Determining the Proper Loss Mitigation Options

      The most important initial step an advocate should take to assist a client facing a COVID-19 hardship is to determine the relevant investor.   The government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, have created online loan lookup tools to help identify loans they own or guarantee. Borrowers with FHA-insured loans may be able to identify the status from the loan documents, their mortgage statements, or closing documents. VA-guaranteed loans are generally clear from the text of the mortgages and notes. The United States clearly identifies itself as the lender for USDA direct loans, and the USDA services these loans through its national servicer. The most challenging loan type to identify is a USDA-guaranteed loan, because it generally has no specific loan language. 

      There has been local, state, and federal assistance for borrowers with COVID-19 hardships. The federal provisions generally apply only to “federally-backed” mortgages, which includes loans backed by Fannie Mae and Freddie Mac and loans insured by federal agencies. There are very limited published guidelines to assist borrowers without federally backed loans. Knowing the relevant investor of the loan is critical to knowing what assistance a borrower is entitled to receive.

      The Federal Housing Administration (FHA) is part of the U.S. Department of Housing and Urban Development.  The FHA provides mortgage insurance on loans made by FHA-approved lenders.  The Department of Housing and Urban Development (HUD) has provided expanded relief for borrowers who have Federal Housing Administration (FHA)-insured loans and face COVID-19 hardships. As with its standard loss mitigation program, HUD generally makes COVID-19 policy updates through mortgagee letters, which communicate program updates to servicers. HUD periodically incorporates its COVID-19 updates into Handbook 4000.1.   

HUD has provided specific options for borrowers facing long-term, COVID-19-related hardships.  Those are (1) the  the COVID-19 Standalone Partial Claim; (2) the  COVID-19 Advance Loan Modification (ALM) ; and (3) the  COVID-19 Recovery Modification.  

     The COVID-19 Advance Loan Modification (ALM) provides eligible borrowers with a 25% reduction of their monthly principal and interest payment through preset loan modification terms.   Borrowers do not apply for the ALM .   Instead,  during a specified period during the pandemic, servicers review their FHA-insured loan portfolio for loans that would achieve the ALM target payment through the modification.  The servicer will send the ALM modification offer to borrowers who meet the eligibility guidelines. No lump sum payment is required.

      The COVID-19 Standalone Partial Claim allows owner-occupant borrowers who can afford their pre-forbearance monthly payments to become current with a zero percent interest loan from HUD that is recorded as a mortgage and is generally payable at the end of the loan term. The partial claim brings their loan current by covering full principal, interest, taxes, and insurance (PITI) payments. It is the same as a standard FHA partial claim except that borrowers do not need to submit financial information to access it.

      The COVID-19 Recovery Modification. If the owner-occupant borrower indicates that a payment pursuant to the COVID-19 Standalone Partial Claim is not affordable, the servicer should then evaluate the borrower for the COVID-19 Recovery Modification (Recovery Modification). 

The Recovery Modification combines a loan modification and a partial claim in order to target a 25% reduction in the borrower’s monthly principal and interest payment from its pre-hardship level.  The targeted payment reduction makes the Recovery Modification similar to the ALM; however, the Recovery Modification involves a partial claim to achieve the payment reduction.

      The government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, have implemented similar policies for borrowers facing COVID-19 hardships, pursuant to the Federal Housing Finance Agency’s (FHFA) Servicing Alignment Initiative, but with some variation.  The GSEs do not vary in terms of the basic options available, but they have some different rules regarding access to relief.

     For borrowers with COVID-19 hardships that are exiting forbearance, Fannie Mae has developed options to address the unpaid amounts.   Borrowers who cannot afford their current payment, did not accept a COVID-19 deferral, and/or were deemd ineligible to receive the deferral are evaluated for the Fannie Mae Flex Modification (borrowers with Freddie Mac loans are entitled to forbearance for COVID-19 hardships.  Freddie Mac likewise has its own version of the Flex Modification).  

      The Fannie Mae Flex Modification offers eligible homeowners mortgage payment relief by extending the term to 480 months and targeting a 20% principal and interest reduction. The modification may also result in a lower interest rate.   Allowable arrearages are capitalized into the loan balance (as allowed by law), the term is extended to 480 months from the effective date of the modification, and a new monthly mortgage payment is determined. 

Some modified mortgage terms also may result in a lower interest rate, and a non-interest bearing principal forbearance due at the loan maturity or earlier payoff of the mortgage loan.  The modification typically results in a reduced monthly principal and interest payment, but overall interest paid on the loan will increase (given the extension of the loan term).   

