For those struggling to make their mortgage payments, and having even more difficulty getting their mortgage company to respond to their mortgage modification requests, a new mortgage modification mediation program administered through the bankruptcy courts can offer a solution. The new program provides a streamlined and transparent process, under the supervision of the bankruptcy court, for negotiating and getting approval for a mortgage modification. This program, which has operated in other states for several years, resolves many of the problems that homeowners have faced under the current process for mortgage modifications.
The Current Mortgage Modification Process
The current process is very complicated, time-consuming, and far from transparent. For one, there are numerous mortgage modification programs. These include HAMP, HARP, standard loan modification, streamlined loan modification, and other government-sponsored programs. In addition, private lenders have their own loan modification programs, the requirements of which vary widely.
For most borrowers, the first difficulty arises in timely completing all forms required for applying for a mortgage modification, and providing the company managing the mortgage (called the “servicer”) with all the required supporting documents. There are federal regulations in place to ensure that homeowners are given an opportunity to supplement an improperly completed application (for example 12 C.F.R. 1024.21). Still, it is not uncommon for homeowners to fail to complete their applications. It is also unfortunately not uncommon for mortgage servicers to “lose” documents, or to claim that they were never received. In addition, if a complete application for modification is not submitted on time (usually at least 37 days before the scheduled foreclosure), then the mortgage company does not have to stop the foreclosure.
Many mortgage modification programs require a trial period plan, usually 3 to 6 months long, during which the homeowner must make so-called trial payments to establish that he or she can make payments on a regular basis. If the homeowner makes all trial payments as scheduled, he or she receives a permanent modification. In numerous cases the mortgage servicers have claimed to have not received payments, or to have not received them timely, resulting in the denial of the permanent modification and foreclosure of the home. In some cases, the homeowner does not find out about this until after the foreclosure takes place.
The mortgage modification programs that have been put in place since the real estate crisis began have been beneficial, and have helped many homeowners keep their homes. However, many other homeowners have lost their homes even when they were eligible for a modification, primarily because of mistakes and carelessness of mortgage servicers in managing the modification programs.
How the Mortgage Modification Mediation Program Will Work in Arizona
The new mortgage modification program is expected to go into effect in Arizona in January 2017. The program is handled through a Chapter 13 bankruptcy. You can read more about Chapter 13 bankruptcy here, but, in general this type of bankruptcy is designed to allow individuals to adjust and restructure their debt, including mortgages and car loans. Unfortunately, many years ago mortgage companies got Congress to pass a law that prevented homeowners from modifying the primary mortgage on their residence (and sometimes the secondary mortgage as well). This probably exacerbated the housing crisis, and is the reason why a mortgage modification requires the mortgage company’s agreement.
The process of using the Mortgage Modification Mediation program begins with the homeowner filing for Chapter 13 bankruptcy. The homeowner will immediately begin making payments toward the mortgage that do not exceed 31% of the homeowner’s gross monthly income. These payments will be held by the Chapter 13 trustee, and will be applied to the mortgage (if a modification agreement is reached), or to homeowner’s other debt (if a modification agreement is not reached and the homeowner wants to apply this money to other debt), or refunded to the homeowner (if the homeowner decides to get out of the bankruptcy).
The homeowner will then use an online portal (called Documods), to submit all the information that will be needed for the mortgage modification. After that’s done, the homeowner will ask the bankruptcy judge to refer them to the Mortgage Modification Mediation program. All of this will be done within 90 days after the bankruptcy is filed. The mortgage company (lender) will then have 14 days to request to be excused from the modification program—if the lender does not do this, or if the judge denies the request, then the judge will order the mediation.
In the next step, the homeowner and the mortgage company will together choose a mediator, and will meet with the mediator in order to work out the terms of the mortgage modification. If an agreement is reached, then the bankruptcy judge will sign an order approving the agreement. All the mortgage payments are then handled through the Chapter 13 bankruptcy for as long as the bankruptcy is ongoing (3 to 5 years).
