of America, LLC

There are many different types of mortgages.  They can have 10, 15, 20, 35 and 40 year terms.  The interest rate can be fixed or variable.  The variable rate can be stable for the first 6 months or the first, second, third, forth, fifth or tenth year.  There are many more features to differentiate mortgage loans. 

There are also many different credit and financial characteristics for the borrowers.   Down payment amounts, mortgage insurance, geography and loan size are additional ways to differentiate mortgages.   Moreover, the securitization agreement and structure will distinguish mortgages.

Mortgage loan owners create guidelines for handling loans when they are are delinquent or will not be paid in full.  Often, the guidelines differ depending on the type borrower, term, type interest rate and other mortgage characteristics. 

For a mortgage service company, it means being familiar with the guidelines for each mortgage owner and also for each type mortgage.   With hundreds of mortgage owners and many different types of mortgages, it become vitally important to know the guidelines for a mortgage before initiating loss mitigation.

Payments from homeowners are collected by the mortgage service company and paid to investors holding the bonds backed by that mortgage. So it has fallen to the mortgage service company to try to modify mortgage terms for homeowners whose loans were sold into these pools. So far, that process has involved a painstakingly slow review of each loan, something most mortgage service companies weren’t originally set up to do.

Each mortgage pool comes with different guidelines for how to deal with delinquent loans. Some don’t spell out clearly who has the authority to make changes in individual loans. Some trusts are managed by two layers that include both a mortgage service company and a master service company. If a service company decides to modify a loan, it still faces a potential legal challenge from mortgage owners.

More often than not, the loss mitigation options available for a loan may be determined by a combination of the mortgage type, the borrower characteristics, the property and the needs of the mortgage owner. Generally, the loss mitigation options are defined a case by case basis.

Length of Delinquency
The length of delinquency before a loan can qualify for loss mitigation is defined in the guidelines. Some guidelines require the loan be delinquent while others allow loans to be current but soon to be delinquent. The time a loan must be delinquent can be 1, 30, 60 90 or 120 days.

Loan modification types
The guidelines will define the type loan modification available for a loan.
Interest rate reduction only. The interest rate may reduced a fixed for 5, 10 or 30 years. The interest rate might start at a very low rate, such as 1%, and then increases in small increments each year for a number of years (3, 4, 5 years) until the rate reaches a target like 4% or 5%.
Principal only reduction. The principal might be reduced sufficient enough to make the monthly payment more affordable for the mortgage borrower. It might also be lowered to 90% of the present value of the property.
A combination of interest rate and principal reduction might be used.

Pre-modification payment plans
Some mortgages require the mortgage to be current before it can be modified. Other mortgages require the borrower demonstrate the ability to make modified payment prior to approving a modification. Still others are contingent on the borrower making a substantial contribution to the arrearage. A pre-modification plan is a vehicle for satisfying such requirements. They can be for 3 to 6 months and include a balloon payment for the arrearage.

An on time payment history is accomplished by paying the plan on time for the term of the plan. The mortgage becomes current because the plan includes a provision for paying the arrearage. The balloon payment at the end of the payment plan is included in the mortgage modification. The borrower does not have to pay the arrearage at the end of the payment plan. Included in the mortgage modification is a provision to add the arrearage to the mortgage principal.

Income qualification
There are various income and asset qualifications for loss mitigation. Generally, a loan modification requires the borrower have a positive disposable income. The percent of disposable income is determined by the mortgage guidelines. The type and manner in which expenses are or are not included in the calculation for disposable income vary according to the guidelines. The amount of available and unrestricted cash assets may also impact the loan modification.

Short sales generally are more impacted by cash assets than by income. The greater the borrower’s cash assets the larger the requirement for a cash contribution from the property owner at closing. The percent of acceptable disposable income is determined by the mortgage guidelines. The type and manner in which expenses are or are not included in the calculation for disposable income vary according to the guidelines.

Generally, all loss mitigation guidelines require the borrower experience an involuntary reduction of income to qualify for loss mitigation. There are several generally accepted hardships.

Type Ownership
Most loss mitigation guidelines have major differences in the alternatives between mortgages for an owner occupied principal residence and all other mortgages. There are more loan modification and short sale alternatives for a mortgage on an owner occupied principal residence. There are fewer loss mitigation alternatives for non-owner occupied property. Generally, loan modifications are limited to only rate reductions. Non-owner occupied property has similar short sale alternatives as owner occupied property.

Foreclosure
Most loss mitigation guidelines require the mortgage service company diligently engage in a loss mitigation alternative before beginning a foreclosure. The mortgage must be delinquent 90 to 120 days before a foreclosure initiated.