     Receiving a loan modification denial letter feels very scary. To make matters worsethe denial letters make it hard to understand why you were denied or what you’re supposed to do now that you’re denied.  A loan modification denial doesn’t necessarily mean that the process is over. 

     The first step to understanding your denial letter is to figure out the reason you were denied. Some reasons for denial are concrete and hard to overcome.   Some reasons for denial should be appealed.  Sometimes, lenders just make a mistake that causes the modification to be denied.   Read this guide on how to appeal a loan modification denial.

     The most common reasons why lenders issue loan modification denials:

     (1) You never completed the required loan modification package.

     (2) You don’t make enough money to support a loan modification.

     (3) Your Loan to Value (LTV) ratio is too high or too low.

     (4) You don’t have a valid financial hardship reason.

     (5) You make too much money and have too many assets.

     (6) You have exceeded the number of loan modifications that you’re allowed.

     (7) Your investor does not offer loan modifications as a loss mitigation option.

     (8) You defaulted too close to the origination date of your mortgage or too close to your   

            last loan modification.

     Let's take a deeper look at what lays behind the lender/loan serviver's reasoning:        

     1.  YOU NEVER COMPLETED THE      

     REQUIRED LOAN MODIFICATION 

     PACKAGE (YOUR REQUEST WAS 

     DEEMED "INCOMPLETE") 

    This is the most common reason people end up denied for a loan modification. When you apply for a loan modification, your package is first reviewed by document processors. In order for your loan modification package to get past the document processors, they have to “deem your file complete.”   Once they do this, they send the package to the underwriters who decide on the loan modification. While this sounds straightforward, it doesn’t always go according to plan. Lenders intentionally make the process hard.

     You may have gotten trapped in a never-ending cycle of additional document requests.  Some lenders continue to request changes to documents or continue to reject your documents without making it clear why they are being rejected.

     Sometimes, the document processors take so long to review your loan modification package that by the time they get to it, the financial documents you submitted (like your bank statements and pay stubs) are outdated. Then, they get to say that your documents were out of date (even if they were current when you submitted them)

     If the issues with your documents do not get resolved, at some point the lender issues a denial letter and will close your loss mitigation review.

     SOLUTION: You can immediately re-apply for a loan modification if you’ve been denied for having an incomplete package. If you get denied for having an incomplete package, you can immediately re-apply.   You were not actually evaluated for eligibility for the loan modification. The underwriting department (the department that makes the decision on whether you get a loan modification) did not actually review your file.

     If you get denied for this reason, you just failed to complete the documents needed to get your file passed to the decision makers. So, you can immediately re-open your review by sending in an updated financial package and trying again.   With that said, since it did not go well the first time around, prior to trying again – you may want to consider getting some help so you can avoid the same issue happening to you twice. 

      2.   YOU DON’T MAKE ENOUGH 

      MONEY TO SUPPORT A LOAN   

      MODIFICATION

     You don’t make enough money to support a loan modification. This is an income-based denial. Mortgage lenders will only offer modifications if they believe that you can afford resuming a regular payment.

     The lender needs to see continuous, stable income coming into the household. The income needs to be enough to allow you to comfortably resume a mortgage payment.   This is why the lender reviews your income. They look at other debt you’re paying on by pulling your credit report and they evaluate the household expenses you reported.

     Generally, they’re looking at two things: 

     (1) Your Front-End Debt to Income Ratio: This is the ratio of your mortgage payment to your total, monthly household income. The general rule is that lenders like to see that your mortgage payment is about 33% (or around this number) of your overall household income. This means that you have enough remaining income coming in each month (after you pay your mortgage) to support your other living expenses. If your mortgage payment takes up 80% of your monthly income, you would likely be denied for your modification because you would not have enough money left over at the end of every month to pay other required expenses.

     (2) Your Back-End Debt to Income Ratio: 

This is the ratio of ALL your monthly household expenses to your total monthly income.  If this number is high (around 55%), you may get denied for a loan modification. At the end of the month, if you have very little funds left over after you pay all your required expenses and your mortgage payment, the bank will view you as someone who does not have enough income to cover unforeseen expenses without defaulting on your mortgage.

     So, if the numbers you reported for your expenses are accurate and the bank calculated your income correctly – they may be raising a good point that you should actually think through. While it may feel like a loan modification is the right option for you – if you can’t comfortably resume making a mortgage payment, you may want to start looking at other options.

