How HAMP Loan Modifications Work

HAMP

In 2008, the federal government rolled out a program called the "Home Affordable Modification Program" or "HAMP". The program pays lenders to work with homeowners. However, the compensation is not very much (especially when compared to the free bailout money). Many homeowners still do not understand how HAMP works and become agitated when the bank representatives themselves can't explain it. If you have been offered a HAMP modification, it is important to know how it works so you can decide what to do.

The modification application requires the lender to review financial documents from homeowners. These documents are then used to figure out what terms are possible under HAMP using a Net Present Value test, also known as the Waterfall.

The first thing the lender needs to do is figure out their investors' interest rate limits. Since most home loans in the U.S. belong to Freddie Mac or Fannie Mae, you can usually find the weekly interest rate "floor" and "ceiling" online. For purposes of this blog only, let's assume that the floor is 3.0% and the ceiling is 4.0%. This means that the lowest interest rate that one can expect from a HAMP loan mod is 3.0% and the highest is 4.0%, although ultimately, everyone will end up paying the 4.0% (explained below).

The lender then goes through a "waterfall" test based on government guidelines to calculate the optimal loan mod scenario. Since the lender is going to submit the application to the government for compensation, lenders have strict rules to follow. It is a mistake for borrowers to assume that HAMP loan mod terms are negotiable. 

Let's go through a waterfall test in its simplest form.

HYPOTHETICAL FACTS

Assume that Alfred, a single man in Washington state, makes $3,500 per month. When he bought his home in 2008, it was worth nearly $365,000. Today, it is worth about $200,000 if he can sell it. The unpaid balance on his loan is $300,000; with an interest rate of 6.5% fixed for 30 years, Alfred's monthly payment is $1,896.20 not including property tax, insurance, and homeowner's association dues. He is currently 15 months behind on his payments and foreclosure is imminent. Assume also that Alfred can show hardship (that is, he didn't simply choose to work less hours and have medical problems). If Alfred is to apply for a HAMP loan modification, what results can he expect to see?

Original balance	Unpaid balance	Property value	Monthly income	Current interest	Current payment	Delinquent
$350,000	$300,000	$300,000	$3,500	6.5%	$1,896.20	15 months

Waterfall test #1: Reduce the monthly payment to 31% of borrower's income

     $3,500 x 31% = $1,085/month.

If Alfred's payment is reduced to $1,085/month, his interest rate would be lowered to -0.60%. That interest rate are WAY below the floor rate (3.0%), the lender is required to move onto the next test.

Waterfall test #2: Extend the loan term to 40 years

$1,085 at 40 years yields an interest rate of 1.3%. This is still below the floor rate thus, the lender is required to move onto the next test.

Waterfall test #3: Apply principal forbearance

A principal forbearance means that some of the principal balance is not going to be charged interest. The lender starts with 4.0% (the ceiling rate) and start to decrease the interest in small intervals until it hits the floor. The idea to minimize the amount principal forbearance without cutting too much interest.

Here, Alfred would require a principal forbearance of $80,019.97. This means that the lender would waive the interest on this part of the loan. Usually, this means that Alfred will have a balloon payment of $80,019.97 at the end of his loan term. [Most people do not know about this].

Results:

New Loan Term	Payment for first 5 years	Interest for first 5 years	Payment after 5 years	Interest after 5 years	Balloon payment at end of loan
40 years	$920.33/mo	3.0%	$1,050.64/mo	4.0%	$80,019.97

Alfred's loan would be modified to 3.0% on $219,980.03; 0% on $80,019.97. The 3.0% will increase to 4.0% (ceiling rate) at month 60 (5 years) and then remain at 4.0% until the end of his loan term. That means that his loan payment will be temporarily reduced to $$920.33/month for the first 5 years; after that, it will be $1,050.64/month. At month 451, he will receive a bill for $80,019.97.

The net benefit of this modification to Alfred is a saving of $975.87/mo during the first 5 years and a saving of 845.56/mo after that.

Thus, no matter what interest rate the loan is temporarily reduced to, the end result is that everyone will pay the ceiling rate (at the time the loan mod applications was approved) after 5 years. Fortunately, the ceiling interest rate is low enough that most people won't complain.

If you are a Washington State resident who needs assistance reaching out to the bank, my office represents homeowners in foreclosure mediation, where we are able to apply for a loan modification directly with the lender. This reduces communication congestion and paperwork nightmare that most borrowers go through during the loan review process. Mediation also allows lenders to look at alternative loan modifications. Since only attorneys and HUD Counselors can refer homeowners to mediation, homeowners are advised to speak to one ASAP since timing is crucial to a successful mediation.

