically, like a robot, by someone who does not follow appropriate procedures or verify information
a common practice in the foreclosure crisis
Servicemembers Civil Relief Act
an act that protects military personnel and their dependents in issues related to housing, including certain protections against default judgments, foreclosure, and eviction
delinquent in mortgage payments
the failure of a borrower to make timely mortgage payments under a loan agreement
most mortgages allow for a grace period, generally 10-15 days, before a late fee may be assessed
default in mortgage payments
the inability to make timely payments or fulfill legal obligations of loan terms
mortgage loans are typically considered in default when a payment has not been made after 60-90 days
foreclosure timeline restrictions
servicers cannot make a first notice or filing for foreclosure until the borrower is more than 120 days delinquent
after 120 days, servicers cannot begin the foreclosure process while a borrower is being evaluated for a loss mitigation plan - for completed loss mitigation applications, additional restrictions and timelines apply for required evaluation and appeal periods
servicer evaluations and explanations
servicers must be able to tell homeowners the circumstances under which the servicer may make a referral to foreclosure
servicers are required to evaluate the borrower for all the foreclosure avoidance options for which the borrower may qualify, though they are not required to offer any specific loss mitigation options
servicers must give specific reasons for denying a loan modification option
court involvement in judicial foreclosure vs non judicial foreclosure
in a judicial foreclosure: it is a lawsuit, so the process is formalized. To obtain permission to foreclose, the servicer files a lawsuit in state court. Many servicers will issue homeowners a notice of intent to foreclose prior to filing.
In a non-judicial foreclosure: courts are not involved; communication occurs between the homeowner and the servicer or the servicer’s appointed representative in the foreclosure process
notice in judicial foreclosure vs non-judicial foreclosure
judicial: the servicer issues the homeowners a notice of the lawsuit via a summons or complaint - the time frame for response varies, but homeowner can choose to contest the foreclosure or let it proceed
non-judicial: in most states, servicer issues a Notice of Default (NOD) - though the timeline on this notice previously varied among states, CFPB guidelines specify that this notice can only take place after 120 days of delinquency
resolving the issue in judicial foreclosure vs non-judicial foreclosure
judicial: a court date is set to present arguments - judge may order a trial, and the servicer cannot take action regarding the foreclosure until the judge rules
non-judicial: if delinquency is not cured, the homeowner gives Notice of Sale (NOS) typically 90 days after the NOD. NOS typically gives homeowner a certain number of days before house will be sold, which varies by state. Homeowner typically has 5-10 days before the sale date to cure the delinquency (i.e., pay all past due amounts, including arrearages, fees, and interest accrued)
how to cure at the last minute in judicial vs non-judicial foreclosure
judicial: if the judge issues a judgment allowing the foreclosure to go forward, the homeowner may still have 30 days to cure the delinquency in many states
non-judicial: once the period for reinstatement has ended, the servicer can schedule the sale. Very rarely will a servicer stop a foreclosure sale at this point
result of no cure in judicial and non-judicial foreclosure
if not cured, an auction sale is scheduled
the ownership transfers to the servicer by lack of sale if the house is not sold at auction
at that point, the homeowner can be evicted following state regulations
loan acceleration
the process of accelerating the payment of the full loan balance
once a homeowner is in default for a certain period of time, a clause in many promissory notes allows the lenders to demand immediate payment of the remaining loan balance
conventional mortgage
a private sector loan typically issued to borrowers with high credit ratings
excludes subprime loans or mortgages insured by the US government
GSE loan or mortgage
a government-sponsored enterprise, or GSE, is a financial services entity created by Congress
a GSE loan or mortgage refers to a mortgage owned by Fannie Mae or Freddie Mac
loss mitigation submission process (8 steps)
- determine reason client is behind on mortgage payments
- determine if homeowner wants to remain in the home (retention) or transition out of the home
- determine the type of mortgage (e.g., conventional, FHA, VA, or USDA; if it is owned by Fannie Mae or Freddie Mac) to determine options and processes available through the servicer
