Recent changes in federal regulations have given those faced with foreclosure a bit of breathing room. These changes say that lenders can’t take your home while you are being considered for a loan modification. If you’re thinking that was always the case, you’d be wrong. And so were many who assumed that if they did all the paperwork to request a loan modification they could take comfort in knowing it stopped the foreclosure process for a while. Sometimes, that misconception caused them to lose their houses. The changes can make a difference for those facing foreclosure. They come as a result of both a new Federal regulation and the official interpretation of that regulation by the federal agency that promulgated it – the Consumer Financial Protection Bureau (CFPB). Together, they say that the lender cannot complete the foreclosure process while there’s a modification application pending. It hasn’t always been that way. Banks would do what’s known as Dual Tracking when a residential mortgage loan is in default.
Track #1 – Loan Modification
This is when the lender considers “modifying” or reducing the loan payment to make it affordable. Lenders ask the borrowers to submit forms and documents, like tax returns, bank statements and pay stubs, showing their income and expense information. Lenders use this information to determine how much of a mortgage payment the borrower can afford to pay monthly and whether they can tinker with the loan to make it fit that amount. Borrowers want the lenders to make modification determinations quickly – if for no other reason than they want to be done with the stress of possibly losing their homes. The problem is that the process often is long and tedious, largely because lenders receive many applications but don’t have enough properly trained staff to efficiently handle them. That creates a backlog which slows things down. The delay is exacerbated by the fact that documents and forms, like bank statements and paystubs, can go “stale” if they are too old by the time the lender gets around to looking at them. That means the lender has to ask the borrower to submit updated documents.
Track #2 – Foreclosure
In Connecticut, foreclosure is a process. It’s not the flip of a switch where one day you own the house and the next day the bank is selling it out from under you. The process is a lawsuit that is pretty much like any other lawsuit. There are steps that the bank must take and those steps take time. They also have to be done in a certain order. The last step is a “foreclosure judgment”. In a foreclosure judgment, the judge sets forth how and when the borrower loses the property. Borrowers understandably want this whole process to go slowly – more time in the house is, well, more time in the house. Fortunately, there are things the borrower can do to increase the number of steps the bank has to take. One of those things, called “summary judgment”, really turns the judgment of foreclosure into two steps instead of one.
Dual Tracking is like a race between Track #1 and Track #2. If you get a modification before the bank gets a foreclosure judgment, you keep the house. If the bank gets a foreclosure judgment before you get a modification, you could lose the house before the bank even decides whether it would give you a modification.
A lot of borrowers had a misconception that if the bank was considering them for a loan modification they didn’t have to worry about the foreclosure track. They’d ignore notices from the bank that indicated the bank was going forward with the foreclosure. These borrowers thought it wasn’t something they had to worry about while the bank was considering their modification request. After all, why would the bank move forward on foreclosure before deciding whether there was going to be a payment modification? Isn’t it true that if there is a modification there is no need for the bank to take the house? Doesn’t it make more sense to see if the borrower qualifies for a modification before taking the house? Of course it does. That’s why the CFPB created this new regulation and issued its official interpretation — to make sure that borrowers are properly considered for a modification before they are at real risk of losing their home.
Here’s how it works: The bank cannot take any significant step in the foreclosure process if the borrower has submitted a modification application and the bank has not made a decision on it. By “significant step,” I mean any step, like the “summary judgment” step, that could lead directly to a foreclosure judgment or the foreclosure judgment step itself. This means that your application must be decided before you will have to deal with the stress of foreclosure. And, if you are denied a modification, you will have some breathing room before the bank gets the house.
What does this mean to you, if you are looking at the possibility of foreclosure? Most importantly, any time that a bank says it’s willing to consider you for a modification you should take them up on it. As long as there’s an application pending it seems that they shouldn’t get your house. This should provide you with some measure of comfort that you’re not going to lose your house while the bank is considering you for a modification.
Next month I’ll be covering another important change in the law that covers who can and who cannot foreclose on a home. These two changes are already having important consequences for those threatened with foreclosure.