The portion of the Treasury Department’s Making Home Affordable Plan (implemented on March 4, 2009, please see earlier article summarizing this Plan) regarding plan participants with high “back end” debt (defined as other debt in addition to your mortgage debt, such as credit cards.) Homeowners in this category, to receive the benefit of a mortgage modification or refinance, must participate in HUD-approved credit-counseling.
This article pertains to situations where borrowers qualify for the portion of the mortgage modification program or mortgage refinance program for homeowners with high back end debt and therefore must participate in mandatory HUD counseling. This article discusses the qualification requirements for this prong of the mortgage modification program as well as the counseling requirements required under this prong.
Credit Counseling and High Back End Debt
Borrowers with high “back end” debt (housing payment, credit cards, and car payment) will have to undergo mandatory credit-counseling to receive a mortgage modification under the Plan. However, under the loan modification prong of the Plan, there is a specific program available for borrowers with high back end debt. Under the Plan, borrowers with back end debt exceeding 55% of their income could be eligible for a loan modification, if they also participate in a HUD-approved credit counseling program.
Generally, if you have less than 20% equity in your current home and your equity has been reduced as a result market conditions, you are among the target group of homeowners at which the Plain is aimed. If your income has declined or your mortgage payment has increased to more than 31% of your gross income (all income before taxes), you also generally meet the guidelines to receive a temporary, five-year reduction in mortgage payment , as well as significant incentives for successful participation in the program.
To be clear and avoid scams, there are no closing costs or fees of any kind for participating in the mortgage modification program or the refinance program for Fannie and Freddie Mae mortgages. You should, to the extent possible deal directly with your lender and you should be aware of and avoid any kind of scheme where a broker might try to charge you fees to participate in this program.
For example, among other incentives, homeowners qualifying for and participating in the mortgage modification program qualify for an initial cash payment of $1500, as well as a $1,000 reduction applied to the loan principle for five years. For more exact breakdown of the incentives available to borrowers, lenders and servicers under the Plan, please see my prior article detailing the entire plan. For the purpose of this article, I will be focus primarily on the credit counseling requirements.
How the Credit Counseling Will Work
Credit counseling agencies nationwide must certify themselves as HUD counselors and can then provide the required counseling under the Mortgage Modification Plan. The Treasury has issued some general information to credit counselors to begin implementation of the Plan. The following is a breakdown of the information provided to credit counselors thus far. For example, the Treasury advises credit counselors that if they are already working on a modification plan to benefit a borrower, they must now first consider whether modification under the Plan may be more beneficial to the homeowner.
When a credit counselor determines that a homeowner does not qualify for a mortgage modification under the Plan, the counseling agency is supposed to discuss all loss mitigation options, including loan modification scenarios outside the Plan and opportunities to refinance or access to available local resources such as rescue grants and loans. If it is impossible to work out a deal to keep the homeowner in the home, the counseling agency should discuss short sales and deeds in lieu of foreclosure as ways to help a borrower transition to more affordable housing.
Treasury advises credit counselors that one of the important components of the Making Home Affordable program is community stabilization. Treasury views short sales and deeds in lieu of foreclosure as options that minimize the impact of vacant and abandoned propertied on communities. Counseling agencies are presumably required to inform participating loan servicers that they could be eligible for an incentive of $500 and can make reimbursable payment of up to $1000 to extinguish other liens. Borrowers in this situation are eligible for a payment of $1500 in relocation expenses in order to effectuate short sales and deeds-in-lieu of foreclosure.
Although all delinquent borrowers are encouraged to seek the advice of a HUD-approved counselor, only borrowers with a back-end debt-to-income ratio at or above 55% must certify that they will participate in counseling as a condition of a modification under the Making Home Affordable Program.
Level of Counseling
Borrowers required to participate in mandatory credit counseling must agree to meet with a counselor from a HUD-approved housing counseling agency or a National Foreclosure Mitigation Counseling Program (or NFMC, was launched in December 2007 with funds appropriated by Congress to increase the availability of foreclosure counseling services across the country) participating agency to create an action plan that includes steps and a time line to eliminate unnecessary debt, minimize expenses, increase income and create savings. The action plan requires the borrower to establish a follow-up schedule with the counselor. The program generally requires that the borrower have two mandatory sessions with a HUD-certified credit counselor.
The Treasury allows a credit counselors to make referrals to specific servicers if the borrow contacts the credit counseling agency and it is determined that the borrower may be eligible for a Home Affordable Modification, the counselor must work with the borrower to submit an intake package to the servicer. To be eligible for compensation, the counseling must conform to Level 3 counseling requirements, as established by the National Foreclosure Mitigation Counseling (NFMC) Program, including some additional requirements detailed in the counseling protocol on the NFMC website.
NFCM Program funds and HUD Housing Counseling Grant funds can be used to pay counseling agencies for counseling provided to borrowers with back-end debt-to-income ratios greater than 55% and for counseling borrowers who are referred to servicers. TARP funds cannot be used to pay for housing counseling. Because the loan modification program is supported by TARP funds, there are no direct financial provisions for fees to be paid by the Making Home Affordable program to counselors.
NFMC Program reimbursement for the required counseling will be set at a new Level 4 fixed price pending available resources. Other counseling will be reimbursed at the current fixed price for Level 3 counseling as established in each organization’s existing NFMC Program grant agreement. HUD Housing Counseling grant recipients may request reimbursement for the actual, document cost of counseling up to the amount available under the grantee’s counseling award. If a portion of the counseling has been reimbursed by NFMC, HUD Housing Counseling grant recipients may bill against their HUD Counseling grant actual costs not covered by the fixed price NFMC reimbursement, up to the amount available under the grantee’s counseling award.
Counseling agencies that do not receive NFCM Program funding or HUD housing counseling grant funding are encouraged to provide counseling through other funding sources. For example, servicers can pay for this counseling. If a housing counseling agency participating in HUD’s Housing Counseling Program or the NFMC Program does not have sufficient resources, they are not required to provide this counseling, but must make a reasonable effort to refer borrowers to counseling agencies that can assist them.
Under Obama’s new Making Home Affordable Act, potential Plan participants with high “back end” debt, will be required to undergo HUD-certified credit counseling as a condition of their participation in the program.
This article was written using only government HUD and Treasury documents. All analysis is original to this author.
Jim Tily is a legal researcher specializing in real estate law.