Reverse Mortgages and Foreclosure

A reverse mortgage operates completely differently from a normal mortgage. A person with equity in their home trades their equity for the right to live in the home for as long as they are living and the ability to cash out the equity over time similar to a Home Equity Line of Credit. Since the person, who must be over the age of 62 and from my understanding not own the home with anyone below that age, can cash out the equity there is a possibility that equity can be used to pay off outstanding mortgages and liens. The amount of money a person can receive in a reverse mortgage depends on their age (the older you are the higher percentage of equity you can take out) and the value of the home. Therefore, in certain situations a Reverse Mortgage is a viable alternative to foreclosure. The following are two examples. The first is where a Reverse Mortgage is a viable option. The second is where it is not.

Example Where It Works: Person A owns a $800,000 home with a $200,000 mortgage with Bank B. Person A receives an equity line in a reverse mortgage from Bank C for $300,000 (half the remaining equity). Person A takes out $200,000 from that equity line with Bank C and pays off the mortgage with Bank B. Person A now has a $300,000 reverse mortgage on the property with Bank C but no mortgage with Bank C.

Example Where It Doesn't Work: Person A owns a $500,000 home with a $550,000 mortgage with Bank B. The property lost a lot of value when the market fell apart and was once worth nearly a million dollars. Bank C won't give Person A a reverse mortgage because there is no equity in the home.

Reverse Mortgages are a complicated topic. If you are looking into applying for one you should see someone who has experience handling their application process.

Home Affordable Unemployment Program (HAUP)

HAUP offers unemployed homeowners who are unable to make their monthly mortgage payments a few extra months to get back on their feet while looking for employment. Homeowners are eligible if they:

(1) Are unemployed;
(2) Live in the mortgaged premises (meaning the property is their primary residence);
(3) Have a first lien mortgage originated on or before January 1, 2009; AND
(4) Have an unpaid principal balance less than or equal to $729,750.10.


Homeowners that qualify will have their mortgage payments suspended for up to three months (or until they are employed). Homeowners that find a job while on the program will be considered for the Home Affordable Modification Program. If the homeowner does not find a job they will be considered for the Home Affordable Modification program 30 days prior to the completion of the Unemployment Program forbearance plan.

HAUP does not cancel any mortgage payments, it merely suspends such payments. Homeowners that successfully complete the program will resume normal payments once the plan ends.

Home Affordable Refinance Program (HARP)

A refinance can perform a number of different functions. It can be used to consolidate debt, pull equity out of one's home, obtain a mortgage with a lower rate, change from adjustable to fixed, etc. Typically as interest rates drop the economy experiences a influx of refinances. Currently we have low interest rates but few refinances because many homes are "upside down". This means that the homeowner owes more on that property than the property is worth. HARP is the governments solution to this problem.

When a homeowner owes more on a property than what it is worth the homeowner is typically unable to find a bank that would give them a new mortgage. Here's an illustration of why this situation doesn't lend itself to refinancing:

John owns his home and owes $500,000 on the premises. The property is worth $300,000. His original mortgage is with Bank A and he'd like to refinance with Bank B. In a refinance Bank B would pay Bank A for the entire amount due (here $500,000) and John would then owe Bank B the value of his property, therefore giving him a new mortgage. In this situation Bank B would pay $500,000 to satisfy John's mortgage with Bank A and then receive a new mortgage from John of $300,000. Clearly Bank B is losing too much money. Therefore John would need to pay Bank B $200,000. In today's economy people like John don't have excess capital sitting around and therefore they are having problem taking advantage of lower rates.

The government's solution to this problem is called HARP (Home Affordable Refinance Program). A person may be eligible for HARP if they:

(1) Own a one-to-four unit home as a primary residence;
(2) Have a mortgage owned by Fannie Mae or Freddie Mac;
(3) Are current with their mortgage;
(4) Have not been late on the mortgage within the past 12 months;
(5) Have a first mortgage not exceeding 125% of the current market value of the home;
(6) Have income sufficient to support the new mortgage payments; AND
(7) Can improve the long-term affordability of the loan with the refinance.

Note that this allows homeowners with a second mortgage to refinance so long as the first mortgage does not exceed 125% of the current market value of the home. In addition, the homeowner does not need to actually live in the home. This is the first government program to allow refinancing for vacation and investment properties.

This program differs from typical refinancing because the homeowner cannot take cash out from the refinance and because the homeowner must be current on their mortgage.

Refinancing your home loan is not an easy process. If you would like more information on HARP or any other type of refinance/modification program feel free to email me at AFriedma@PulversThompson.com.

