Tag Archive for 'modification'

Treasury Department Issues Guidelines for Use of HAMP in Bankruptcy

Published
by
Monette Cope
on March 30, 2010
in Bankruptcy Filings, Homeowners Affordable Modification Program and Real Estate
. 0 Comments

A recent post advised lenders and servicers of a strategy proposed by a prominent Chapter 13 Trustee to file bankruptcy and apply for a HAMP modification at the same time. To recap, theoretically, the servicer will lower the mortgage payments and a modification would be in executed within 60 days of filing the bankruptcy, and the plan would be ready for confirmation.  However, this not only overlooks likely delays in the process, but also the three month trial period during which the debtor must make full and timely modified payments before the modification is permanent.  During the process, the servicer can be bound by automatic stay for months while awaiting completion of the modification, and so confirmation.

Now the U.S. Treasury is promoting the idea through its just-issued Supplemental Directive 10-02.  It includes guidelines for HAMP modifications in bankruptcy, which will become effective June 1, 2010.  These guidelines may in some cases help ease the expected delays in Chapter 13 confirmations.

The Treasury acknowledges that the HAMP process may cause delays in Chapter 13 cases, and further permits (but does not require) servicers to extend the trial payment period from three to five months to accommodate any legal proceedings needed to approve the modification or to receive trial payments from the Chapter 13 trustee.  This would obviously create more delay, but gives the servicer control over such an extension.

Even better, servicers can waive the three month trial period when:

  1. Post-petition payments on the loan are current prior to entering into a HAMP agreement; and
  2. The payments are equal to or more than the payment as modified; and
  3. The Bankruptcy Court approves the modification, if necessary; and
  4. The investor agrees to the waiver.

If a debtor qualifies, the Treasury Directive’s waiver provision could prevent months of delay before confirmation, and could allow a plan to be confirmed within 60 days of filing in some cases.

Coordinating HAMP with a Chapter 7 bankruptcy is much less complicated.  The only new requirement applies in the event a debtor obtained a discharge, and a reaffirmation agreement was not filed.  If a debtor later enters into a modification agreement, the servicer must include specific language that it will not hold the debtor personally liable for any debt arising out of the agreement.

In both Chapter 13 and Chapter 7, the servicer may choose (but is not required) to accept bankruptcy schedules and tax returns provided in the case as evidence of income in lieu of the Affidavit of Hardship and Form 4506T-EZ. The only restriction is that the schedules must be less than 90 days old.

These guidelines, where appropriate, are avenues that can reduce delay where a Chapter 13 case is combined with a HAMP application.  However, servicers still need to take quick and aggressive action in this circumstance because all too often, it may lead to unjustified delay.

If you have any questions, please contact Ms. Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., L.P.A. located in the Chicago office. She can be reached directly at 312-253-9614 or via email at mcope@weltman.com.

Beware of Chapter 13 Plans That Depend on HAMP Modification

Published
by
Monette Cope
on March 25, 2010
in Chapter 13, Homeowners Affordable Modification Program and Real Estate
. 0 Comments

The bills in both the House and Senate which would have allowed bankruptcy judges to modify the terms of certain mortgages died long ago.  However, one prominent Chapter 13 bankruptcy trustee is promoting his own version of reform by promoting the use of HAMP (Homeowners Affordable Modification Program) in concert with a Chapter 13 bankruptcy.  Lenders and Servicers need to be aware of this and the issues it presents.

The idea is to submit an application for a HAMP modification at the same time a Chapter 13 bankruptcy is filed.  Because both require proof of income, a budget, and the debtor’s most recent tax return, it should be “easy” for the debtor’s attorney to submit them to HAMP along with the Request for Modification and Affidavit of Hardship.  Because lenders and servicers are required to respond to applicants within 30 days with a yea or nay, it would in theory dovetail perfectly with the timing of most districts’ confirmation hearings, and result in reduced mortgage payments and so affordable plan payments.

