A Loan Modification is a permanent change in one or more of the terms of a Borrower's loan, allows the loan to be reinstated, and results in a payment the Borrower can afford.
Question 1: How many Loan Modifications may a Borrower receive?
Answer: Borrowers are permitted to receive a Loan Modification or FHA-HAMP only once within a 24-month period. See ML 2013-32.
Question 2: How does a lender determine a borrower’s eligibility for a Loan Modification?
Answer: Lenders are to use specific financial analysis criteria when determining a borrower's eligibility for the Loan Modification Option:
- The household or mortgagor(s) has experienced a verifiable loss of income or increase in living expenses;
- One or more mortgagors receives “continuous income” in the form of employment income (e.g., wages, salary, or self-employment earnings), social security, disability, Veterans benefits, child support, survivor benefits, and/or pensions;
- The mortgagor’s surplus income is at least $300 and is at least15 percent of his/her net monthly income;
- 85 percent of the mortgagor’s surplus income is insufficient to cure arrearages within six months;
- The mortgagor’s monthly PITI mortgage payment can be reduced by the greater of 10 percent of the original monthly mortgage payment amount and $100, using the Market Rateand amortizing the new loan over 30 years;
- The mortgagor has successfully completed a 3-month Trial Payment Plan based on the reduced mortgage payment amount or a 4-month Trial Payment Plan in cases of imminent default; and
- The mortgagor has not received a Loan Modification or FHA-HAMP in the previous 24 month period.
See Mortgagee Letter 2013-32.
Question 3: When utilizing the Loan Modification option, may the lender include all fees and corporate advances?
Answer: Yes. Legal fees and related foreclosure costs for work actually completed for the current default episode may be capitalized into the modified principal balance. See ML 2008-21.
Question 4: May a lender perform an interior inspection of the property if they have concerns about property condition?
Answer: Yes. The lender may conduct any review it deems necessary to verify that the property has no physical conditions adversely impacting the borrower's continued ability to support the modified mortgage payment. See ML 2000-05.
Question 5: May a Lender include late charges in the Loan Modification?
Answer: The lender is expected to waive all accrued late fees. See ML 2008-21.
Question 6: When completing the Loan Modification Option, what interest rate should the lender use?
Answer: The lender should modify the interest rate to the current Market Rate, defined as a rate that is no more than 25 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) Rate for 30 year fixed-rate conforming mortgages (US average), rounded to the nearest one-eighth of one percent (0.125%), as of the date a Trial Payment Plan is offered to a borrower. See ML 2013-17.
Question 7: Are Lenders required to re-amortize the total amount due over a 360 month period?
Answer: Yes, the Lender must re-amortize the total unpaid amount due over a 360 month period from the due date of the first installment required under the modified mortgage. See ML 2009-35.
Question 8: Are lenders required to perform an escrow analysis when completing a Loan Modification?
Answer: Yes, Lenders are to perform a retroactive escrow analysis at the time of the Loan Modification to ensure that the capitalized delinquent payments reflect the actual escrow requirements required for those months capitalized. See ML 2008-21.
Question 9: Can a lender qualify an asset for the Loan Modification option when the borrower is unemployed, the spouse is employed, but the spouse’s name is not on the mortgage?
Answer: Based upon this scenario, the lender should conduct a financial review of the household income and expenses to determine if surplus income is sufficient to meet the new modified mortgage payment, but insufficient to pay back the arrearage. Once this process has been completed the lender should then consult with their legal counsel to determine if the asset is eligible for a Loan Modification since the spouse is not on the original mortgage. See ML 2000-05 and ML 2013-32.