Mortgage servicers handle loan modification applications from homeowners. Unfortunately, mortgage servicers often make serious errors when processing loan modification requests. This can cause a number of problems for a homeowner, such as missing out on getting a modification or even a wrongful foreclosure.
Read on to learn about the most common mortgage servicer violations when it comes to loan modifications and find out what to do if any of these things has happened to you.
Understanding the Parties in Mortgage Transactions
To fully understand the errors that can occur in the mortgage servicing industry, you must first understand the players involved in a residential mortgage loan transaction.
Mortgagor. The mortgagor is the individual (the homeowner) who borrows money and pledges the home as security to the lender for the loan.
Mortgagee. The mortgagee is the lender. The mortgagee gives the loan to the mortgagor.
Mortgage Investor. An investor buys loans from lenders. By purchasing mortgage loans from lenders, the mortgage investor provides the lender with funds to use to make additional loans.
Mortgage servicer. Mortgage servicers manage loan accounts on behalf of the mortgagee or investor. The servicer typically:
- sends the monthly mortgage statement to the homeowner
- collects and processes payments
- tracks account balances
- manages the escrow account
- reviews loan modification applications, and
- pursues foreclosure when the mortgagor stops making payments.
Basically, a servicer acts as the agent of the owner of the loan (the mortgagee or investor).
Understanding Loan Modifications
A loan modification is a permanent change to the loan terms to reduce the monthly payments in order to make the loan more affordable for the borrower. In a loan modification, the lender may agree to do one of more of the following:
- reduce the interest rate
- reduce the principal balance
- convert from a variable interest rate to a fixed interest rate, or
- extend of the length of the term of the loan.
(Learn more about loan modifications.)
Common Violations in Loan Modifications
Below are some common problems that mortgage servicers perpetrate in the loan modification process.
Failing to Process the Application in a Timely Manner
Many homeowners have experienced lengthy delays when waiting for the servicer to make a decision on whether or not to grant a loan modification. In some cases, the servicer doesn't tell the homeowners that they are missing documents necessary for the loan modification decision. In others, the servicer simply doesn't get around to reviewing the request in a timely manner.
Recent federal mortgage servicing rules, effective January 10, 2014, aim to reduce these delays. Under these rules, when a mortgage servicer receives a loan modification application from a homeowner 45 days or more before a foreclosure sale, it must:
- review the application
- determine if the application is complete or incomplete, and
- notify the borrower within five days stating that the application is complete or incomplete. (If incomplete, the servicer must describe the information needed to complete the application.)
If the servicer receives a complete application more than 37 days before a foreclosure sale, it must review the application and determine if the borrower qualifies for a loan modification within 30 days. (Learn more about New Federal Rules Protecting Homeowners With Mortgages.)
Telling Homeowners They Have To Be In Default
It used to be commonplace for mortgage servicers to tell homeowners that they couldn't get a modification unless they were late in payments modification. Sometimes, servicers still make this statement. However, it is not necessarily true.
For example, to qualify for a home mortgage modification under the government's Home Affordable Modification Program (HAMP), you may be either behind in payments or simply in danger of falling behind on your mortgage payments. (Learn more about HAMP.)
Requiring a Homeowner to Resubmit Information
In some cases, servicers ask homeowners to submit and then resubmit information when applying for a loan modification. This is especially true in the case of income verification documents (such as paystubs and profit and loss statements), which can quickly become outdated in the eyes of the servicer.
In addition, servicers may also sometimes ask borrowers to resubmit documentation when the paperwork gets lost.
If this happens to you, you should resubmit any duplicate information that the servicer requests, but be sure to keep a record of when you sent it, who you sent it to, and send it by some method that you can track.
Asking for a Down Payment
In most cases, you should not have to pay a down payment in order to get a loan modification. For example, there is no down payment required to get a HAMP modification.
Using Incorrect Income Information In Processing the NPV
When a servicer evaluates a borrower for a loan modification, it looks at financial information about the borrower, the loan, and the property (such as the borrower’s income, the unpaid principal balance on the loan, the property’s fair market value, etc.). It then makes a comparison between
- the estimated cash flow the investor will receive if the loan is modified, and
- the investor’s cash flow if the loan is foreclosed.
If the investor would be better off if the servicer forecloses on the loan, rather than modifies (this is called NPV negative), then the servicer doesn't have to modify the loan. (Learn more about the NPV calculation.)
Under federal mortgage servicing rules, the national mortgage settlement, and under California's Homeowner Bill of Rights, if the reason you didn’t qualify for a loan modification is because of the NPV calculation, the servicer must tell you the values that it used to calculate the NPV. If the servicer used the wrong information, you can appeal the denial.
Also, under HAMP, if you discover that the servicer used incorrect information in the calculation, you have 30 days to correct any NPV values. Then your servicer must re-run the test.
Inserting a Waiver Into the Loan Modification Documents
Sometimes servicers will try to insert a waiver into a loan modification agreement in which you agree to release all legal claims you have or may have against the servicer or the lender concerning the loan.
This is generally not allowed. HAMP guidelines, for example, prohibit servicers from asking borrower to waive their legal rights as a condition of getting a loan modification.
Failing to Convert a Trial Modification into a Permanent Modification
Many loan modifications, particularly those under the HAMP program, start with a three-month trial period plan. So long as you make three on-time payments during this period, the modification is supposed to become permanent (assuming you still meet the eligibility criteria).
When a servicer promises to modify an eligible loan, homeowners who live up to their end of the bargain expect the servicer to keep that promise. However, many homeowners who have successfully made their trial mortgage modification payments have been unable to get the servicer to make the modifications permanent.
Servicing Transfers in the Middle of a Modification
Servicing transfers are common in the mortgage industry. In some cases, the new servicer fails to honor the modification agreement with the previous servicer.
To address this, recent mortgage servicing rules require the old servicer to send the new servicer:
- any information showing the current status of discussions with a borrower regarding a loan modification, and
- any loan modification agreements entered into with the borrower.
Under the rules, the new servicer must also have policies and procedures in place to ensure that it honors existing loan modification agreements.
When You Should Hire an Attorney
Mortgage servicers that commit any of the violations mentioned in this article could cause you to (among other things):
- incur increased fees and costs in order to avoid foreclosure
- lose your savings in a fruitless attempt to get a loan modification
- be wrongfully foreclosed upon, and/or
- miss out on the opportunity to pursue other alternatives to foreclosure, such as a short sale or deed in lieu of foreclosure. (Learn more about alternatives to foreclosure.)
If your mortgage servicer has committed any of the violations mentioned in this article or is otherwise improperly handling your loan modification, you should speak to a qualified attorney who can advise you what to do in your particular situation.