The assumptions behind this idea show its inherent problem – delay.  Among the assumptions are the following: the debtor is a viable candidate for a HAMP modification; the documents the attorney sends are complete and sufficient the first time; the lender or servicer will be able to respond within the 30 days; the debtor can afford the proposed modification; the modification is accepted immediately; the plan will work with the modification; and the modification documents are signed soon after the 30 day response period has passed.  It is more likely that there will be snags in the process and it will not move as smoothly as the trustee assumes.   Debtor’s counsel will certainly use any delay in the HAMP process to delay the Chapter 13 proceedings.

Even if the modification process goes smoothly, a huge delay is overlooked.  Confirmation hearings are usually set within 60-90 days after a case is filed, and plans can be confirmed in 60 days in some jurisdictions. Under HAMP, a signed modification will not be permanent until and unless the debtor pays according to the modification for three consecutive months. Assuming that a plan cannot be confirmed until the modification is finalized, it will be at least 4 ½ months until the plan can be confirmed. Meanwhile, the creditor is bound by the automatic stay.

Moreover, if the debtor cannot afford the existing mortgage payments, how will it be paid after the bankruptcy is filed?  If a post-petition default accumulates, creditors have grounds for relief from stay.  Will courts put off granting relief while a HAMP application or trial period is pending?  More delay.

How could a debtor propose a budget and a plan if he or she cannot afford the current mortgage payments?  If not, the debtor must file a budget and plan that are unfeasible or based on a future unknown payment.  With either option, creditors have grounds for denial of confirmation, dismissal of the case or relief from stay. Will courts delay or deny creditors this relief while a debtor is waiting for a loan modification?  Again, more delay.

Or would debtor’s counsel seek and obtain an extension of time to file a plan and budget while waiting for a HAMP decision?  In cases where a loan modification gets approved, confirmation will be extended to at least 5 ½ months after filing.  In cases where modification is not successful, the case will either have to be dismissed or converted to a Chapter 7.  Again, the creditor is delayed from exercising its state court rights because the automatic stay has been in effect during the Chapter 13 case.

While a HAMP modification plan could be a win-win for both creditor and debtor in certain cases even with the delay it would cause, chances are that the creditor will be frustrated with the process.  Creditors must move aggressively and quickly if a Chapter 13 case is filed that is dependant upon a HAMP modification.

If you have any questions concerning this matter, please contact Ms. Monette W. Cope, Esq. Monette is a Junior Partner in the Bankruptcy department located in the Chicago office. She can be reached directly at (312) 253-9614 or via email at mcope@weltman.com.

Unintended Consequences: Bankruptcy Cram Down May Actually Case Decrease in Bankruptcy Filings

Published
by
Scott Fink
on April 8, 2009
in Bankruptcy Act 2009, Chapter 13 and Real Estate
. 0 Comments

With the proposed amendments to the Bankruptcy Code placed on temporary hold by Congress until at least late April, it seems appropriate to take a step back and examine the possible unintended consequences of the passage of such a law.

While providing troubled borrowers with an effective tool to rework their mortgage terms under the protection of the Bankruptcy Code, is it possible that the mere threat of such a modification by a borrower could lead an increasing number of lenders to agree to rework the loan terms outside of the bankruptcy process?

Debtor’s counsel have always operated with the knowledge that, while they have the ability to tie up a pending foreclosure for months or even years by aggressively opposing the case, the reality has always been that mortgage lenders held the upper hand once a Chapter 13 bankruptcy was filed. A borrower could not alter the terms of the loan, but could only seek breathing room to bring delinquent payments current.

If the proposed amendments become a reality, the leverage will clearly shift into the borrower’s favor, which may lead more and more lenders to seek a negotiated modification prior to bankruptcy, saving both sides from litigating over valuation of the home and risking assessment prior to plan confirmation.  The end result could be a decrease in Chapter 13 filings within the pool of borrowers who, but for their mortgage delinquency, might not be in financial difficulty.

