March 18, 2009 – On March 5, the U. S. House of Representative passed (234 to 191) the Helping Families Save Their Home Act of 2009 (HR 1106). The Act, a supplement to the Obama Administration’s Making Home Affordable Plan, encourages affordable voluntary modification of mortgages by providing financial support and incentives to all parties.

There are three separate and distinct components to the plan, and each must be examined separately to determine how they can best help our clients. First a word of warning, as I cautioned in the last edition of InsideTrack (Mortgage Modifiers: Beware of Upfront Fees), there are no upfront fees associated with this plan. The government advises anyone being asked to pay an upfront fee to “run the other way.”

Home Affordable Refinance Program

The first phase is the Home Affordable Refinance Program. To be eligible for this phase of the program:

1. The loan must be for the homeowner’s primary residence;
2. The loan must be a Fannie Mae (1-800-7FANNIE) or Freddie Mac loan (1-800-FREDDIE);
3. The client must be current on mortgage payments. Current is defined by the program as having not been more than 30 days late on your mortgage payments in the last 12 months); and
4. The amount you currently owe on the first mortgage is about the same or less than the current value of your house.

If your client answers yes to all four points, he is eligible for the refinance component of the plan.

Home Affordable Modification Program

The second phase of the program is the Home Affordable Modification Program. To be eligible for this phase of the program:

1. The loan must be for the homeowner’s primary residence;
2. The amount you owe on your first mortgage must be equal to or less than $729,750;
3. The homeowner must be experiencing trouble paying the mortgage because of a hardship, i.e., unexpected medical bills, loss of income, or significant increase in your mortgage payment; and
4. The loan must have been originated before Jan. 1, 2009.

If your client can answer yes to all four points, she is eligible for the modification component of the plan. However, it is not mandatory on the part of the mortgage servicer to cooperate with the program. Its cooperation is voluntary. There are, however, financial incentives for the servicer to participate. Those include:

1. Monthly Payment Reduction Cost Share. The lender must reduce the mortgage payments to no greater than 38 percent of the borrower’s debt-to-income ratio. The government will match further reductions to bring that ration to 31 percent.
2. Servicer Incentive Payments and Pay for Success Fees. Servicers will receive an upfront payment of $1,000 for each loan modification meeting established guidelines, plus an additional $1,000 for each year the borrower is successful in the modified loan up to three years.
3. Current Borrower One-Time Bonus Incentive. One-time bonuses of $1,500 to lender/investors and $500 to servicers for modification made while a borrower is still current.

In order to receive the incentive payments, the servicer must enter the Treasury Department’s Program and agree to its terms no later than Dec. 31, 2009. New borrowers will be accepted into the program until Dec. 31, 2012.

The industry standards in the Pooling Servicing Agreements are unaffected. The servicer is required to consider all eligible loans unless prohibited by the PSAs rules. Servers participating in the program are “required to use reasonable efforts to remove any prohibitions and obtain waivers or approvals from all necessary parties.”

Are the incentives enough to motivate the servicers to cooperate with the program and provide the voluntary modifications the program envisions? Time will tell. If the program’s Refinance or Modification phases are the proverbial carrot, the Judicial Modification phase is the stick.

Judicial Modification

The Judicial Modification Phase allows for the modification of certain mortgages under Chapter 13 of Title 11 of the U.S. Bankruptcy Code. The homeowner can reduce principal to current fair market value, change a variable rate loan to fixed rate loan, and extend the term of the loan to 40 years, minus the amount of time the loan has been outstanding.

If the homeowner receives a Judicial Modification, he must pay back the lender on a sliding scale from the net proceeds of the house from 90 percent in the first year of the Chapter 13 plan to 10 percent in the fifth year of the Chapter 13 plan. If the home is sold after completion of the Chapter 13 plan, the homeowner is entitled to the entire amount of the sale of the home. In order to qualify for Judicial Modification:

1. The mortgage must be for the debtor’s principal residence.
2. The debtor must submit certification to the court that a foreclosure may be commenced by the lender at least 30 days prior to filing a petition.
3. The debtor, no less than 30 days prior to filing a petition, must have contacted the lender regarding modification of the mortgage. The debtor must provide the lender with current income and expense details and must consider any affordable qualified loan modification. A qualified loan modification means a loan in accordance with the Obama Administrations Making Home Affordable Modification guidelines.

If the home is subject to a foreclose sale, these requirements are waived.

While the voluntary portions of the Act went into effect March 4, the judicial modification phase is awaiting action in the Senate.

Edward W. Harness, Harness Law Offices LLC, Milwaukee, is regional co-counsel for the National Consumer Bankruptcy Litigation Center and a member of the National Association of Consumer Bankruptcy Attorneys.