- gather required financial documentation and determine affordability
- complete the necessary forms to request the loss mitigation option
- submit the request to the servicer
- respond to additional requests for information
- if request is approved, discuss if it is affordable - if it is denied, determine why - escalate, if necessary
imminent default
when default is reasonably foreseeable
typically applies to borrowers who are either current or less than 60 days delinquent
with FHA mortgages, borrowers facing imminent default are defined as those who are current or less than 30 days past due on the mortgage obligation and are experiencing a hardship that prevents them from making the next payment
surplus income
the amount of income left over after all financial obligations are met
calculated by subtracting expenses from net income
emergency budget
a household budget created to increase savings, reduce expenses, and/or pay down debt in financial emergency situations
possible indicators a client will not be able to remain in their home after foreclosure
- temporary or permanent disability of the homeowner, which prevents them from working
- illness or disability of a family member, which requires the homeowner to stop working to care for him/her
- drastic reduction in income, which will not be overcome
- job transfer at a time when the homeowner cannot sell the home because they owe more than it is worth
- death of an income-earning borrower
- divorce or separation
Home Affordable Modification Program (HAMP) - purpose
to assist homeowners who are struggling to make mortgage payments
Home Affordable Modification Program (HAMP) - benefit
lowered mortgage payments to make them more affordable and sustainable in the long-term
Home Affordable Modification Program (HAMP) - status
expired
Home Affordable Modification Program (HAMP) - next phase
most HAMP modifications offered greatly reduced interest rates for five years, then increased the interest rate at one percent or less for three or four years, though rates were not to exceed the market rate
some homeowners with a HAMP modification may need help handling higher mortgage payments due to the reset of the interest rate after five years
additionally, the mortgage industry at large uses lessons learned from HAMP to guide universal principles for loan modification program options
Fannie Mae Flex Modification and Freddie Mac Flex Modification - overview
the flex modification leverages Fannie Mae and Freddie Mac Standard and Streamlined Modifications
modifications can be applied to all mortgage loan delinquencies and to mortgage loans determined to be in imminent default
Fannie Mae Flex Modification and Freddie Mac Flex Modification - purpose
to provide an easier, flexible way of helping more borrowers qualify for a loan modification in a changing housing environment
Fannie Mae Flex Modification and Freddie Mac Flex Modification - benefit
provides eligible borrowers an option to resolve delinquency and sustain homeownership by targeting a 20% payment reduction
Fannie Mae Flex Modification and Freddie Mac Flex Modification - key eligibility
borrower must be 60 days or more delinquent and occupy the property as a primary residence OR be current or less than 60 days delinquent, occupy the property as a primary residence, and be in imminent default
AND
submit a Borrower Response Package (BRP), which includes:
- completed and signed Form 710, Uniform Borrower Assistance Form
- eligible hardship documentation
- documentation to verify stable income to support a monthly payment
- imminent default hardship documentation, for borrowers less than 60 days delinquent
Fannie Mae Flex Modification and Freddie Mac Flex Modification - restrictions based on mortgage loan
- must be owned by Fannie Mae or Freddie Mac to qualify for respective program
- must have originated at least 12 months prior to loan modification request
- must not have been modified three or more times previously, regardless of the loan modification program or dates of prior modifications
Fannie Mae Flex Modification and Freddie Mac Flex Modification - restrictions based on primary residence
if investment property, must be more than 60 days delinquent
Fannie Mae Flex Modification and Freddie Mac Flex Modification - status
mandatory evaluation effective Oct. 1, 2017
financial documents generally required for clients to submit with their application for loss mitigation requests
- monthly mortgage statement
- information about other mortgages on the home, if applicable
- two most recent pay stubs for all household members contributing toward the mortgage payment
- last two years of tax returns
- the most recent quarterly or year-to-date profit and loss statement, if self-employed
- documentation of income from other sources, such as alimony, child support, social security, etc.
