The HAMP Plan
Understanding the HAMP Plan
At the heart of the President Barack Obama’s ambitious plan to rescue the housing market is the conviction that restructuring distressed mortgages will keep struggling borrowers in their homes and help insert a floor beneath plummeting property values. With $75 billion dedicated to reworking troubled loans, that’s a big bet—especially considering that a top banking regulator said last December that almost 53 percent of loans modified in the first quarter of 2008 went bad again within six months. But supporters argue that mortgage modifications need to be properly engineered to work—and many early ones weren’t. To that end, the Obama administration on Wednesday unveiled fresh details on its plan to restructure at-risk loans and help as many as four million home owners avoid foreclosure. Here are seven things you need to know about Obama’s loan modification program.
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1. Payments, not prices: The plan centers on the belief that struggling borrowers will stay in their homes—even as values decline sharply—as long as they can make their monthly payments. Although not everyone agrees with this, billionaire investor Warren Buffett endorsed the philosophy in his most recent letter to shareholders. “Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans),” Buffett wrote. “Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay.”
2. Thirty-one percent: To that end, the administration’s plan requires participating loan servicers to reduce monthly payments to no more than 38 percent of the borrower’s gross monthly income. The government would then chip in to bring payments down further, to no more than 31 percent of the borrower’s monthly income. In lowering the payment, the servicer would first reduce the interest rate to as low as 2 percent. If that’s not enough to hit the 31 percent threshold, they would then extend the terms of the loan to up to 40 years. If that’s still not enough, the servicer would forebear loan principal at no interest. The plan does not, however, require servicers to reduce mortgage principal, which Richard Green, the director of the Lusk Center for Real Estate at USC, considers a shortcoming. “For underwater loans, if you don’t write down the balance to be less than the value of the house, people still have an incentive to default,” Green says. “Writing down the principal first instead of last—which is what [the Obama administration is] proposing—makes sense to me.”
3. Cash incentives: To encourage participation, servicers will be paid $1,000 for each modification and will get an additional $1,000 payout each year for as many as three years, as long as the borrower continues making payments. Borrowers, meanwhile, can get up to $1,000 knocked off the principal of their loan each year for as many as five years if they make their payments on time. Neither party can receive the cash incentives until the modified loan payments have been made for at least three months.
4. Financial hardship: The Obama administration is pitching its plan as an effort to help responsible homeowners ensnared in the historic housing slump and painful recession—not speculators. As such, only owner-occupied, primary residences with outstanding principal balances of up to $729,750 are eligible. Occupancy status will be verified through documents, such as the borrower’s credit report. In addition, the program is designed to target homeowners who are undergoing “serious hardships”—such as a loss of income—which have put them at risk of default. To participate, borrowers will have to sign an affidavit of financial hardship and verify their income with documents. “If we would have had such stringent verification over the last four or five years, we probably wouldn’t be in as bad a position as we are in,” says Richard Moody, the chief economist at Mission Residential. But while Moody has no objection to such verification, obtaining documents from so many homeowners could be an onerous effort. “It’s going to be a very time-consuming process,” he says. Only loans originated on or before Jan. 1, 2009, are eligible, and modified payments will remain in place for five years. Now that the administration’s plan is out, lenders are free to begin modifying loans.
5. Net present value: To determine if a particular mortgage will be modified, the servicer will perform a so-called net present value test. The test compares the expected cash flow that the loan would generate if it is modified with the expected cash flow it would generate if it isn’t. If the modified loan is expected to produce more cash flow for the mortgage holder, the servicer is to restructure the loan. Howard Glaser, a mortgage industry consultant and a U.S. Department of Housing and Urban Development official during the Clinton administration, called this component of the plan “clever,” arguing that it would work to ensure broad participation. “When you apply the formula, the loans that are modified are the ones that are in the best economic interest of the investors to modify,” Glaser says. “The federal subsidy for the payment on the modification…tips the scale toward modification as a better deal for the investor.”
6. Second liens: The Obama plan also addresses the issue of second liens—such as home equity loans or home equity lines of credit—by offering incentives to extinguish them. But key details on this component of the plan remained unclear. “Distinguishing the second lien is really important,” Green says. “[But] exactly how they are going to convince the second lien holder to do this is not clear to me at all.”
7. Will it work? Moody argues that while the plan may reduce foreclosures for primary residences, it could lead to a spike in defaults for another group of homeowners. Although he supports the administration’s efforts to focus the initiative on primary residences, Moody notes that “it could be the case that a lot of [real estate speculators] have been just hanging on waiting to see exactly what the details are of this [plan],” Moody says. Now that it’s clear the Obama plan leaves speculators out, “we could actually see a spike in foreclosures or at least mortgage defaults among this group.”
