HAMP modifications are government incentivized modifications that work off of a homeowners gross monthly income to determine an affordable monthly payment. After determining what the homeowner can afford the bank weighs the value of the modified loan against the value of a foreclosure of the property. If the modified loan has a greater net present value, it is offered in the form of a trial modification. After 3 trial payments are made the homeowner is again reviewed prior to the modification going permanent.
A major issue with HAMP modifications is that after making the 3 monthly trial payments banks have to complete a permanent modification review where the homeowner may be rejected. Banks had little incentive to determine the net present value of the modification compared to the foreclosure prior to offering a trial plan because the banks had no actual risk. Should the modification pass the net present value test a permanent modification would be offered. Should the bank determine the net present value of the foreclosure was greater than the modification the homeowner would be rejected and the bank would retain the 3 trial payments. It appears things may be changing.
Recently I have seen numerous HAMP trial modifications that automatically go permanent upon the final trial payment. No permanent review is required and all net present value calculations appear to have been conducted prior to the trial modification offer. This will likely lead to an increased number of rejections for homeowners who do not make enough money to pass the net present value test upon the trial modification review, it should lead to a large increase in permanent HAMP modifications. Assuming this is the new practice there will be a few side effects:
(1) Increased Bank Efficiency – Presumably each major bank has hundreds (if not thousands) of workers somehow involved loan modifications. If loan modifications are automatically going permanent the staff responsible for the permanent modification review would likely be directed towards assisting with other aspects of the modification review.
(2) Increase Court Efficiency – Every settlement conference part is bogged down with cases that require 5+ appearances to negotiate. Nearly every case that results in a permanent modification has one or two conferences that serve as a status updates where the appearing attorney simply advises that the permanent review has not yet been completed. If loan mods go permanent automatically it should result in less conferences per file.
(3) More Initial Rejections – Homeowners that don’t have enough income or have too much equity in their homeowner to pass the net present value test should find out upon the initial trial review as opposed to making three (or more) trial payments before being rejected.
Written by: Adam J. Friedman, Esq.