Contact Arrow Law Group at (206) 467-1785

How lawyers help in car accidents - Washington State

You're driving down I-5 on a sunny Monday morning. Traffic seems to be flowing smoothly at 60 mph. Suddenly, you notice the car in front of you stopped with its brake lights on. You try to change lanes, but there's no time---plus cars around you are going too fast. Being a defensive driver, you've left enough room to slow down and and eventually stop. Just as you release a sigh of relief, the driver behind you slams his car into yours, and your car is suddenly forced forward into the car in the front. You find yourself involved in a car accident. Although a little sore, everyone manages to get out of their cars to exchange information.

Washington State
Auto Accident Lawyers
(800) 854-6967

Later, you find out that the reason why the car in front of you stopped was because she ran out of gas, and her vehicle stalled. The car behind you was going with the speed of traffic and was caught off-guard by your sudden stopped vehicle on the interstate.

Who is at fault? Even though everyone is clear on the question of fact, liability is a question of law. Surprisingly, we have handled multiple cases with facts similar to the ones above. Having multiple parties (and their insurance) all pointing fingers at each other makes it tough.

Since Washington is a comparative negligence state, the law apportions fault among all the parties. It's possible that the lady who failed to put enough gas in her car is only legally 65% at fault, and thus, can only be liable for 65% of the total damage to others. As lawyers, we put a lot of time in negotiating fault to obtain the highest award to our clients. If necessary, we will put a case before a court to decide.

We also find that those who try to handle their own personal injury claims without a lawyer will end up settling for less money than those who started the case with a lawyer. This is usually because auto accident victims are usually unaware of the value of their claim; and therefore, they are unprepared to fight for more.

If there are passengers in the car, please do not consider trying to settle the auto accident claims for others. Do get competent legal advice. And if you do decide to hire a professional to handle your injury claim, it's best to meet with one earlier in the case to obtain the best result.

Arrow Law Group is a Seattle based law firm. We handle personal injury and auto accident claims from all over the state.

Amendments to the Foreclosure Fairness Act

Washington's Foreclosure Fairness Act is being amended and will take effect in June 2012. Among the changes include a new timeline and additional requirements for both the borrowers and lenders. The new rule will require a Notice of Default before mediation can be initiated. And it will allow extra time to request mediation. Currently, once the Notice of Trustee's Sale has been recorded, the borrower loses the right to mediation. That will change.

Some things will remain the same though. The statute still requires a HUD Counselor or Attorney to refer borrowers to mediation; borrowers cannot simply apply for, or refer themselves to, mediation. Given the lengthy statutory requirements that both sides have to comply with, most borrowers will not want to tackle this on their own. This is the borrowers one last chance to directly discuss workout options with their lender. Borrowers are expected to know what is required and to comply with the law.

Since the Foreclosure Fairness Act was enacted last year, our office has represented numerous clients in mediation and other debt relief proceedings. If you are facing foreclosure and you cannot get help from the lender, do not wait! We can only apply for relief under state law before a foreclosure is scheduled.

www.ArrowLawGroup.com

Foreclosure Fairness Act

I'm sure, by now, you all see news about foreclosure increase and home prices dropping on a daily basis. Washington State legislators responded to the foreclosure crisis by changing the way banks foreclose.

Washington State passed the Foreclosure Fairness Act, which went into effecton July 22, 2011. The new law will allow borrowers more time and a better chance at seeking a work-out solution with lenders to avoid foreclosure. Particularly, the new law requires banks to physically sit down and talk to borrowers before foreclosing. Without this new law, lenders often refuse to slow down the foreclosure process even if there was a possible way to avoid it. Keep in mind that foreclosure in Washington can occur within 6-7 months from a default (missed payment). Now, lenders will be required to slow down the process by a month or two and review alternative options.

More information on the Foreclosure Fairness Act: http://www.webwire.com/ViewPressRel.asp?aId=143539

What debts are dischargeable in bankruptcy?

I probably meet at least a handful of new clients on days our office in Seattle conduct consultations, and one of the most common questions that come up with is, "Can this be discharged?" Through experience, I can easily identify dischargeable debts from non-dischargeable debts on the spot. But I can imagine that to average consumers, this area of law can be a bit foggy.