HAMP v. In-House Mod

A bank needs to put any HAMP eligible loan through a HAMP modification review prior to successfully foreclosing on any residential property. This is both good and bad. It's good because it gives the courts the power to slow down a foreclosure until they're certain the bank has reviewed a person's unique situation for a HAMP mod. It's bad because HAMP is a slow, drawn out process. While a homeowner is under review for a modification missed payments, interest and attorneys fees can still be added to the total amount due on the mortgage. The more that is owed on the mortgage the more difficult it is to get modified.

Time Before Response

HAMP mods require the bank to follow government created guidelines before offering the modification. In-House mods vary by bank but instead of requiring the extensive paperwork necessary for a HAMP mod an In-House mod may require very little paperwork. I've seen a few In-House mods that were actually "blind" meaning without any paperwork.

How the Modification is Structured

HAMP mods are required to be as close as possible to 31% of the household's pre tax income. The net present value of that loan is then compared to the net present value of the foreclosure. The bank is permitted to do whichever one has a higher net present value. In-House mods follow no set structure. Since they cost less to offer (less employee time and lawyer time spent on the loan) banks are quicker to offer them and sometimes offer better deals than the homeowner would receive under HAMP.

Reaching Permanent Status

HAMP trial mods come with a 3 month trial period. At the end of the trial period homeowners must resubmit certain documents prior to the loan going Permanent. Sometimes this can take months other times it can be quick. In-House mods are almost always (99% of the time) Permanent instantly. There is no trial plan period.

Documents Required

HAMP mods always require the following: Financial Worksheet, Hardship Affidavit, Bank Statements, Pay Stubs or Profit and Loss Statement, 4506-T and Tax Returns. You may also be required to submit proof of rental income, proof of occupancy and a number of other government required documents. As with any government program there is a lot of paperwork. In-house mods can require nothing and can require everything listed above for HAMP mods. They're not part of a government program and therefore the bank can make their own requirements.

Does the Bank Actually Want My House?

The short answer is a resounding "No".

In a foreclosure action the bank would much rather find a way to keep you in the home and paying your mortgage. A foreclosure takes a lot of time and money. During that time period no one is paying the mortgage and if the bank eventually purchases the property at the foreclosure auction they will be responsible for property taxes, homeowners' insurance and necessary repairs. This is good for a struggling homeowner because the bank will try to help you modify or conduct a short sale. Keep in mind however that just because the bank wants to keep you in your home it doesn't make a modification easy.

Many homeowners assume that the bank approaches the settlement conference stage with a negative attitude and numerous stalling tactics. Instead of viewing the bank behind the foreclosure as making deliberate actions with evil intentions keep in mind that these companies are over worked and under lots of pressure by the courts to get something done.

If it takes them a while to review your paperwork its likely because their staff is trying to get through hundreds of applications. If they lose a document you faxed in its likely because they have dozens of departments and your document may have been sent to the wrong one. This doesn't mean all hope is lost. If you are in foreclosure make sure you send a copy of every document to the firm representing the bank in the foreclosure. Make sure you follow up with a phone call to the firm to determine if everything has been received and if anything else is missing. Call the bank too and see if someone can verify that your documents have been received. Get as proactive as you can and follow up weekly to make sure you modification or short sale is moving along properly.

Reinstatement & Payoff

When you attend a foreclosure settlement conference there are a few papers that the you should request from the bank. Two of the most important (depending on your situation) are Reinstatement and Payoff quotes.

What is a Reinstatement Quote and Why/When is it Important?

A Reinstatement Quote tells you how far behind on your mortgage. It gives you a dollar amount that, if paid, would make you current on your mortgage. If you pay this amount your mortgage is Reinstated and you would make next month's payment as if you were never delinquent.

It is VERY rare that someone actually reinstates their mortgage. It is far more common to go on a forebearance to mod agreement (pay a certain elevated amount per month to help you catch up on areas and then have a modification) or receive a HAMP or In-House Modification. It is important to receive a copy of the Reinstatement so you can check the bank's math and make sure that (1) they are billing your account correctly and (2) they have credited your account for past payments. Its also good to know how much is owed because while you are in foreclosure you are typically unable to make mortgage payments so it is sometimes possible to save up enough money to offer a huge chunk up front for a more favorable In-House modification.

What is a Payoff Quote and Why/When is it Important?

A Payoff Quote will tell you exactly how much the bank is owed on the mortgage. This amount is typically larger then the original mortgage (depending on how long you've been in default and how long you paid the mortgage before defaulting). If you pay this amount the mortgage will be satisfied and you will no longer owe the bank anything.

A Payoff Quote is important for a few of the same reasons a Reinstatement Quote is important. You should check the bank's math and have an idea of how you are being billed. A Payoff Quote becomes very important if you are looking to sell the house. If what you owe is more than what the house is worth then you will need bank approval to conduct a Short Sale. If what you owe is less than what the house is worth then you will not need bank approval as this is a normal sale. Keep in mind that you'll need to pay a broker fee and will need to set aside for a few other expense.

When Will I receive these Quotes?

