Put simply, mortgage modification is a process in which the company holding a mortgage agrees to a change in the terms of the mortgage in order to help a homeowner in financial trouble. If the modification stops the homeowner from defaulting on the loan, the mortgage company ends up in better financial shape over the long run, as well. Mortgage modification was a rare event before the crisis in the housing market and subsequent recession. If you are considering bankruptcy and loan modification, be sure to talk to an experienced bankruptcy attorney before making any decisions. In 2009, the federal government launched a variety of programs designed to help homeowners in trouble, including the Home Affordable Modification Program, more commonly referred to as HAMP.
What is HAMP?
HAMP is included in a federal law passed by Congress and signed by President Obama – The Emergency Economic Stabilization Act of 2008, which was amended in 2009. The purpose for a national home modification program, according to the law, is to protect home values, stop homeowners from raiding college accounts, retirement funds and life savings and preserve home ownership in the country. The program has a number of key rules:
Date and Amount of Mortgage
The maximum mortgage balance on a home to qualify for HAMP is $729,750, and the mortgage must have originated on or before Jan. 1, 2009.
To qualify for a modification under HAMP, the mortgage loan must be more than 31 percent of a homeowner’s gross monthly income. The monthly cost of property taxes and homeowner’s insurance can be included to reach above the 31 percent figure. Homeowners must show proof of income.
Specific Modification Help
HAMP lays out a sequence of financial help for homeowners that begins with a reduction in the interest rate of the loan. That’s followed by an extension of the length of the mortgage term – to a maximum of 40 years. If the 31 percent figure still hasn’t been met, some portion of the principal of the loan can be forgiven.
As of early May, the deadline for loan modifications under HAMP remained set for Dec. 31, 2012. However, it is possible that the program will be extended by Congress.
Incentive For Mortgage Servicer
The law requires that mortgage servicers perform a calculation using the net present value of the mortgage. Under the calculation, if the servicer would receive more money with a modification, the company must move in that direction. In addition, small cash awards are paid to mortgage services for every modified loan.
Mortgage Modification and Bankruptcy
There is nothing contained within the rules for the Home Affordable Modification Program that states or even suggests that a homeowner can’t file for bankruptcy and still request a loan modification. In fact, the law specifically includes language to protect a debtor who files for personal bankruptcy.
HAMP and Chapter 13
If your bankruptcy attorney filed a Chapter 13 repayment plan and you subsequently requested a loan modification, the mortgage servicer is specifically barred from objecting to your Chapter 13 plan, seeking relief from the bankruptcy automatic stay and asking for a dismissal of your case because you only paid the amount included in the modification plan.
HAMP and Chapter 7
You can also request a loan modification after receiving a Chapter 7 discharge. It is common after a bankruptcy for the debtor to continue paying the monthly mortgage note. That’s because bankruptcy doesn’t do away with the security the lender has against the property.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.