First, here is what the Bankruptcy Code says a discharge is:

11 U.S.C § 524(a)(2) states that "A discharge . . . operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived. . ."

And of course, we have exceptions to a discharge, which is found in 11 U.S.C. § 523. This section has a long list of the types of debts that are not dischargeable. Among those are student loans, certain types of taxes, government fines, child support arrears, personal injury claim as a result of a DUI, debts incurred by fraud, etc.

Next, I'll explain what this all means. A discharge order acts as a Federal court order against creditors from collecting debts that were deemed discharged. All debts are considered dischargeable unless it fits in one of the types listed in the "exceptions to discharge." Usually, this means that all medical bills, credit cards, personal loans from friends and family, mortgages, and car loans are all dischargeable in bankruptcy. Speak to an attorney if you have car loans or a mortgage because there is more to discuss than I can go into in this post.

If you are in Washington State (or in Seattle-area) and would like to schedule a free bankruptcy consultation, please call our office. We recently added a new paralegal to our team. More to come about our staff soon!

Arrow Law Group | 1904 3rd Ave Ste 930 | Seattle, WA 98101

Effect of filing bankruptcy

Contrary to popular belief, filing for bankruptcy is not credit suicide. The fact that many people who file for bankruptcy already have less than perfect credit generally leads to an increase in their credit score after they file for bankruptcy. For years, creditors and collection agencies, who abhor bankruptcy, spread the idea that bankruptcy is the end all of your credit life. Working in the industry, I've seen people's lives improve drastically after bankruptcy.

For people with unmanageable amount of debt, there are several reasons why filing for bankruptcy is a good thing.

First, it provides a definite time line for relief. Credit card companies make money on the minimum payments and late charges that people can only afford to pay; we all know that by paying only the minimum payments, it could take 30+ years to pay off a small debt. You basically enslave yourself with debt for 30+ years. Bankruptcy can break this ball and chain and allow you to actually work toward a better future.

Second, you can only benefit from a Chapter 7 bankruptcy once every 8 years. This means that after you've filed, you are considered lower risk customer to creditors. In fact, people report receiving a crazy amount of credit card offers within months of filing for bankruptcy. Although getting back into debt is an easy way to build up credit, it's also a debt trap. In 2005, Congress reformed the Bankruptcy Code. One of the many changes include mandatory credit counseling and financial management classes before someone can file for bankruptcy. It was designed to curb the number habitually filers. It's too early to see if credit counseling is working since people who filed after 2005 aren't eligible to file again until after 2013 (since one can only file a Chapter 7 once every 8 years).

Third, credit reporting bureaus generally suppress reportings after a bankruptcy case is filed. This means that your credit score can only go up after a bankruptcy--so long as you act responsible with future credit. From experience, credit scores are usually around the mid-600s one year after filing. The ideal score would be around 700 and higher. 800 or higher is considered supreme, but even those with "perfect credit" don't have scores in the 800s. *Note: Nobody starts at 800, you have to earn it over a long period of time and credit.* Bankruptcy is only a one time hit on your credit report. Everything you do after that can substantially improve your credit.

Fourth, the Fair Credit Report Act requires credit bureaus to remove a "bankruptcy" mark after 10 years. This means that after 10 years, the only way anybody would know that you have filed for bankruptcy is if you tell them or they search bankruptcy court records. Even so, after 10 years, if someone can't obtain credit, it's probably not because of the bankruptcy.

People fear bankruptcy for the wrong reason. It is not a credit suicide. It is, at worst, a temporary obstacle to getting back into debt, and at best, fresh start at life with a clean slate and no stress.

Happy new year everyone!

How does it all just go away?

A client asked me this the other day. It didn't occur to me until the client kept repeating the question that bankruptcy is something both scary and almost unbelieavable. Why would anyone EVER let someone borrow money if there is a possibility that the debt may NEVER be paid back under the law? The answer is simple--Capitalism is all about risk. The government encourages banks to lend money and allow them to make a profit by betting on their customer's future. It also encourages people to take risk, big risks, to better our society. And when one fails, the government provides a mean to hit the 'reset' button and start over. Indeed, we almost lost GM if it wasn't for this policy.

When it seems like life is impossible to go on and debt is keeping life from progressing, bankruptcy may be the relief valve that one needs. Bankruptcy law allows a judge to order a discharge of any debt. A discharge is an injunction, or restraining order, against creditors. It is an order to cease ALL collection action against the debtor and it last forever. Some debts are not dischargeable, such as child support, certain tax debt, and government fines, but a majority of all debts are indeed dischargeable. And just like that, debts simply just go away.

Merry Christmas!