- two most recent bank statements
- a utility bill showing homeowner name and property address
- unemployment insurance letter, if applicable
- account balances and minimum monthly payments due on all credit cards
- information about savings and other assets
- a letter describing any circumstances that caused reduced income or increased expenses, such as job loss, divorce, illness, etc. (not always required, but often useful)
Request for Mortgage Assistance (RMA)
form that a borrower must complete to be considered for mortgage loan modification options
FHA Loss Mitigation Home Retention Options
Informal/Formal Forbearance Plan - purpose
to assist borrowers who are temporarily struggling to make mortgage payments
FHA Loss Mitigation Home Retention Options
Informal/Formal Forbearance Plan - benefit
allows for a period of reduced or suspended payments and may provide specific terms for repayment, depending on circumstances
lenders must consider these steps before proceeding with other options
FHA Loss Mitigation Home Retention Options
Informal/Formal Forbearance Plan - key eligibility
borrower must:
- occupy home as primary residence
- demonstrate financial hardship
- demonstrate income
- demonstrate surplus income over minimum limit (85% of income must be sufficient to bring the mortgage current within 6 months)
FHA Loss Mitigation Home Retention Options
Special Forbearance - Unemployment Agreement - purpose
to assist unemployed borrowers
FHA Loss Mitigation Home Retention Options
Special Forbearance - Unemployment Agreement - benefit
suspends and/or reduces the current monthly mortgage payment, ensuring that forbearance installments are based on the borrower’s ability to pay
if the borrower’s circumstances change, the servicer can reevaluate and adjust the payment
the agreement will include an expiration date, though it can be revised or terminated earlier due to a change in financial circumstances
prior to expiration, the borrower will be evaluated for an additional forbearance period or a permanent loss mitigation option
FHA Loss Mitigation Home Retention Options
Special Forbearance - Unemployment Agreement - key eligibility - restrictions based on
- mortgage delinquency (at least 3 months delinquent, or more than 61 days)
- maximum arrearage (not to exceed 12 months of PITI)
- state of property (not in foreclosure or foreclosure actions suspended)
FHA Loss Mitigation Home Retention Options
Special Forbearance - Unemployment Agreement - borrower must
- have verified unemployment status, leading to loss of income or increase in living expenses
- occupy home as primary residence
FHA Loss Mitigation Home Retention Options
FHA-HAMP Loan Modification - purpose
to assist borrowers who are struggling to make mortgage payments because they are no longer affordable and do not qualify for other FHA options
FHA Loss Mitigation Home Retention Options
FHA-HAMP Loan Modification - benefit
allows the mortgage to be reinstated by establishing an affordable monthly payment and/or through a partial claim
FHA Loss Mitigation Home Retention Options
FHA-HAMP Loan Modification - key eligibility - restrictions based on
- mortgage delinquency (in default or imminent default. Loan can be in foreclosure at time of FHA HAMP review but not at the time modification documents are executed)
- loan origination date (at least 12 months elapsed)
- mortgage payments paid (at least four payments)
- previous receipt of an FHA-HAMP Loan Modification (cannot be within previous 24 months)
- partial claim amount (cannot exceed 30% of unpaid principal balance)
FHA Loss Mitigation Home Retention Options
FHA-HAMP Loan Modification - key eligibility - borrower must
- demonstrate verifiable loss of income or increase in living expenses
- submit hardship affidavits
- be ineligible for other FHA workout options
- occupy home as primary residence
- demonstrate continuous income (at least one borrower)
- show surplus income insufficient to cure arrears in six months
- successfully complete a trial payment plan based on the FHA-HAMP monthly mortgage payment amount
FHA Loss Mitigation Home Retention Options
FHA-HAMP Loan Modification - partial claims
defers some principal so monthly payments are affordable
payment is not required until the maturity of the FHA-HAMP mortgage, the sale of the property, or the payoff or non-FHA refinancing of the mortgage; and no interest is charged
FHA Loss Mitigation Home Retention Options
FHA-HAMP Loan Modification - standalone partial claim
offered if the following criteria are met:
- current interest rate is at or below market rate
- affordable mortgage payment cannot be achieved by re-amortizing the mortgage for 360 months at market rate
- borrowers meets all requirements of the FHA-HAMP Option
- borrower is three months past due (61 days or more)
FHA Loss Mitigation Home Retention Options
FHA-HAMP Loan Modification - combination of FHA-HAMP Loan Modification and FHA-HAMP Partial Claim
used to establish an affordable monthly payment and provide an amount to cover:
- arrearage
- legal fees and foreclosure costs
- principal deferment
formula for calculating surplus income
net monthly income - PITI - expenses = surplus income
formula for calculating surplus income percentage
