Modification of Mortgages through Chapter 13 in Jacksonville, FL
In the Jacksonville Division of the Bankruptcy Court, the mortgage modification experiment is about to celebrate its one year anniversary. So how are things going for clients who have attempted to modify loans in Chapter 13 on their principal residences?
The results so far have been mostly positive if you compare the current system to the old “cure” plans that were required under the Bankruptcy Code. Under Chapter 13 (Section 1323(b)(2)), the Chapter 13 Plan may not modify the rights of lien holders secured by real estate that is the principal residence of the debtor. The same prohibition exists in Chapter 11 in § 1123(b)(5). These sections have been interpreted to mean that principal residence mortgages may not be “stripped down” to current value, may not have legitimate interest charges as allowed by the note and mortgage deleted from the account and also may not prohibit attorney’s fees and other charges if allowed by the note and mortgage.
The end result was that many people were unable to save their home from foreclosure due to a variety of factors. Take, for instance, a hypothetical example of a couple who went to a foreclosure defense firm prior to the mediation program. The foreclosure defense firm may have been able to stall the foreclosure process due to the backlog in the court system. Eventually, however, the home will be severely delinquent and a summary judgment hearing will be looming. At this point, many foreclosure defense firms would have simply told the couple to plan on moving out shortly. Or that firm may have recommended to the couple to file Chapter 13. However, due to the delay in the filing of the Chapter 13 case, the arrearages under the old “cure” Chapter 13 would have been too large to cure while trying to maintain the regular mortgage payments each month. Not only did the foreclosure defense serve only to delay the inevitable, it also made a cure plan impossible.
HAMP Program now in use by the Jacksonville Bankruptcy Courts
In December of 2011, the Jacksonville Bankruptcy Courts began a HAMP modification program in Chapter 13 cases. The program is a voluntary mediation program that was modeled after successful programs in Orlando and Tampa Bankruptcy Courts. The program cannot force the mortgage company to modify a loan. But, it does provide a process to obtain a HAMP modification through a mediation session with a federally appointed mediator. The great benefit of the program is that it is run through the Federal Bankruptcy Court and is subject to the Mediation Order issued by the Bankruptcy Judge. If the mortgage company fails to cooperate or does not offer a HAMP modification to an otherwise qualified candidate, that mortgage company may be subject to sanctions. In fact, statistically, our office has seen great success in obtaining modifications, either through HAMP or an “in house” program offered by the servicer. Each financial situation is different, so a full evaluation of your particular eligibility for the modification program must be performed prior to any recommendation to attempt to obtain a modification through Chapter 13.
HAMP Eligibility
To be eligible for HAMP, a homeowner must owe less than $729,750 on a one-unit property, have established the mortgage prior to January 1, 2009, and have a monthly mortgage payment greater than 31 percent of his monthly gross income. Also, a homeowner must be able to provide documentation indicating that he is facing a serious financial hardship as a result of his mortgage.
Our office has a full-time person devoted to making sure that your paperwork is organized and prepared properly prior to submission to the mortgage servicer. Based on our experience, the paperwork component of the modification process is the step that most denials have been based upon outside of Chapter 13. Without the experience of a dedicated staff member and multiple past modifications, it is simply too difficult to put together a complete modification package which will satisfy a mortgage underwriter.
Once our office has obtained your package, the mediation session is set up to provide a decision on the modification request. Typically, the mediation session is held about 45 days after the modification package has been presented. The mediation session is held at our office with the mortgage company on the phone and generally lasts about 20 minutes. The mediator is present during the mediation session and will guide the parties through the process in order to ensure that each side has a chance to present whatever documentation and testimony is needed.
A modification is usually offered at the mediation session or at a follow up phone conference to be held within two weeks of the mediation session. There are also instances where the modification is denied at the mediation session. Normal reasons for denial are that the mortgage payment is currently low enough to be below the 31% of gross income, the borrower does not currently have income to support the modified payment amount needed or that the Net Present Value of the home is greater through foreclosure.
The Net present value Trap
If the loan otherwise meets HAMP requirements, the decision of whether a homeowner must be approved for HAMP rests on the results of the NPV test. Based on Treasury data as of March 2012, approximately 5% of 3.2 million homeowners denied for HAMP were denied based on the NPV test. This represents 160,870 homeowners who did not get help from HAMP.
The NPV test estimates whether it is in the best interests of the investor to modify a mortgage under HAMP. Servicers enter data into the NPV test. The NPV test compares the expected cash flow from a modified loan with the expected cash flow from the same loan with no modification to determine which option is likely to be more valuable to the investor. If the NPV test estimates that modifying a mortgage will result in more revenue for the investor than not modifying the mortgage (described as a positive NPV result), the servicer must offer a HAMP mortgage modification to the homeowner. If the NPV test produces a negative result, a servicer has the option of modifying the mortgage under HAMP if the investor consents.
Prior to attending your mediation session, our office will run an NPV test to determine if the loan modification may be denied. While the investor may still consent, a NPV failure may doom any modification attempt under HAMP. This would leave only an “in house” modification program as an option for the borrower.
Conclusion
The mortgage modification process has been extremely beneficial to those people who qualify for HAMP treatment on their principal residence. With the benefit of judicial oversight and attorney involvement by both the borrower and lender, a large number modifications have been obtained through the Chapter 13 loan modification program. While no modification can be guaranteed, you can at least have your modification application reviewed by mortgage company and expect to receive a written approval or denial instead never receiving any response. HAMP is currently scheduled to expire on December 31, 2013. Your package must be in the mail by that date in order to qualify for a modification under that federal program.
If you feel that you may benefit from a loan modification or any type of mortgage relief, contact our office at 904.725.0822 or bkmickler@planlaw.com for a free consultation.
Bryan Mickler
