Saturday, May 25, 2013

Loan Modifications and 150-day Cure Rights under the New Massachusetts Mortgage Law

In 2012 the new Massachusetts mortgage law went into effect.  It is a very important new consumer protection law for homeowners.  The law does two things: (1) gives homeowners a 150-day right to cure mortgage defaults and (2) makes certain mortgages eligible for modification.

There are three main parts of the law, M.G.L. ch. 244, Sections 35A, 35B and 35C.

The first section, M.G.L. ch. 244, s. 35A creates the 150-day right to cure.  This law is temporary and will sunset on January 1, 2016, but for now it is the law.  The key provisions are:
  • You have a 150-day right to cure a mortgage default in Massachusetts and must get a written notice of this.
  • You only have this right once every three years.
  • During the cure period, the loan cannot be accelerated.  You can just pay the past due amount and reinstate the loan during the 150-day period.  You will have to pay normal late fees, but you cannot be made to pay the mortgage company's attorneys' fees during the cure period.  This is a big change from prior law.
  • The cure period can be reduced to only 90 days if, and only if, the mortgage servicer "certifies that: (i) it has engaged in a good faith effort to negotiate a commercially reasonable alternative to foreclosure as described in subsection (c); (ii) its good faith effort has involved at least 1 meeting, either in person or by telephone, between a creditor’s representative and the borrower, the borrower’s attorney or the borrower’s representative; and (iii) after such meeting the borrower and the creditor were not successful in resolving their dispute."  This is heavy burden because there are many factors that a mortgage company must consider to engage in the aforementioned "good faith effort."  If they wish to attempt to foreclose in fewer than 150 days, they must also given notice of the fruits of this effort to the homeowner and provide a sworn affidavit of these efforts to both the homeowner and the Massachusetts Land Court.
So, to summarize, Section 35A just creates a longer period to cure mortgage defaults and prevents fees being charged to the mortgagor during the cure period.  The details regarding a good faith review of alternatives to foreclosure only apply when and if the mortgage company doesn't want to wait the 150 days.  However, the next part of the law, Section 35B, is even more powerful for some homeowners.

First, the provisions of Section 35B do not apply to everyone.  They only apply to "certain mortgage loans," which are those with any of these features:
  • an introductory interest rate granted for a period of 3 years or less and such introductory rate is at least 2 per cent lower than the fully indexed rate; 
  • interest-only payments for any period of time, except in the case where the mortgage loan is an open-end home equity line of credit or is a construction loan; 
  • a loan with multiple payment option in which any one of the payment options is less than principal and interest fully amortized over the life of the loan (negative amortization); 
  • the loan did not require full documentation of income or assets; 
  • certain large prepayment penalties (those that exceed M.G.L.. ch. 183, s. 56);
  • the loan was underwritten with a loan-to-value ratio at or above 90 per cent and the ratio of the borrower's debt, including all housing-related and recurring monthly debt, to the borrower's income exceeded 38 per cent; 
  • or the loan was underwritten as a component of a loan transaction, in which the combined loan-to-value ratio exceeded 95 per cent.
Do you have a mortgage with one of these features?  If so, you have powerful rights if you are ever facing foreclosure.  Here are what they are:

If you default on your mortgage, the mortgage servicer will send you the 150-day cure notice I referenced above.  However, since you have one of the types of loans defined above--which are customarily riskier loans--you should also get a second notice.  You have the right to be considered for a mortgage modification, and the mortgage servicer must send you a notice about this at the same time as the 150-day cure notice.  Once you get this, if you want to keep your home, you should immediately find a lawyer.  The reason for the need for a lawyer is that the rights you have involve time limits, strict procedures, many details, and very importantly, the right to make a counter-offer to a mortgage modification proposal supported by evidence as to why it should be accepted.  Also, very importantly, if the mortgage servicer violates the provisions of the law, a lawyer can make a viable threat of a lawsuit under the Massachusetts Consumer Protection Act (M.G.L. ch. 93A), and that can be be powerful leverage to help reach a successful outcome.

But let's take a look at the details of Section 35B.  Once you receive the special notice I just mentioned, you have 30 days to respond in writing, either alone or through an attorney, to indicate you wish to pursue the loan modification.  If you do not respond with the information requested--which will be financial statements of income, expenses, debts and assets--within 30 days, you forfeit your rights under the section.  

Once you provide the notice and financial information, the mortgage company has 30 days to respond with:
  • a written statement of the borrower's income, debts and obligations as determined by the creditor; 
  • the creditor's net present value analysis of the mortgage loan;
  • the creditor's anticipated net recovery at foreclosure;
  • a statement of the interests of the creditor; and 
  • a modified mortgage loan offer under the requirements of this section or notice that no modified mortgage loan will be offered. 
If a modification offer is received, you have 30 days to respond, which includes making a counter-offer with appropriate and detailed "substantiating documentation."  The mortgage company will have 30 days to accept or reject the counter-offer and may, in turn, offer its own counter-offer.  It is important that you have help with this counter-offer process. A lot of money, and the success or failure of the modification itself, will be at stake.

But what if you have one of these "certain" mortgage loans and the mortgage servicer doesn't give you a modification offer?  Well, you aren't guaranteed a modification offer, what you are entitled to is a "good faith effort to avoid foreclosure," and that is very powerful.  Essentially, the law provides that the only way that the mortgage company can be sure it meets this burden of good faith foreclosure avoidance is if it:
  • determines a borrower's current ability to make an affordable monthly payment;
  • identifies a modified mortgage loan that achieves the borrower's affordable monthly payment.  This can include one or more of the following: reduction in principal, reduction in interest rate or an increase in amortization period; and
  • conducts a compliant analysis comparing the net present value of the modified mortgage loan and the its anticipated net recovery that would result from foreclosure.
In other words, the mortgage company must follow various guidelines to see what you can afford and then hypothetically structure a new loan based on that analysis.  The hypothetical new loan can be created by reducing principal or extending the loan term. (However, the terms can't be extended more than 15 years or to a point where the total loan length is more than 45 years).  Then the mortgage company must do a net present value calculation based on this hypothetical new loan.

The net present value (NPV) calculation is really at the heart of this part of the law.  The inquiry here is to determine what would be greater, the present value of the payments under the hypothetical new loan or the expected net proceeds from foreclosure.  The NPV calculations are quite complicated.  You can see a sample NPV worksheet from the FDIC here (at the bottom of the page there is a link to an Excel workbook).  The bottom line is that there is a lot to work with here and many tools for an experienced lawyer to hold a mortgage servicer's proverbial feet to the fire to ensure that the homeowner gets what they are entitled to and the best deal that can be negotiated.

If you get a notice of mortgage default, wish to keep your home, and would like to hire experienced attorneys to help you, give us a call or send us an email.  We also have a great deal of experience handling Chapter 13 bankruptcies, so even though you may not want to file, it is reassuring to have that option in your back pocket if you need it to save your home.

1 comment:

  1. Thanks for highlighting the updated loan modification rules in Massachusetts. In other words, the mortgage company must follow various guidelines. The VA loan rates vary due to a number of factors. You can avail refer to the online information to compare and choose the best loan rates in VA.