Mortgage Modification Confusion
by Nathan M. Brandenburg, Esq.
On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act into law. Accordingly, in the months from the legislation’s introduction in February 2009 to its enactment into law in May, a great deal of misinformation regarding the modification of residential home mortgages and the obligation and/or willingness of mortgage lenders to modify the terms of said mortgages has pervaded the media. Nonetheless, before investing any significant time or expense in attempting to modify an existing residential mortgage obligation, it is important to keep in mind the following:
Mortgage Modifications are Almost Exclusively Need-Based
A great deal of the misinformation regarding the potential to modify existing residential mortgage obligations has to do with the great loss of equity many homeowners have realized over the past 24 to 36 months. This has usually manifested itself in two ways: (1) the homeowner put little or nothing down upon the purchase of the home and, especially in the case of exotic mortgage products, has paid little to no principal since the purchase; or (2) the homeowner took a significant amount of equity out of the home as home values appreciated over the past decade. As a result, many homeowners who took advantage of the easy lending environment of the past decade are now faced with mortgage obligations that sometimes far exceed the fair market value of the home. This dilemma is often compounded for many homeowners who bypassed traditional mortgage products in favor of interest-only obligations or 3, 5 or 7 year adjustable rate mortgages.
Simply because a homeowner is faced with a negative equity situation does not mean that one will qualify for a modification of their existing mortgage obligation. Upon approaching a mortgage lender regarding the modification of a mortgage obligation, the first thing requested by the lender from the homeowner is usually an extensive financial disclosure statement, current wage statement and prior year tax returns. Hence, financial necessity is often the first threshold for mortgage modification. Moreover, whether a homeowner is current or not on the mortgage obligation often is not the controlling factor; it is whether the homeowner has the financial means to make the payments. If the mortgage lender determines that the homeowner has the financial means to make the payments, the lender often will not consider a modification of the obligation.
Modification Usually Does Not Mean a Reduction in Principal
Need-based mortgage modifications usually do not result in a reduction of the principal amount owed. Instead, terms ripe for modification usually include the interest rate, whether the rate is fixed or adjustable, and the term of the obligation. If a homeowner is not current on their mortgage obligation, the lender may allow a short-term forbearance of payments to allow the homeowner to get the obligation current, but these payments are usually not forgiven.
A Homeowner Must Have the Financial Means to Meet the Modified Terms
Mortgage modification is a bit of a double-edged sword. On one hand, a homeowner’s financial situation must necessitate the modification of the obligation; on the other, the homeowner must have the financial means to meet the modified terms. If the homeowner’s financial situation is so dire that they likely cannot meet the modified terms, the lender will likely not consider a modification and will instead proceed through foreclosure if a default occurs and remains uncured.