Understanding the National Mortgage Settlement

loan modification national mortgage settlement

 

In the last few months, there has been a steady stream of news stories about the “National Mortgage Settlement” reached by the biggest mortgage lenders, the federal government, and every state that isn’t Oklahoma.  As with any trending news related to the foreclosure crisis, this development has prompted dozens of calls to my office from clients and potential clients who want to know about its impact, if any, on their efforts to save their homes.

While the mortgage settlement itself is complex, the general outlines can be expressed simply.  The settlement affected the “big five,” which are Bank of America, Wells Fargo, Chase, Citibank, and GMAC (now known as Ally Financial).  Those lenders agreed to a combination of loan modifications and loan forgiveness to atone for their bad behavior, which included false affidavits and other legal shenanigans during the foreclosure crisis.

One important thing to mention about this is that the settlement does not REQUIRE the banks to modify any particular mortgages.  However, while they are allowed to choose in which cases they will offer relief, they have certain financial obligations to meet.  In total, these amount to $17 billion.  How each modification or loan forgiveness is counted for this purpose is complex; the important thing to keep in mind is that they are obligated to offer some form of relief to hundreds of thousands of people.

In addition, the settlement provides payments for some people who lost their homes in foreclosure, if there were mistakes or abusive practices involved.

From a practical standpoint, here is what we are seeing: more people are getting approved for modifications, and they tend to be processed much more quickly than in the past.  They are also approving loan modifications while the borrowers are in bankruptcy, in some cases more easily than before the bankruptcy was filed.  This is likely due to a combination of factors, including the elimination of unsecured debt or the management of back taxes.  That makes the borrower less of a risk to re-default, and makes the banks more likely to offer relief.

For borrowers in an active bankruptcy, loan modifications are still available.  However, Court approval may be required, though it is almost always given if the documents are filed  properly.  If the case is filed under Chapter 13, the plan may need to be modified, or in certain cases, the case can simply be dismissed or converted, since the modification usually fixes the arrears and brings the loan current.

As a borrower, the way to take advantage of this settlement is to contact your lender, and apply for a loan modification.  In addition, there is a claim form you can fill out, and this must be done by January 18th, 2013.  It really is that simple.  And, while I won’t give my whole spiel about this topic, resist the urge to pay a company thousands of dollars to “assist” you in obtaining a loan modification.  If it can be done, it can be done by you, and professional help is only likely to lighten your wallet.

You also should check to see if your state has a website with specific information about the settlement.  Those sites generally contain information and instructions on how to take advantage of the settlement.

Good luck, and happy hunting!

~Andrew

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How to Save a Home in Chapter 13

chapter 13 save home mortgage foreclosure

Most people struggling to keep their home know that bankruptcy is one way to avoid foreclosure.  In this post, I will explain the nuts-and-bolts of how you can save your home- and cure your mortgage delinquency- through a Chapter 13 bankruptcy reorganization.

First, let me briefly explain what a reorganization is all about.  It is NOT a bankruptcy in which you are simply walking away from your debts.  Rather, you are proposing a plan, usually lasting three or five years, in which you will repay a portion of your debts based on your ability to repay them.  Each month, you make a single payment to a bankruptcy trustee, and they pay your debts on your behalf according a plan you draft with your attorney.  That plan, when approved by the Court, is binding on all your creditors.

Now, not every district is the same when it comes to mortgage delinquency.  In some areas, including the Sacramento area, the trustee makes your mortgage payment, as well as repaying your arrears.  This is known as a “conduit” jurisdiction, since the trustee is a conduit for your regular monthly payments.  In other areas, you continue to pay your monthly mortgage payment, and the trustee only pays the portion needed to cure your arrears.

The payment is calculated as follows:  First, your regular, ongoing mortgage payment remains the same.  It must be paid each month.  Second, your total amount of mortgage arrears must be provided for, though usually without interest or further penalties.  For example, if you have a $1,000 per month mortgage payment, are $15,000 in arrears, and propose a five-year reorganization plan, your new payment to your mortgage lender will be $1,250.  That is the ongoing amount, plus just enough to “cure” the arrears over five years (sixty months).

As you can see, the Chapter 13 plan operates as a kind of “reverse modification,” in that your payment is likely to go up, not down.  However, being in a Chapter 13 does NOT mean you cannot apply for a loan modification.  Several of my clients have entered Chapter 13 to save their homes from foreclosure, and have later gotten modifications that deal with the arrears and lower the monthly payments.  If that happens, the court will usually approve a modified plan that allows you to pay the modified amount to your mortgage creditor, so you are not locked in to the higher payments of your plan.

Chapter 13 plans are not “fire and forget.”  They can be modified at any time.  While you are in the plan, however, your mortgage creditor cannot foreclose on you, as long as you keep making your payments according to the terms of the plan.  It is a solid defensive strategy to avoid foreclosure.

One additional note about Chapter 13: if you have a second mortgage that is entirely underwater (i.e. your home would be underwater even if you didn’t have a second mortgage, but you do), most courts will allow you to “strip off” the second mortgage, and treat it as unsecured debt.

If you have taxes, car loans, or other secured debts, those might also affect your Chapter 13 plan, so you should talk to your attorney to see what the broader plan will look like in your situation. However, the basics of saving a home through Chapter 13 will be consistent with the explanation above.

Chapter 13 is usually the best solution if you are seriously delinquent due to an interruption in income or a major life event, but you have enough money to resume making your mortgage payments, plus pay a small part of your arrears each month.  It is not for everyone, but in many cases, it is exactly what a homeowner needs to avoid foreclosure and keep their home.

~Andrew