Debt is the new normal. According to the New York Fed, total household debt has risen for the 19th straight quarter, now nearly $1 trillion above the previous peak reached during the financial crisis of 2008. While housing-related debt has not surpassed pre-financial crisis peaks, non-housing debt has grown by $1.33 trillion driven by a 144% increase in student loan debt and a 58% increase in auto loans. Thus, rising consumer debt has contributed to tighter household budgets overall. What’s worse, 60% of Americans have such meager savings that they can’t afford to pay an unexpected $1,000 expense.
As Americans continue to become more leveraged and wage growth remains consistently low, many borrowers will find it harder and harder to keep up with their monthly mortgage payments, among other debt obligations. Some may become so overwhelmed that they become seriously delinquent and are ultimately forced into foreclosure by their lender. While overall foreclosure activity is down across the country, foreclosure filings have already started to increase again in some markets. Overall, 17 states, Florida included, have sustained annual increases in foreclosure starts contrary to the national average. But is foreclosure the only answer?
One of the biggest misconceptions that borrowers have is that once they are delinquent, there is nothing else that can be done. You simply have to accept that you will lose your home. In actuality, alternatives are available and are often a better option for both parties (the borrower and the lender) than simply jumping to foreclosure proceedings. One of these options is to request and apply for a mortgage loan modification.
What is a mortgage loan modification?
The Consumer Financial Protection Bureau (CFPB) defines a mortgage loan modification as simply a “change in your loan terms” which can “reduce your monthly payment to an amount you can afford” or even “may involve extending the number of years you have to repay the loan, reducing your interest rate, and/or forbearing or reducing your principal balance.” Essentially, a mortgage loan modification is a way to change or ‘modify’ your current loan terms either on a temporary or permanent basis.
Modifications should not be confused with a refinance. Refinancing your loan pays off your current loan and replaces it with another. While this is one way to get new loan terms, you have to apply and qualify for what is essentially new credit. A modification differs in that you are not taking out any new debt or paying off any old debt. Instead, you are modifying or adjusting your existing credit agreement to make your financial position more favorable for repayment. The original loan still remains in place.
As mentioned, a mortgage loan modification can be either temporary or permanent. Temporary modifications can be granted by a lender where they agree to accept a lower payment for a short period of time. These are often referred to as forbearance agreements. If you need temporary relief to overcome a recent financial setback (maybe a large medical or other expense) but believe you can get back on track in the near future (short term), a forbearance agreement provides you with breathing room in the interim. Some forbearance agreements allow borrowers to switch their payment to interest only (meaning no portion of your payment goes to reduce the principal balance).
Permanent modifications modify your current mortgage loan in perpetuity. In order to qualify for a permanent modification, borrowers typically need to be delinquent for about 60 days or in imminent default. Imminent default means that you might not be in default yet, but there is a strong likelihood that you will be. Although available for borrowers, lenders do not always use modifications as loss mitigation tools as they require significant effort on their part and could delay future foreclosure proceedings if not handled correctly.
At one point the federal government offered the Home Affordable Modification Program (HAMP). However, this program was dissolved in 2016. If your lender doesn’t have an in-house program, aggregators Fannie Mae and Freddie Mac both offer the Flex Modification Program (which replaced HAMP), designed to provide qualified borrowers (whose loans are guaranteed by Fannie or Freddie) a foreclosure alternative program.
Flex Modification Program
The Flex Modification Program went into effect on October 1, 2017. It includes some previous aspects of HAMP but with modified and updated eligibility and qualification requirements. Deborah Kearns from NerdWallet explains that “with HAMP, lenders could adjust the terms of a qualified loan until a mortgage payment equaled 31% of the borrower’s income. The Flex Modification program applies those same measures, but it allows lenders to also consider how many days delinquent borrowers are and the value of their home. It aims to reduce monthly mortgage payments by 20% for eligible borrowers.”
To qualify you must meet the following minimum guidelines:
- Fannie Mae or Freddie Mac must guarantee your mortgage. If your loan is guaranteed through a government program, such as the FHA, VA, or USDA, this is not the program for you.
- Your mortgage must also be in a first lien position on a primary residence, second home, or qualifying investment property
- Your mortgage must be seasoned (meaning it must meet certain age requirements). At this time your mortgage must be a minimum of 12 months old to qualify
- You must be 60 days or more past due or in imminent default
- If you are more than 90 days delinquent on your mortgage, you would be considered in severe risk of foreclosure. For these borrowers, there is a streamlined version of the Flex Modification Program available, which doesn’t require certain documentation. These situations are handled on a case-by-case basis.
Similar but Different: Relief Refinance Programs
Relief refinance programs were created out of the financial crisis as homeowners saw property values drop significantly but could not refinance their debt. A similar program to HAMP called the Home Affordable Refinance Program (HARP) was created by the federal government to help homeowners that were underwater (meaning their loan balance exceeded the value of their home). This program assisted borrowers by allowing them to refinance into a more affordable mortgage. However, this program ended at the end of 2018.
While both HAMP and HARP programs were terminated, both Fannie Mae’s High Loan-to-Value Refinance Option and Freddie Mac’s Enhanced Relief Refinance can be utilized by qualified borrowers to get new mortgage terms, an alternative similar to modification.
The housing market has rebounded since the last financial crisis. As the market continues to strengthen, government programs that were created to assist borrowers through the fallout of the financial crises are being replaced by the private sector. This is in part motivated by the current government’s desire to remove Fannie Mae and Freddie Mac from conservatorship.
Still, while many homeowner’s facing foreclosure think there aren’t any options available, “standard” options are still out there. Applying for a mortgage loan modification can be the perfect alternative to foreclosure. Forbearance agreements can provide temporary relief to borrowers in short term financial distress, while the Flex Modification Program can offer permanent changes to qualified borrowers’ credit agreements, making repayment feasible. While every program will not be a fit for every borrower’s unique situation, the best option for many people is to work with their lender. There are several tools available to help you determine who your lender may be and how to communicate with them.
Sources if you would like to read more …
Center for Microeconomic Data. (n.d.). Retrieved June 11, 2019, from https://www.newyorkfed.org/microeconomics/hhdc.html
U.S. Foreclosure Activity Decreases 13 Percent in April 2019. (2019, May 16). Retrieved June 7, 2019, from https://www.attomdata.com/news/market-trends/april-2019-u-s-foreclosure-activity/
A $1,000 emergency would push many Americans into debt. (2019, January 23). Retrieved June 3, 2019, from https://www.cnbc.com/2019/01/23/most-americans-dont-have-the-savings-to-cover-a-1000-emergency.html
Despite Historically-Low Rates, Foreclosures Increasing in Areas. (2019, April 08). Retrieved June 3, 2019, from https://thinkrealty.com/despite-historically-low-rates-foreclosures-increasing-areas/
What is a mortgage loan modification? (n.d.). Retrieved June 3, 2019, from https://www.consumerfinance.gov/ask-cfpb/what-is-a-mortgage-loan-modification-en-269/
Crone, E. S. (2018, December 20). All You Need to Know About Mortgage Loan Modifications. Retrieved June 3, 2019, from https://www.nerdwallet.com/blog/mortgages/all-you-need-to-know-about-mortgage-loan-modifications/
Kearns, D. (2017, November 03). Loan Modification From Fannie, Freddie: What to Know. Retrieved June 3, 2019, from https://www.nerdwallet.com/blog/mortgages/new-fannie-freddie-flex-loan-modification-what-to-know/