     With that said, lenders often make mistakes in this area with the calculations they use.  They can calculate income incorrectly, forget to include one (or multiple) sources of income that you reported, or they inflate or miscalculate your expenses.

     SOLUTION: Ask your lender to tell you the number they used for your monthly income and your monthly expenses. If they made a mistake OR if circumstances have changed since you initially asked for the loan modification, appeal the loan modification, and point out their error(s).

     All loan modification denial letters come with an appeal option – meaning, if you believe the bank calculated your income or your expenses incorrectly, you should appeal your denial.  Tell them what you believe the error is and what you believe the correct calculation should be.  Attach supporting documents to provide as much proof as you can that your calculation is correct.

     If the calculation they used is inaccurate because of a change in circumstances on your part (and not an error), you can still appeal.   Make sure your appeal letter explains the change in circumstances, how the change has impacted your income and then attach supporting documents. Give them an updated number to use for your monthly income.

     SOLUTION: Re-apply (or appeal) with raised income. If you received an income-based denial because the bank does not believe you can afford the home and they didn’t make any mistakes (and you still want to keep it), you may choose to try and raise the household income.

     Some people choose to take in a renter, raising the household income with rental income. Others choose to take on a second job. Some people have a partner or significant other who wants to participate in the modification process and include their income.  Trying to raise the household income is a personal decision and should likely be discussed with an attorney so you understand the potential impact of adding another’s income but – it is an option that you can try in the event you want to do everything possible to save the home.

     If you raise the household income – re-apply for the loan modification from the beginning, with new documents. You re-apply instead of appeal because you want to show the bank proof of the raised income and that usually takes more than the 30 days you have to appeal. If you can raise the income during the appeal period and have proof that the income was raised, you can address the change in circumstance through the appeal.

     SOLUTION: Re-apply (or appeal) with reduced expenses. Reducing expenses can be an option if you were denied for having excessive expenses. If you have large credit card payments that caused you to get denied for a loan modification, paying them off and then re-applying for the modification is an option.

     Remember – you can’t just tell the bank that you’ve reduced your expenses. You have to prove that you’ve reduced them either by paying off the outstanding debt or by significantly lowering your outgoing expenses in a verifiable way. You can verify a reduction in household expenses by showing the bank an updated bank statement showing less money going out.

     If you reduce your expenses, re-apply for the loan modification from the beginning, with new documents because it usually takes longer than the appeal period for you to get your expenses lowered in a verifiable way.

      3.  YOUR LOAN TO VALUE (LTV) 

      RATIO IS TOO HIGH OR TOO LOW

     Have you received a letter that states, " Your loan to value (ltv) ratio does not meet the investor’s guidelines for approval" and they “cannot create an affordable payment for you.” Different investors have different loan to value or (LTV) requirements when deciding whether they can approve a loan modification offer.    

     A loan to value ratio is the ratio of your mortgage in relation to how much your home is worth (or the value of your property).   An example of an LTV calculation is as follows:

     If your home value is $400,000, and 

     Your mortgage balance is $200,000, then

     Your loan to value ration (LTV): 50%

     The bank looks at how far behind you are and what an affordable payment would look like for the household. Part of the loan modification process includes deferring your arrears (the amount of missed payments) to the end of the loan.   Sometimes, the loan to value ratio will be too high if they defer the payments you missed to the end of the loan. Most lenders have LTV “cut off points.” 

     For example, some investors allow the LTV ratio to be 115% or less but it cannot exceed 115%, so if – by adding your arrears to the end of the loan, your LTV ratio exceeds 115%, you would be denied for the modification.

     If this is the situation you’re facing, you likely need to speak to an attorney. It’s not good to owe money in excess of what your home is worth (which would be the case if your LTV passed 100%). Even if lenders allow this to be the case – it may not be a good idea for you to do because your home would then be underwater.

     Sometimes, if the LTV is too low, you will also get denied. If you have a ton of equity in the home and the loan to value ratio is very low, you may also get denied.  So, if you believe you have an LTV issue at play, figure out what your investor’s guidelines say about the LTV ratio and then try to talk to an attorney about the issue.

