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Mortgage Servicing and Loan Modifications: 6.7.8.2.1 Introduction

Under the terms of the National Mortgage Settlement, the five original servicers were required to set aside money to provide various forms of financial assistance to borrowers. Consumer relief was provided in the form of cash payments to former homeowners, loan modification and refinance programs for existing homeowners, and other assistance.375 Both the modification and refinance programs targeted borrowers who were underwater, that is they owed more on their mortgage than their homes were worth.

Mortgage Servicing and Loan Modifications: 6.7.8.2.2 Consumer relief provisions from other settlements

The Ocwen and Sun Trust Mortgage consumer relief provisions provided for modifications for loans that were underwater. Ocwen was to receive credit for modifications with principal reductions for loans that were underwater.376 Borrowers who were at least thirty days delinquent or at imminent risk of default could qualify for a modification that reduces the principal and interest payment at least ten percent.

Mortgage Servicing and Loan Modifications: 6.7.8.3.1 Introduction

The National Mortgage Settlement provides detailed guidelines and standards related to the servicing of loans in foreclosure and the loss mitigation process. The standards are meant to address some of the abuses unearthed in the government’s investigation of servicing practices of the original five servicers, including widespread use of “robo-signed” affidavits in foreclosure proceedings. The servicing standards are contained in Exhibit A (referred to as the “Settlement Term Sheet”) to each of the five consent judgments.

Mortgage Servicing and Loan Modifications: 6.7.8.3.5 Authority to foreclose

Servicers must implement procedures ensuring that the servicer or foreclosing entity has a “documented enforceable interest” in the note and mortgage under state law, or is otherwise a proper party to the foreclosure action.388 A statement setting forth the basis that the foreclosing party has the right to foreclose must be set forth in a pleading or affidavit of indebtedness filed in court foreclosure proceedings, and in the preforeclosure notice sent to borrowers.

Mortgage Servicing and Loan Modifications: 6.7.8.3.6.1 Proofs of claim

The five servicers must ensure that any factual assertions made on the proof of claim form or in any of its attachments are accurate, complete, and supported by competent and reliable evidence.389 If the servicer has filed a proof of claim or stay relief motion in a case pending before the settlement that contains materially inaccurate information, the servicer may not rely upon the claim or motion, and must file an amended claim or motion, at the servicer’s expense, within thirty days of acquiring knowledge of the inaccuracy.

Mortgage Servicing and Loan Modifications: 6.7.8.3.6.2 Bankruptcy mortgage rules

The five servicers must also comply with the notice requirements under Bankruptcy Rule 3002.1(b) (notice of payment changes), Rule 3002.1(c) (notice of postpetition fees or charges), and Rule 3002.1(g) (response to notice of final cure payment).394 The Settlement imposes a sanction for noncompliance separate from that available under Bankruptcy Rule 3002.1(i).

Mortgage Servicing and Loan Modifications: 6.7.8.3.6.3 Stay relief motions

The settlement imposes additional requirements on servicers when they seek relief from the automatic stay in a borrower’s chapter 13 case in order to foreclose on the borrower’s home under state law.397 These requirements generally demand more evidentiary support for the motion than under current procedural rules in most bankruptcy courts, so attorneys should review stay relief documentation for compliance.

Mortgage Servicing and Loan Modifications: 6.7.8.3.6.4 Payment application in chapter 13 cases

The settlement also addresses payment application issues in chapter 13 cases. The servicers must ensure that there is prompt and proper application of payments made on prepetition arrearage and postpetition payment amounts.398 The debtor is to be treated as being current so long as the debtor is making payments in accordance with the confirmed plan and any later effective payment change notices.

Mortgage Servicing and Loan Modifications: 6.7.8.4.1 Monthly statements

The servicers are required to send monthly billing statements to borrowers containing the following account information: total amount due; allocation of payments (including notation if any payment has been posted to a suspense account); unpaid principal; fees and charges for the relevant time period; current escrow balance; and the reasons for any payment changes (no later than twenty-one days before the new amount is due).399 The billing statement requirement does not apply if the borrower is provided a coupon book for a fixed rate mortgage

Mortgage Servicing and Loan Modifications: 6.7.8.4.2 Servicing fees

The settlement requires that fees collected from borrowers be bona fide and reasonable.401 They must be disclosed in the preforeclosure notice and in a schedule of fees that each servicer must maintain and keep current. The schedule must be available on the servicer’s website or to the borrower (or their representative) upon request.402 It must identify and provide a plain language explanation of each fee, and state the maximum amount of the fee or how the fee is calculated.

