Are you or someone you know thinking about getting a loan modification? Read this article first!
Another top notch article from NEW YORK (CNNMoney.com) — Attention delinquent borrowers: If you want to get into the Obama administration’s mortgage modification program, you’d better have your paperwork ready.
New Treasury Department guidelines go into effect on June 1 that will require loan servicers to verify applicants’ income and financial hardship before placing them into trial modifications.
This will make it much tougher to get temporary relief from unaffordable mortgage payments. But if you make it into a trial modification, you’re more likely to get long-term assistance, providing you send in your check on time.
“This will allow people to have more certainty that the modification they want will materialize,” said Suzanne Boas, president of CredAbility, formerly the Consumer Credit Counseling Service of Greater Atlanta.
Of the 1.2 million people who’ve started trial modifications, fewer than 300,000 have received permanent assistance. Another 278,000 have washed out of the program either because they didn’t send in timely payments, hand in the required documents or meet the eligibility criteria.
Paperwork has caused all sorts of problems for the president’s signature foreclosure rescue program. In order to get the effort off the ground quickly, administration officials allowed servicers to place people in trial modifications before verifying that they were indeed eligible for the program.
Originally intended to last three months, the trial period was meant to give troubled borrowers a chance to prove they could make the modified payments and qualify for a so-called permanent modification, which lasts five years.
Instead, many homeowners have been stuck in trial modifications for months and months while they wrestle with servicers over the documentation requirements. The financial institutions say that borrowers aren’t sending in the needed forms; homeowners contend the servicers are losing them.
At Saxon Mortgage Services and JPMorgan Chase (JPM, Fortune 500), for instance, about three of four borrowers in the trial phase have lingered there for at least six months.
A few servicers, however, have been requiring documentation up front all along. And the impact of this practice is evident in the government’s monthly modification report. Firms such as Ocwen Financial (OCN) and HomeEq Servicing have converted 83% of eligible borrowers to permanent modifications. Others that rely on stated income to place people in trials have yet to shift half their participants to long-term adjustments.
Many loans didn’t require much documentation when they were originated, which makes gathering the paperwork during the modification process that much more difficult, said Paul Koches, executive vice president at Ocwen. But doing so helps servicers craft sustainable payment plans.
“It puts us in a better position to determine the specific terms and conditions of the modified loans that will make it more likely that they will stick,” he said.
The pace of people entering trial modifications has already slowed as servicers have started requiring the paperwork in advance. Only 47,160 trials were started in April, down from more than 72,000 in February.
“You have pinging back and forth between borrowers and servicers,” said David Sisko, who heads Deloitte & Touche’s default management practice. “Requiring upfront documentation to really start the clock is a good thing.”
Though the application process takes longer, borrowers understand that they will now have a better ideas of whether they’ll get long-term assistance, said a Chase spokesperson.
Among the documents Chase and other servicers require are hardship affidavits, two recent pay stubs, a bank statement, a tax return, proof of occupancy and a 4506T-EZ form.
“If they make the trial payments, it’s almost certain they’ll get a permanent modification because all the paperwork has been done upfront,” she said.
