MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN
TROY, MI – On July 30, HUD published Mortgagee Letter 2009-23, that detailed their long awaited loan modification program for homeowners with FHA mortgages. What took so long? President Obama announced the “Making Home Affordable Program” (MHA) for FNMA & FHLMC mortgages back on March 4th of this year.
We should all be glad HUD’s modification program is finally available, but HUD is supposed to be a homeowner advocate and watchdog. Some watchdog! HUD’s response time on this means if they were guarding your house, the crooks would have already been back several times and stolen everything but the kitchen sink before they sounded an alarm.
This latest piece of legislation does show the Obama administration fully believes the best way to solve the housing crisis and stem the tide of foreclosures is to make home payments affordable. This was sorely lacking with FHA’s other modification options. Most homeowners with FHA mortgages were forced into forbearance programs that usually increased their monthly payments.
HUD’s forbearance program was actually designed for different economic times when a job loss or other economic hardship was typically temporary. Worse-case in those days, a homeowner could usually sell their home to pay off the mortgage they were having difficulty paying. The current Great Recession and percentage of upside homes no longer makes forbearance a very realistic and viable option.
The new guideline kicks in August 15, 2009 for homeowners with FHA mortgages.
Who’s Eligible
The FHA mortgage to be modified must be at least 12 months old and the homeowner must have made at least 4 full monthly payments.
The FHA mortgage must be less than 12 months behind on payments, but surprisingly, it s required that the mortgage be at least 30 days behind. This is a major difference from the MHA program where no delinquency is required.
The homeowner must still live in the property with the FHA mortgage being modified, so rental properties with FHA mortgages are not eligible.
The homeowner cannot have deliberately defaulted on their FHA mortgage payments. I’d like to know how HUD and the mortgage servicers intend to determine this. My guess is that they won’t - except in obvious cases where a homeowner has a lot of liquid reserve funds in non-retirement accounts.
The homeowner must first try to qualify for other loss mitigation home retention options – FHA Special Forbearance, Loan Modification and Partial Claim. This is a silly requirement that could lead to confusion, unnecessary delays and ultimately foreclosures instead of the intended modifications. FNMA & FHLMC modifications have no such requirement.
The Modification Process
A homeowner will have to submit detailed financial information to whoever is servicing their FHA mortgage and sign a hardship affidavit attesting to their financial difficulties. This information may be provided either in writing or verbally over the phone.
Similar to the FNMA/FHLMC modification process, the goal of the FHA modification is to lower the Principal, Interest, Taxes & Insurance (PITI) payment to 31% of the homeowner’s gross monthly income. HUD calls this a Front End Ratio.
Unlike the FNMA/FHLMC modification program though, the FHA version also has a Back End Ratio requirement where total debt payments including PITI, cannot exceed 55% of gross monthly income. Any second mortgages must also be included in the Back End Ratio.
The last calculation is the toughest to understand – up to 30% of the current mortgage balance, less payments in arrears (up to 12 months) and allowable foreclosure costs, may be deferred along with the corresponding payment amount. The amount deferred is also limited to that which will bring the PITI payment down to 31% of the homeowner’s gross monthly income.
Confused yet? I’d like to know why HUD made this so complicated. It’s bound to cause major confusion in the customer service ranks. HUD did provide an example to illustrate the process:
Homeowner had a reduction of income and is delinquent 3 full mortgage payments. The unpaid principal balance on the mortgage on the date of default is $150,000 and the monthly payment is $1,220 (consisting of P&I of $920 and escrows, including MIP, of $300). The financial analysis reveals that the homeowner’s gross monthly income is $3,500 and the total monthly other recurring debt payments are $800.
In order to fulfill the 31% Front End Ratio requirement, the homeowner’s total monthly mortgage payment would have to be reduced to $1,085 ($3,500 x 31%). Therefore, P&I would have to be reduced to $785 ($1,085 total monthly mortgage payment less $300 escrow and MIP). Assuming that the loan modification will have an interest rate of 6% and a P&I of $785, the new mortgage amount would have to be $130,931, resulting in a principal reduction of $19,069 ($150,000 unpaid principal balance less $130,931). In this example, the homeowner’s Back End ratio is 53.9% ($1,885/$3,500), which satisfies the 55% Back End Ratio limitation.
