DS News

DS News_February_2023

DSNews delivers stories, ideas, links, companies, people, events, and videos impacting the mortgage default servicing industry.

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Page 31 of 83

30 For almost 100 years, loan modifications have been utilized in the United States to adjust mortgage loans of individuals struggling to make their payments by: reducing interest rates, reducing their ongo- ing monthly mortgage payment, or even reducing principal balances. Modification programs began during the Great Depression in the 1930s at the state level and transformed over the years into federal policy during the subprime mortgage crisis in the early 2000s. Forbearance agreements raced onto the scene during the COVID-19 pandemic. Borrowers quickly found themselves in an unexpected fi- nancial situation with the future uncertain. Along with forbearance agreements, there was more help as mortgage interest rates fell to record lows in 2020 and 2021 during the pandemic. Swift actions by the Federal Reserve pushed mortgage rates below 3% and helped to keep them there. Low interest rates coupled with a housing market boom gave hope that the housing market would survive and even flourish during the pandemic. e narrative changed in 2022. With inflation skyrocketing, mortgage interest rates have surged to their highest levels since 2002 1 . is has created a new difficulty, with millions of Americans still recovering from the fallout of the pandemic and needing assistance with their loans. e challenge becomes, how can a borrower in distress be offered a loan modification that can modify the loan to a payment that the borrower can afford when high interest rates may cause the payment to go up? Typically, the answer to help a borrower stay in their home and avoid foreclosure was to add the delinquent payments to the loan amount, extend the term, and adjust the interest rate on the mortgage to the current market rate. But because today's interest rates are rising, a loan modification may no longer be the pathway to home retention. Loan modifications are particu- larly attractive for borrowers when interest rates are low, because the borrower can often obtain a lower monthly payment. However, when interest rates are higher, a loan modification may not be the answer the borrower is hoping for. Due to servicer and federal guidelines, some lenders are not able to approve modifications if the principal and interest payment is increased beyond a cer- tain amount. Higher interest rates and amortizing the loan to account for the past-due balance may cause that payment to increase too much, thereby eliminating the option of a loan modification. Before the financial crisis in 2008–2009, most borrowers faced with foreclosure would opt to file a Chapter 13 Bankruptcy case. A Chapter WHY CHAPTER 13 BANKRUPTCY SHOULD BE BACK ON THE RADAR Legal Industry Update By By Laura M. Hawley & Michael P. Hogan 1 As of 12/29/2022 the national average for a 30-year mortgage loan is 6.42% according to https://www.freddiemac.com/pmms

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