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Understanding Obstacles to FHA Foreclosure Prevention Programs

by Karen Lawson
April 6th, 2010

Recent changes to the government’s Home Affordable Modification Program (HAMP) will allow eligible homeowners the opportunity for a “short refinance,” a transaction involving refinancing a mortgage loan of more than a home is worth to a new FHA mortgage loan with a loan-to-value ratio (LTV) of no more than 97.75% of current home value. This could theoretically help many borrowers who’ve sustained severe drops in their home value and who cannot sell their homes or qualify for refinancing to better mortgage rates and mortgage terms. Unfortunately, the difference between theory and practice could eliminate many homeowners from this program. Here’s why.

Mortgage Loan Assistance Programs May Require Multiple Approvals

Gone are the days when you borrowed a mortgage loan from a local bank, and could go to that bank for help during tough times. Today, mortgage loans are almost always sold on the secondary mortgage market, which means that your mortgage loan is no longer owned by the company who made the loan. Mortgage loans may also be sold as securities: investors buy securities that are backed by a group of mortgage loans with a certain amount and mortgage rate. Regulations prohibit modifying securitized loans, and mortgage servicers generally cannot remove troubled loans from securitization until they become  delinquent. This can cause major delays and potential credit problems if homeowners cannot make payments while awaiting required approvals.

Mortgage Lenders and Mortgage Servicing Companies

Once your mortgage loan has been sold to an investor, it will be turned over to a mortgage loan servicing company that collects your payments and takes care of paying property taxes, insurance, and general administrative functions. The mortgage servicing company is your first point of contact if you need help; contact your mortgage servicing company and ask to speak to their foreclosure prevention or loss mitigation department.

Your loan servicing company can determine your eligibility for assistance, but it may also have to contact other entities for their permission. These may include:

The owner (investor) of your mortgage loan: Investors typically approve any change to loan terms, rates, or amounts. The mortgage loan servicer requests approval, which can take months.

A mortgage insurance company (if you have a conventional mortgage and want an FHA  “short”refinance): Private mortgage insurance companies (PMI) pay lenders for losses associated with defaults on insured conventional mortgage loans. PMI companies have requirements for handling at-risk mortgage loans, and must approve any loss mitigation arrangements.

Home equity lenders: Home equity loans and lines of credit further complicate the approval process; your mortgage servicer will negotiate with the home equity lender to release or subordinate its lien as required by the investor and PMI company.

Mortgage loan servicing companies evaluate homeowners for eligibility, and then must coordinate with applicable investors, PMI companies, and home equity lenders for gaining approval. Unfortunately, this takes time while you’re waiting for help. Having patience, and plenty of it, is essential for getting mortgage relief.

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