Loan Modifications topic of Bankruptcy Section Meeting

By Roberta M. Gubbins Legal News "Traditionally loss mitigation was only for delinquent loans," said Janielle E. Ryan, Trott & Trott, opening her discussion at the ICBA Bankruptcy Section Meeting, held at the State Bar of Michigan on October 13th. "Loans in bankruptcy were generally excluded from modification options." "Current loss mitigations options have changed and bankruptcy loans are no longer excluded." The options now include HAMP, the US Treasury Home Affordability Modification Program, Home Affordable Foreclosure Alternative (HAFA), which is short sale or a deed in lieu of foreclosure, HARP, the Home Affordable Refinance Program and traditional options. The goal of HAMP is to adjust loans to sustainable payment levels. "Modification requirements are much more stringent than the loan origination requirements for many borrowers," Ryan said. "And the requirements under HAMP leave little flexibility for servicers." The level of documentation is significant, she noted. "The program under HAMP keeps changing and it is difficult for servicers to keep trained on the current requirements" for eligibility. "The borrower must be delinquent or in eminent risk of default, must be the borrower's primary residence, the mortgage must have originated prior to Jan. 1, 2009, the unpaid balance can be no more than $729,750 for single unit properties and the current payments must be above 31% of gross monthly income." The HAMP payment adjustment goal is to reduce the payment to 31% of the borrowers gross monthly income by "systematic 'waterfall' application, which begins by reducing the interest rate to 2% and extends the term to 40 years." If those options don't get the payment down, then it is possible to forebear a portion of the principal payment until the loan is paid off. The lender is not required to do a modification, however, if they are HAMP participant provider they are required to modify the loan. "Many lenders have chosen not to participate in HAMP because of the stringent requirements," she said. The borrower is allowed to apply for HAMP one time and once declined cannot seek modification. "Non-HAMP modifications have less stringent requirements and it is possible to convert from a trial to a permanent modification," Ryan said. The debtor, the attorney or the bankruptcy trustee cannot request loan modifications in bankruptcy. "Bankruptcy can not stop a HAMP request nor be the cause of a denial." There are many questions that we do not have the answer to such as 'is the plan modification sufficient documentation or is an order needed." She noted that the judges in Western District each have different answers to these questions. "I have a little chart that tells me which way to go. For example, some of them require a motion for a loan modification, some say 'I don't' have the authority to grant a loan modification." In chapter 13 bankruptcies there are communication challenges--"can we talk to the debtor directly, is a motion needed and who should file it." Some districts have local rules that address these issues. A bill has been introduced in the Senate that would allow for a court sponsored loss mitigation program. Problems she sees that can lead to rejection include "incorrect figures, failure to describe a payment change in the life of the plan, prematurely amending the proof of claim or relieving the trustee or mandating the application." For more information, "it is possible to contact lenders directly for information by checking their websites to get their financial worksheet, contact Trott & Trott if they are the representatives, or the Default Mitigation Management (DMM) portal for uploading tracking information." "Timing is an issue," Ryan said. "Full and complete documentation is a difficult thing because all documents must be dated within 30 to 60 days for HAMP. The details of the application can be overwhelming. When you get a response that 'we lost your stuff' it means that it's old. It is one slice of time." Ryan indicated that she has rarely seen principal balance modifications. Asked if, in those situations where the lender reduced the loan was a 1099 issued the next year, "I don't know," she answered. The Bankruptcy Section will meet on November10th. The topic will be the new Federal Laws. Janielle E. Ryan, lawyer with Trott & Trott, has been with the company for about six years. She specializes in loss mitigation and is an expert in loan modifications. She can be reached at 248-594-5419 or at jryan@ Trottlaw.com Published: Thu, Oct 20, 2011

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