The modification process is intended to be very expeditious, and can take as little as 30 days from the initial request to be referred to the Mortgage Modification Mediation Program until a modification agreement is reached. It can take longer if information is not submitted timely or if both sides agree that they need more time, but there are clear-cut deadlines in place.
If a modification agreement cannot be reached for any reason, then the homeowner can get out of the bankruptcy, or can stay in bankruptcy if it offers any other benefits in the homeowner’s circumstances. These could include removing (or stripping) a second mortgage, having extra time to catch up on the original mortgage payments, or modifying other debts like car loans.
If the homeowner has a lawyer, then most of the work relating to the mortgage modification process will be done by the lawyer.
Benefits of the Mortgage Modification Mediation Program
The mortgage modification program offers several benefits over the conventional mortgage modification process.
There is no need for the homeowner to fill out paper forms. Everything is done online, and can be edited or supplemented as needed.
Both the homeowner and the mortgage company always have access to all the documents submitted.
The homeowner can check the status of the case and the loan modification at any time.
All communications between the homeowner and the mortgage company through the portal are tracked, which prevents disputes about what was said by whom or what information was or was not provided.
A trained mediator assists the homeowner and the mortgage company in reaching an agreement.
All payments are made through the Chapter 13 bankruptcy trustee, so the mortgage company cannot “lose” your payment, as often happens during the trial period in conventional modification programs.
The homeowner can take advantage of other benefits of Chapter 13 bankruptcy, like elimination of second mortgages and home equity lines of credit, and elimination of credit card debt and other unsecured debt.
This can all be done with the help of an attorney, who can do most of the work for the homeowner, and will represent the homeowner during the mediation. The attorney fees can be rolled into the monthly bankruptcy payments, often resulting in no additional cost to the homeowner on top of what would already have to be paid for the Chapter 13 bankruptcy.
Costs of Mortgage Modification Mediation Program
The mortgage modification program does involve some costs. These include $300 for the mediator’s time (the mortgage company pays the same amount), and the costs of the online portal used to prepare and submit the modification documents, which is estimated to be under $100. In addition, if the homeowner uses an attorney, there will be the attorney’s fees, which can often be included into the regular Chapter 13 bankruptcy payments. Lastly, there will be the regular costs and fees associated with a Chapter 13 bankruptcy.
Possible Drawbacks of Mortgage Modification Mediation
The primary drawback of the Mortgage Modification Mediation program is that it is completely voluntary. That is, both the homeowner and the mortgage company have to agree to participate in it. In addition, the mortgage company is not required to grant a modification, unless modification is required under one of the government-sponsored programs that are then in effect.
On the other hand, once a homeowner requests the mortgage modification mediation, the mortgage company will have to request to be excluded from it within 14 days, and if it does not make the request, then will be required to participate. And if a mortgage company participates, it is usually doing so because it is interested in reaching a modification agreement. This is likely one of the reasons why the approval rate for modifications under the Mortgage Modification Mediation program in other states has been in the range of 60%, compared to 4% for modifications attempted through state courts.
It is also worth noting that if the mortgage company declines to participate in the program, or if the modification is unsuccessful, then the homeowner can get out of the Chapter 13 bankruptcy. Or, the homeowner has the choice of staying in Chapter 13 in order to take advantage of its other benefits, like eliminating a second mortgage or eliminating credit cards and other unsecured debt.
What if I am facing a foreclosure and cannot wait until 2017?
The good news is that those already in a Chapter 13 bankruptcy when the new modification program goes into effect will be able to take advantage of it. What this means is that if you are facing an impending foreclosure, but cannot afford your current mortgage payments, you can file a Chapter 13 bankruptcy and stop the foreclosure. Then, when the mortgage modification program goes into effect, you can apply to participate in the program, and if the modification is successful, it should result in the elimination of all mortgage arrears, leaving you with only a reduced monthly mortgage payment to make.