Glaser, meanwhile, worries that lenders may soon be overwhelmed by inquiries from homeowners looking to participate. “Starting today, millions of borrowers are going to start to call their lenders to see whether or not they are eligible,” he said. “And I’m not sure that the financial services industry has the capacity to handle these inquiries.”
FDCPA LAW
What Is the Fair Debt Collection Practices Act?
The Fair Debt Collection Practices Act, often referred to as the “FDCPA”, was passed by Congress in response to abusive conduct by collection agencies, and concern that the abuses were causing an increase in the filings of personal bankruptcies. The purpose of the Act is to provide guidelines for collection agencies which are seeking to collect legitimate debts, while providing protections and remedies for debtors.
What Types of Debts Are Covered?
The FDCPA applies to personal, family, and household debts, including debts associated with the purchase of a car, for medical care, for retail financing, for first and second mortgages, and for money owed on credit card accounts. Please note that most states have similar laws, which typically proscribe the same types of misconduct by debt collectors and which may cover a broader range of debts than the federal law.
What Debt Collectors Are Covered By The Act?
The act regulates the conduct of debt collectors: any person who regularly collects debts owed to others. This definition includes lawyers who perform debt collection services on a regular basis. Even where money is legitimately owed, a debt collector’s conduct is restricted by this law.
In-house collection agents are not ordinarily covered by the Act. For example, if you have a store credit card, and the store’s own collection department contacts you, the FDCPA does not apply. However if the same store uses an outside collection agency to contact you in relation to that same debt, the outside agency’s conduct is restricted by the FDCPA. Similarly, if the same store uses an in-house collection agent, but suggests to you that the collection is being performed by a third party, the FDCPA may apply to them as a result of that representation.
Please note that there may be other laws in your state which restrict the conduct of in-house collection agents.
What Restrictions Are Imposed On Collection Agencies By The FDCPA?
The FDCPA restricts debt collectors from engaging in conduct including the following:
*
Contacting a third party who does not owe the debt, such as a relative, neighbor, or your employer. Co-signers to the debt, however, may be contacted by the debt collector;
*
Threatening to refer your account to an attorney, harm your credit rating, repossession or garnishment, without actual intention of action on the threat. Please note that a debt collector may warn you of an actual impending intention to refer your case to an attorney or to report your debt to a credit agency. What they cannot do is use a false threat to try to intimidate you into paying;
*
Making repeated telephone calls or telephone calls at unreasonable times. The act defines unreasonable times as contat before 8:00 AM or after 9:00 PM, unless you have given the debt collector permission to contact you during those hours;
*
Placing telephone calls to an inconvenient place. For example, contacting you at work in violation of a policy by your employer that is known to the debt collector or following a request by you that they not contact you at work;
*
When placing a telephone call to you at work, informing your employer of the purpose of the call, unless first asked by the employer;
*
Using obscenity, racial slurs or insults;
*
Sending letters which appear to have come from a court;
*
Seeking collection fees or interest charges not permitted by your contract or by state law;
*
Requesting post-dated checks with the intention to prosecute if they bounce;
*
Suing in courts far removed from your place of residence;
*
Making certain false representations in association with efforts to collect the debt, including the false claim that the person contacting you in relation to the debt is an attorney, falsely claiming to have started a lawsuit, using a false name, or using stationery that is designed to look like an official court or government communication;
*
Using false claims to collect information about the debtor, such as pretending to be conducting a survey;
*
Threatening you with arrest if you do not pay the debt.
Who May A Debt Collector Contact About My Debt?
If you have an attorney, you can instruct the debt collector to make all inquiries about the debt through your attorney. Once the debt collector has been instructed to make inquiries through your attorney, they should no longer make any direct contact with you.
Sample Letter
Your Name
Your Address
Date
Collection Agency’s Name
Collection Agency’s Address
Subject: Debt Collection Against [Your Name]
Creditor Name: [Creditor]
Account No. [Number]
Dear Account Representative,
I am writing pursuant to inform you that I am represented by an attorney in relation to the alleged debt associated with my account [number ________] with [creditor]. Please direct all further inquiries to my attorney:
[Attorney's Name and Address]
Thank you for your cooperation.
Sincerely,
[Your Name]
If you do not have an attorney, the debt collector may make only those inquiries necessary to determine where you live, what your phone number is, and where you work. If your current address is not known, the debt collector may be permitted to send a single letter to your last known employer inquiring about your present address. Ordinarily, other than your attorney, a debt collector may make only one inquiry about you with any given third party.
What Must The Debt Collector Tell You About The Debt?
Within five days of their first contact with you, the debt collector must send you a written notice telling you:
* How much money you reportedly owe;
* The name of the creditor to whom the debt is owed;
* That unless you, within thirty days after receipt of the notice, dispute the validity of the debt or any portion thereof, the debt will be assumed valid by the debt collector;
* That if you dispute the debt in full or in part within that thirty day period, the debt collector will obtain verification of the debt and mail it to the consumer; and
* That upon your written request within the thirty day period, the debt collector will provide you with the name and address of the original creditor, if different from the current creditor.