Bank attorneys are instructed to bring these documents with them to all settlement conferences. You or your attorney can request a copy of each at every settlement conference. If the opposing council doesn't have a copy you should request, in front of the court referee, JHO or Judge, for a copy to be emailed or faxed to you.

The NPV Test

The NPV test should only come up in one specific situation concerning your foreclosure so this post will only discuss the test as it relates to that situation. As I explained in other posts, if you earning a living that is reasonable in relation to your mortgage and you live in your home you will likely qualify for a HAMP trial modification. Once you get through the trial modification you will be reviewed for a permanent modification. If you are rejected for the permanent modification there is a great chance the reason will be that the NPV test failed. There are two ways to explain the NPV test. First I'll give you the short answer and I'll follow it up with the long, detailed answer.

What is the NPV Test? (Short Answer)

It is within the bank's power to determine which is more profitable: (1) Foreclosing on your home, winning the bid at an auction and selling your house to someone else OR (2) Modifying your loan under HAMP guidelines. If the bank determines that they will turn a higher profit through option 1 then through option 2 then they are allowed to deny your modification because the NPV of option 1 is great than the NPV of option 2.

What is the NPV Test? (Long, Detailed Answer)

When determining the Net Present Value of anything (not just your home and your foreclosure) numerous factors need to be considered. Imagine I told you I could give you $100,000 right now or $120,000 next year. You would need to determine which was more valuable to you right now and go with that choice. If you took the cash today you could invest it and at the very least earn interest on the money. You could also pay off student loan debt or your mortgage. I could also die in the next year in which case you may need to hire a lawyer to go after my estate for the money. Therefore it is very possible that the $100,000 makes more sense and its Net Present Value is higher than the $120,000 in a year.

There is convincing evidence to suggest that the $120,000 has a higher NPV. Interest rates are low right now so putting it in the bank wouldn't earn $20,000 worth of interest in a year. You may not have the desire to start your own business with the money. You might now have student loan debt or a mortgage to pay off. So maybe the Net Present Value of the $120,000 is greater. Clearly to make these determinations take time and a careful evaluation of the situation. The bank's determination is no different.

The bank will first evaluation the value of foreclosing on the property. They will need to wait another 6 months - a year to go through the foreclosure, during which time they will take in no money on the property. They will have legal fees and eventually broker fees in marketing the place. During the time they own the property they will pay property taxes, homeowners' insurance and be responsible for repairs. They need to have staff members monitor the property and the foreclosure. The bank will need to determine how much the foreclosure is worth. The most basic way to determine that is by predicting how much the property will sell for and how much the bank will spend to get to that point.

The bank will then need to determine the value of the modification. Remember everyone wants their money as soon as possible. A 30-40 year modification certainly delays the time they will collect their money. Each payment over the time period of the loan will be decreased to determine it's Present Value. All of those payments will then be added together and the bank will determine the Net Present Value of the entire mortgage. The bank will then add the incentive payments that the government provides with a HAMP modification and will compare this number to the Net Present Value of the foreclosure. If the NPV of the foreclosure is higher the bank will reject the HAMP Permanent Modification. If the NPV of the HAMP Permanent Modification is higher the bank will send you an offer and if you sign it the foreclosure will end.

How Do I Know If My Modification is At Risk of Failing the NPV Test?

Keep in mind that I am about to make generalizations. Every property is different and if you are concerning about these issues I would consult an expert on your specific situation.

If a property is "underwater" such that the mortgage is worth $500,000 and the property is worth $100,000 it is extremely unlikely that the homeowner's HAMP modification will fail due to the NPV test. If that property is foreclosed on and sold the bank can make a maximum of $100,000 if it has no legal fees or broker fees, pays no property taxes or homeowners insurance and makes no repairs. Once all of those fees are taken into account the bank is probably only collecting around half of that figure. In addition, it will need to wait months to collect. Therefore the NPV of the $500,000 mortgage, even if the interest rates are down to 2% and it is extended 40 years and a third of the principal is pushed to the back end, should always be higher than the NPV of foreclosing. The bank doesn't want your upside down house. They'd rather you pay off the mortgage at a different rate.

If the property is not "underwater" such that the mortgage is worth $250,000 and the property can be sold for $500,000 there is a great possibility that the NPV test will fail for the HAMP modification. In this situation if the bank forecloses and the property is sold at auction the bank will be able to collect its full mortgage amount at the auction. If they purchase it at auction and sell it a third party they will incur broker fees and all of the other fees listed above but they will get the substantial portion of their mortgage within one year as opposed to waiting 30-40 years to be paid in full. This does not mean that you have no options, it just means that your situation is slightly more difficult. Then again if you're having trouble paying your mortgage but you can sell your house for a quarter of a million dollar profit you're in a substantially better position than the homeowner who passes the NPV test because their property is $400,000 underwater.