In this example, the maximum principal deferment is $41,340 (30% of $150,000, less the $3,660 delinquency, or $45,000 - $3,660). However, based on their gross income, the homeowner is eligible only for a principal deferment of $19,069 plus $3,660 arrearages (which would include any foreclosure costs incurred to that point, in accord with Mortgagee Letter 2008-21) for the total deferment of $22,729.
Once a modified payment is calculated, a homeowner must undergo a trial modification period and make three consecutive trial monthly mortgage payments on time. Failure to do so will result in foreclosure.
The good news is that no payments will be due and no interest charged on the amount deferred until the rest of the mortgage is paid off. HUD is NOT forgiving part of the mortgage balance. Effectively, HUD is lowering the current payment by extending the term of the mortgage.
Other Issues
A lender may not charge a homeowner any fees for doing an FHA loan modification and all late fees must be waived.
No appraisal is required, but a lender may perform an inspection of the property to confirm it’s in livable condition.
The interest rate may be lowered to 2% above the monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of 10 years.
A modified mortgage must result in a lower payment for the homeowner.
By the way, lenders will be paid up to $1250 for each FHA mortgage they modify. Hopefully, lenders use that money to hire a few extra bodies to handle the increased workload and don’t just use the funds to pad their profits.
Click here to read more HUD issued guidelines on modifications.
Overall, it’s about time HUD caught up with FNMA & FHLMC in regards to more aggressive loan modification guidelines. It didn’t make sense to force FHA lenders to only offer an antiquated forbearance option to homeowners experiencing economic hardships.
It’s interesting that there’s still no official loan modification program to lower payments on VA mortgages.
I’d like to know how many homeowners with FHA mortgages lost their homes to foreclosure while waiting for these new modification guidelines from HUD. Many of them could probably have avoided foreclosure with this new modification plan. Congress should call the organization to task for this delay.
If anyone you know has any questions on modifying their FHA mortgage please forward them this article. Although we don’t handle loan modifications, if they need further assistance have them contact me, but please warn them there may be a consulting fee for my time.
Posts
Drew - What is not addressed is how the "prinicpal forbearance" will be accounted for and accrued.
ReplyDeleteAnd how does this solve the issue of negative equity? These homeowners will now be "mortgage slaves" and while they may have a lower payment they are buried with Neg equity and if and when they need to sell - they are a short-sale or a walk away anyway.
The Gov't just keeps skirting the REAL issue - how to handle prinicpal reduction without killing the capital markets or a bank's balance sheet.
Let's have that discussion - that is what is necessary.
Thanks!
Wasn't TARP supposed to take care of this when it was originally created? Seeing as we are in uncharted times, possibly new accounting methods need to be considered. Right now we are doing a slow bleed in my opinion based on what John has stated. The quicker we can find the bottom the sooner we can get back to building a "real" growing economy...the sooner the better!!
ReplyDelete"I’d like to know how many homeowners with FHA mortgages lost their homes to foreclosure while waiting for these new modification guidelines from HUD. Many of them could probably have avoided foreclosure with this new modification plan." - You're exactly right Drew!! We've had extreme cases with some of our clients because they are ineligible to get modifications or refinance.
ReplyDeleteDavid - since FHA financing did not come back into favor in many of the "boom/bust" markets until late 2007, many of the Loan Mods / Short Sales / Foreclosures were most likely not HUD Insured FHA loans. Also - with the large percentage of FHA loans done in the last 2-3 years at historically low fixed rates (<6.5%) then how will Ginnie Mae allow these loans to be "modified"? We already know their attempt at principal reduction fell flat on its face - now this new idea above is "principal forbearance" - helps no one EXCEPT the Capital Markets (aka the holders of those Ginne Mae MBS's).
ReplyDelete