The first notice must also include a warning known as the “Mini-Miranda Warning”, which must state that the communication is from a debt collector and that any information obtained may be used to collect the debt. Except for pleadings associated with a legal action, all subsequent communication from the debt collector must also include this warning.
Please note that the thirty day notice requirement does not limit the debt collector from taking other measures to collect the debt during that initial thirty day period, as long as its action is not inconsistent with your right to contest the debt under the FDCPA.
What If You Don’t Want The Collection Agency To Contact You?
If you wish the debt collector to stop contacting you, you must send the collection agency a written notice instructing them to stop. Once the collection agency receives that letter, they may contact you only one additional time to notify you that the collection agency or creditor intends to take a specific action in relation to the debt.
Sending this type of notice does not resove the debt. For example, the creditor may file a lawsuit against you in order to collect the debt, even if you prohibit further contact by the collection agency.
Sample Letter
Your Name
Your Address
Date
Collection Agency’s Name
Collection Agency’s Address
Subject: Debt Collection Against [Your Name]
Creditor Name: [Creditor]
Account No. [Number]
Dear Account Representative,
I am writing pursuant to the Fair Debt Collection Practices Act, 15 USC 1692c(c), to request to request that you cease all communication to me about my account [number ________] with [creditor].
[If you wish, explain your circumstances. For example, "I was recently laid off from my job, and I do not presently have any resources with which to pay off this debt. Once I have again secured employment, I intend to resume payment on the debt."]
[If there have been any violations of the FDCPA, you may wish to describe them. For example, "Please note that in violation of the Fair Debt Collection Practices Act, one of your agents contacted me last night at 9:30 PM. Should your agency contact me at any time in the future, please be sure that your contact is made in full compliance with the FDCPA."]
Sincerely,
[Your Name]
What If You Dispute The Debt?
If, within thirty days after receiving written notice of the debt from the debt collector, you send the collection agency a letter stating that you do not owe the money, the debt collector must stop contacting you. The notice must be in writing, and must be hand delivered or postmarked within thirty days of the first written notice from the debt collector.
The debt collector may renew collection activities if you are sent proof of the debt, such as a copy of a bill for the amount claimed by the creditor.
Sample Letter
Your Name
Your Address
Date
Collection Agency’s Name
Collection Agency’s Address
Subject: Debt Collection Against [Your Name]
Creditor Name: [Creditor]
Account No. [Number]
Dear Account Representative,
I am writing pursuant to the Fair Debt Collection Practices Act, 15 USC 1692g, to inform you that I dispute the alleged debt associated with account [number ________] with [creditor]. I do not believe that I owe the amount alleged by you.
Your letter of [Date of letter from debt collector] was the first time I have heard from you about this alleged debt. Thus I am requesting that you provide the following information:
* Please explain the nature of the alleged debt – that is, what the money I allegedly owe is for;
* Please provide an accounting explainign how you calculated what you allege that I owe;
* Please provide me with copies of any contracts or documents which form a basis for the alleged debt; and
* Please provide me with the name and address of the original creditor.
I further request that you take the following actions:
1. Please contact any credit agencies to whom you have reported this alleged debt, and inform them that I am disputing the debt; and
2. Please also forward a copy of this letter to the creditor who alleges that I owe the debt at issue, and inform them that I am disputing the debt.
Except as specifically outlined herein, I am requesting that you cease all contact with me about the alleged debt. Any further contact should be strictly in conformity with the FDCPA: It should be limited to providing me with the documentation requested in this letter, informing me that you have ceased collection efforts on the alleged debt, or stating that you are taking a specific action in relation to the debt such as commencing a collection lawsuit. Any further contact should be made in writing, and should be submitted to my home address by mail.
Sincerely,
[Your Name]
What Remedies Are Available If The Debt Collector Violates The Law?
Under the Fair Debt Collection Practices Act, you have the right to sue a debt collector in state or federal court within one year from the date of the violation. If you win, you may recover damages in the amount of any losses you suffered as a result of the violation, plus an additional amount of up to $1,000.00. You may also be able to recover court costs and attorney fees.
If the same debt collector has engaged in unlawful conduct with a number of consumers, it may be possible to find a lawyer who will file a class action lawsuit.
Where Can I Report Legal Violations By Debt Collectors?
In most states, you may report the agency’s conduct to the state Attorney General’s office.
You may also contact the Federal Trade Commission (FTC) if you have a problem with an out-of-state debt collection agency.
Federal Trade Commission
One Bowling Green Ste. 318
New York, NY 10004
1-877-382-4357 (877-FTC-HELP)
- 5 Critical Loan Modification Questions to Ask $07pm31UTC_f2010Thu, 07 Jan 2010 19:24:51 +000001pm31
