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Mha Loan Mod Denials Leave Borrowers Worse Off
Many people were managing to make their payments each month when they applied for the Making Home Affordable (MHA) modification
. Borrowers are usually granted a 3 month trial period with relative ease. A trial period, as many homeowners have come to find out, in no way guarantees a permanent modification. The trial period is often offered to the borrower with no verification of income, or even verification of investor participation. Meaning, the bank will offer a trial period before they even determine if the investor is participating in the government program. See my article "You Got the Trial Period, Now What?" for some tips to increase success in obtaining the permanent mod.It is a very common misconception that lenders must participate in the MHA program. They are not obligated at all to participate in MHA, just incentivized by the government. Basically, the governement is subsidizing your MHA modification, and very little at that. So little, that banks do not even consider the government subsidy when reviewing your loan for a modification.
The lender will still have the final say in any modification, and if the modification does not make business sense for them, then they are going to deny the mod. Banks are using a formula call "Net Present Value," to determine the cost/benefit ratio of modifying a loan. The NPV is based off a formula unique to each bank. It gives them a projection of the costs of foreclosing versus the cost of modifying. Whatever cost the least amount of money, wins. Put another way, this decision is almost always completely fiscal in nature. Borrowers sometimes try to appeal to the bank's soft side, rest assured it is not there. The sooner prospective modification applicants realize that the decision to modify is based on money, the better their chances are. The prospect of losing a home can be very emotional for a homeowner, it's business as usual for the lender.
But Why Are Homeowners Worse Off?
Ok, it is clear that trial periods often end in a denial. Homeowners are worse off because the trial payment is the estimated payment on the basis that the loan will be modified. Upon denial the homeowner is responsible for paying back the difference of the money not paid to the bank during the trial period. What's worse, is that these trial periods usually go beyond the 3 months. So, say a trial period last for 6 months at a $500 discount. The borrower will now owe the bank $3000 in addition to their monthly payment. If the homeowner was already late prior to the modification, no big deal, just add it to the already accumulated mountain of arrears. But this most affects the ones that were managing (barely) to stay current. All of the sudden they owe $3000 in addition to their mortgage payment, and the bank wants it now.
In the end, the only advice I can give is, don't get comfortable with the reduced payment and try to save any additional money in the event of a denial.
by: Mark Korte