surplus income divided by net income = surplus income percentage
formula for calculating arrearages
number of mortgage payments missed multiplied by PITI = arrearages
formula for calculating forbearance qualification criteria
arrearages divided by (.85 multiplied by surplus income) = # of months for payment
common signs of a loan modification scam
company/person:
- asks for a fee in advance to work with your lender to modify, refinance, or reinstate your mortgage
- guarantees they can stop a foreclosure or get your loan modified
- advises you to stop paying your mortgage company and pay them instead
- pressures you to sign over the deed to your home or sign any paperwork that you haven’t had a chance to read and you don’t fully understand
- claims to offer “government-approved” or “official government” loan modifications
- asks you to release personal financial information online or over the phone, but you do not know the company/person
- offers to help modify your mortgage either directly, through advertising, or by other means such as a flyer
- asks you to surrender the title to your home in the belief you will be able to remain in the home as renters and buy your home back over the next few years
steps to report a loan modification scam
- call the homeowner’s hope hotline
- visit PreventLoanScams.org
- call the FTC
- call the state’s attorney general’s office
- call the HUD office of the inspector general hotline if an FHA mortgage
3 options for clients when homeownership becomes unaffordable
- foreclosure
- short sale/preforeclosure sale
- deed-in-lieu
foreclosure
a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower
foreclosure laws are based on the statutes of each state
short sale/preforeclosure sale
also called a preforeclosure sale, a short sale is a procedure in which a borrower sells a property for an amount less than the outstanding mortgage balance to avoid a foreclosure
basically, the mortgage company allows the homeowner to sell the house for an amount that falls “short” of the amount still owed
except in certain states or by agreement between homeowner and servicer, the sale does not necessarily satisfy the borrower’s debt and may result in a deficiency judgment
deficiency judgment
assessment of liability by a court against a homeowner for the unpaid balance owed to the servicer after a foreclosure, short sale, or deed-in-lieu if the sale does not cover the full amount owed
deed-in-lieu
a process that allows a homeowner to avoid foreclosure by providing a deed “in lieu” of foreclosure to the lender
the homeowner gives the title back and effectively transfers ownership to the mortgage company
except in certain states or by agreement between homeowner and servicer, the sale does not necessarily satisfy the borrower’s debt and may result in deficiency judgment
though it helps to avoid foreclosure, the process does not allow the homeowner to stay in the home
costs and consequences of foreclosure
- will remain on credit report for up to seven years and lowers credit score significantly
- will typically prevent the option to buy another home for several years–extenuating circumstances like co-borrower death, illness, severe injury, or job transfer can lessen the waiting period
- may limit how much time there is to vacate the property after the sale date
- may require paying taxes on the lender’s losses from the process
- may lead to a deficiency judgment if sale doesn’t cover the full amount owed
- will cause loss of accumulated equity/investment
- may lead to children attending new schools
options to reduce financial burden of foreclosure
- will receive financial assistance that can be used for relocation costs or other expenses
- may receive tax relief from paying taxes on the bank’s losses in the foreclosure
- can make a request to the lender that the option for a deficiency judgment be removed
GSE (Fannie Mae/Freddie Mac) mortgage disposition options
the available short sale and deed-in-lieu options, which share some common elements, may be good for a borrower that:
- is ineligible to refinance or modify the mortgage
- is facing long-term hardship that qualifies under specific program criteria
- is behind on mortgage payments, or in some cases, is at risk of falling behind in the near future
- owes more on the home than it’s worth, also known as an “underwater” mortgage
- can no longer afford the home and is ready to leave
GSE (Fannie Mae/Freddie Mac) mortgage disposition benefits
- eliminate or reduce mortgage debt
- avoid the negative impact of foreclosure
- repair credit sooner than with a foreclosure
- reduce time before eligibility to purchase a home again (in as few as two years, whereas foreclosure is seven)
- be eligible for up to $3,000 in relocation assistance in some cases (in certain states, relocation assistance for a deed-in-lieu may be as high as $7,000 for Freddie Mac mortgages and $10,000 for Fannie Mae mortgages)
cash-for-keys
an alternative to a legal eviction following foreclosure
the occupant receives cash funds from the servicer in exchange for turning in the keys and vacating the property
certain conditions apply, such as returning the property in broom-clean condition with all appliances