Mortgage Servicing and Loan Modifications: 6.7.8.4.3 Application of payments

The Settlement appropriately distinguishes between daily accrual (or daily interest) loans and scheduled loans. For daily accrual loans in which a delay in posting payments can cause the borrower to incur additional interest charges, the Settlement requires that servicers post all payments made by the borrower no more than two business days after receipt at the address specified by the servicer. Diversion of these payments to a suspense or unapplied funds account, even those payments that are less than a full contractual payment, is not permitted.

Mortgage Servicing and Loan Modifications: 6.7.8.4.4 Force-placed insurance

The Settlement provides a significant protection to borrowers not found in existing regulation of force-placed insurance, through a similar requirement under Regulation X which went into effect on January 10, 2014.412 It requires the servicer to advance payments for the borrower’s existing insurance policy rather than force-place insurance if the mortgage has an escrow account and the borrower or insurance company does not cancel the existing policy.413 Although this protection does not extend t

Mortgage Servicing and Loan Modifications: 6.1.1 The Changing Climate for Workouts

The dynamic for negotiating preforeclosure workout agreements for low-income and moderate-income homeowners continues to evolve. Workout agreements became popular when the 2008 foreclosure crisis escalated and the lending industry liberalized its approach to homeowner defaults, and federal, state, and local governments sought programs to respond to the growing number of foreclosures.

Mortgage Servicing and Loan Modifications: 6.2.1 Overview

There are many different ways to modify or temporarily change mortgage payments to alleviate a homeowner’s difficulty making payments. Each mortgage holder’s standards for agreeing to these different possible workouts (and its jargon for identifying them) may be slightly different. Not every mortgage holder will consider a workout on each basis described below, but it does not hurt to make a proposal and solicit a counterproposal.

Mortgage Servicing and Loan Modifications: 6.2.2 Repayment Plans

A repayment plan involves curing a default by making regular monthly mortgage payments as they are due, together with partial monthly payment on the arrears (including fees and costs). For example, a typical agreement might call for making one-and-a-quarter monthly payments until the default is resolved. This type of agreement is similar to a cure of arrears in the context of a chapter 13 bankruptcy. However, the typical repayment plan outside of bankruptcy is no more than six or twelve months in length.

Mortgage Servicing and Loan Modifications: 6.2.3 Forbearance Plans

A forbearance plan is an agreement to allow a period of reduced payment or zero payment during which the servicer will “forbear” from initiating foreclosure even though full contractual payments are not being made. Forbearance agreements, which are sometimes oral and sometimes documented in writing, are typically offered to a homeowner experiencing a temporary hardship such as unemployment, short-term disability, or recovering from a natural disaster.

Mortgage Servicing and Loan Modifications: 6.2.4.1 Generally

Loan modifications have emerged as a primary strategy for addressing the risk of foreclosure. A loan modification is a written agreement between the servicer and the homeowner to change one or more of the original terms of the note to ease the homeowner’s financial burden and, typically, to bring the loan current. Modifications may involve reducing the interest rate, changing from an adjustable rate to a fixed rate, extending the loan term, capitalizing delinquent payments, and forbearing or forgiving principal or arrears.

Mortgage Servicing and Loan Modifications: 6.2.4.2 Capitalization

Perhaps the most common feature of a permanent loan modification is the capitalization of arrears—adding the unpaid interest, fees, and escrow deficiency to the principal balance. If a loan is reamortized, which is often the case, the existing interest rate is then applied to the new, capitalized principal balance over the remaining loan term. Payments are recalculated accordingly, and the loan is brought current; the next payment is due the month after the modification’s effective date.

Mortgage Servicing and Loan Modifications: 6.2.4.3 Interest Rate Reductions

A loan modification may involve a reduction in the interest rate, especially if the current contractual rate is above the market rate. In some cases, this may involve converting a variable rate to a fixed rate loan. The mortgage holder may recognize that if it forecloses on the property and finances a new loan for this property or another property, it can obtain no more than the market rate of interest.

Mortgage Servicing and Loan Modifications: 6.2.4.4 Term Extension

Extending the loan repayment period helps homeowners by allowing them to repay the principal over a longer term, thereby reducing the monthly payment. For example, an older homeowner who borrowed $100,000 in 2000 on a thirty-year mortgage might owe only $20,000 today. Payments might be $750 monthly based on the original note. By extending the term back out to 360 months on the $20,000 balance, monthly payments can be reduced to $175 dollars.