Of course, the flip side to this argument would be that with all the economic indicators clearly showing a downturn, the actual number of borrowers whose only financial difficulty consists of their mortgage, is likely becoming smaller and smaller each month.  Therefore, it is likely that even with the offer of a voluntary loan modification by the lender, the vast majority of borrowers will still seek bankruptcy relief.

House Passes Bankruptcy Cram Down Bill

Published
by
Jack Day
on March 6, 2009
in Bankruptcy Act 2009, Chapter 13 and Real Estate
. 0 Comments

Last night, the House of Representatives approved H.R. 1106 by a vote of 234-191, permitting bankruptcy judges to cram down residential mortgages to their current value, modifying variable interest rates to a fixed annual rate and extending the repayment period of up to 40 years. This part of the bill contains identical language to other bills pending in the House. One big change is a built in sunset provision; the only loans that can be modified are those dated before the statute takes effect. Future loans may not be modified under this statute. In addition, the debtor must certify that he or she has attempted to contact the lender regarding modification of the mortgage at least 15 days before the petition is filed, unless a foreclosure sale is scheduled within 30 days. If a foreclosure sale is pending or if the debtor wants to modify a mortgage covered by a confirmed plan, the debtor must first attempt to contact the lender and try to work out a loan modification. Nothing in the statute explains how the debtor is to prove that the attempt to contact the lender was actually made.

The legislation would be immediately effective and would apply to all pending, but not closed, cases. The value of the property is the value as of the hearing date, not the date the petition was filed. This would give debtors the option to ask for mortgage cram downs on plans that have already been confirmed, even those that are four years old.  The only limitation on the provision is that the court must determine that the debtor has proposed the modification in good faith and that the debtor has not been convicted of obtaining the extension, renewal or refinancing of loan by actual fraud.

If the debtor sells the house for more than the crammed down value within five years, the lender would share in the net proceeds.

The Chapter 13 trustee’s fee on modified loans is capped at 4%, which will encourage more debtors to make regular mortgage payments through the trustee. The court may also waive the trustee’s fees for certain low income individuals.

Furthermore, there are provisions that protect servicers who agree to modify mortgages from liability to owners of interests in securitized loans. The terms of some securitization agreements will be changed, declaring certain provisions to be against public policy. This could have the effect of allowing many servicers to go forward with loan modifications, which have not been possible in the past.

All eyes are now on the Senate. If the legislation that passes in the Senate is not identical to the House version, the bills will go to a conference committee to hammer out a compromise. The compromise bill would then go back to both houses for approval and then to the President for signature.

Obama’s Homeowner Affordability and Stability Plan: A Breakdown Part II

Published
by
Beth Schenz
on February 27, 2009
in Bankruptcy Act 2009 and Homeowner Affordability & Stability Plan
. 0 Comments

Bankruptcy Modifications

The Administration will continue to influence change in the bankruptcy rules to allow individuals to pay the fair market value under Court order.  Currently, the Administration is in talks with Congress and predicts a swift enactment of the reformed bankruptcy law.  Such reformation includes the following:

  • Debtors’ mortgage loans will be crammed down to the current value of the property (with the remaining balance being treated as unsecured)
  • Bankruptcy Judges will have the power to, “develop an affordable plan for the homeowners to continue making payments”
  • Debtors who have existing mortgages under Fannie Mae and Freddie Mac conforming loan limits must ask their servicers/lenders for a modification first before seeking a modification in bankruptcy.  Also, the debtor requesting the modification must certify that he or she, “complied with reasonable requests from the servicer to provide essential information.”  (The reason behind this requirement is to not allow millionaire homes in bankruptcy.  However the program as worded would require an extra step for non-millionaire homes but not for millionaire homes.)
  • FHA and VA will provide partial claims in the event of bankruptcy or voluntary modification, “so holders of loans guaranteed by the FHA and VA are not disadvantaged”