      4.  YOU DON’T HAVE A VALID 

      FINANCIAL HARDSHIP 

     As part of the modification process, you have to prove to your lender that you defaulted on your mortgage as a necessity and not just due to poor financial planning or because you prioritized other, less important expenses.  Your financial hardship should fall into one of the five categories below:

     · Job Loss / Reduction in Income

     · Medical Issues

     · Death of a Borrower

     · Divorce or Marital Separation

     · Unforeseen Expenses

     If you had a hardship that did not mention one of the above five categories, this may be the reason for your denial.

     SOLUTION: Appeal the denial and change how you explained your financial hardship to fit one of the 5 valid financial hardship reasons.    The 5 reasons listed above are very broad. Most people who get denied for this reason just mis-stated what their financial hardship was or didn’t explain it clearly enough.  You can appeal the denial by re-stating your hardship as one (or multiple) of the valid hardship reasons listed above. Attach as much supporting documentation as you can to help prove that your hardship is valid.

      5.  YOU MAKE TOO MUCH MONEY 

      AND HAVE TOO MANY ASSETS

     A denial based on affordability is when the bank believes you can fully reinstate your mortgage and resume regular mortgage payments without needing a loan modification.  If you’ve been denied for this reason, you have shown the bank so much money both in assets and in a monthly surplus of income that they don’t believe you need a modification.   Whatever you have shown the mortgage lender makes them believe that you have enough funds to fully reinstate your mortgage at one time.

     Most commonly, this occurs when people send their bank statements to the lender and the bank statements show more money available than what is needed to reinstate the mortgage. If this is the case, and you have enough money to complete a reinstatement (and you want to keep the home), you would probably be best served by completing the reinstatement to end the default (since you have the funds).

     Then, you would go back to making regular monthly payments. The loan would be brought current and then you would have the option to refinance to get better terms in about 6 months or less.

     SOLUTION: Clarify using the appeal process that the income the bank is relying on is not what it looks like.   If you truly do not have the funds available that the bank thinks you have, or if the funds are not able to be easily pulled out of your accounts without penalties (for example 401K income should NOT count as income that should be calculated as income because it is earmarked for future use), you should file an appeal of your denial and further clarify why that income cannot be used for a reinstatement.

     Write the reason you believe these funds cannot be used to reinstate your loan in an appeal letter and attach as much supporting documentation as possible.

      6.  YOU HAVE EXCEEDED THE 

      NUMBER OF MODIFICATIONS 

      THAT YOU’RE ALLOWED BY YOUR 

      INVESTOR.

     Depending on who the investor is on your loan, the number of modifications you can receive could be capped at a certain number. For example, if you have a Fannie Mae or Freddie Mac loan, you can only receive 3 modifications over the life of your loan. If you apply for a 4th modification, you will probably be denied.

     This is a very difficult denial reason to overcome. Most investors strictly abide by their guidelines regarding the number of modifications you can have – simply asking them to give you one will not work.  Your best bet to overcome this one is to try and use a state-specific process (like Foreclosure Mediation) to get your lender to ask your investor to make an exception for you.   

     Even with mediation, this can be a difficult denial reason to overcome, so if you know you’ve already had three modifications, you may want to discuss backup options with an attorney should the modification be unavailable to you.

      7.  YOUR INVESTOR DOES NOT 

      OFFER LOAN MODIFICATIONS AS     

      A LOSS MITIGATION OPTION

     Most investors have loan modification programs that you can apply for. The top 5 government-backed investors (Fannie Mae, Freddie Mac, USDA, VA and FHA) all have structured loss mitigation departments and loan modification programs for you to take advantage of.    Many non-government backed investors also have loan modification programs that you can apply for.  

     But, there are a few private investors that simply do not offer loan modifications. These investors cannot be forced to offer you a loan modification and they may not even have the procedures in place to know how to offer them.

    While this is rare, it does happen. If you find yourself facing this reason for denial and you want to keep the home, you should consult with a Chapter 13 bankruptcy attorney as soon as possible, as this may be your only option to keep the home without having to fully reinstate the mortgage all at once.

      8.  YOU DEFAULTED TOO CLOSE 

      TO THE ORIGINATION DATE OF 

      YOUR MORTGAGE OR TOO    

      CLOSE TO YOUR LAST LOAN 

      MODIFICATION

     Most investors will deny a loan modification if you default 60-days or less after you’ve taken out your mortgage (or received a loan modification).   This is a difficult denial reason to overcome. 

     Investors are allowed to set limits on how quickly you can default before being offered a loan modification. So if this happened to you, your best bet is going to be to figure out how to cure the default quickly before the amount owed gets too high