March 23, 2010

Credit Union Management magazine’s Web-only “Loan Zone” column runs the fourth Tuesday of each month.

Until Oct. 3, 2010, credit unions may still register to participate in the federal government’s Home Affordable Modification Program. Laura Hetherington says IBM Southeast Employees’ Federal Credit Union got involved with the program last April as a way to help members keep their homes.

"We've been able to help 165 people get back on track either through HAMP or a customized program in the last 15 months," says Hetherington, VP/loans for the $831 million credit union in Boca Raton, Fla. "While it's a lot of work, our board strongly supports the idea of helping members avoid foreclosure."

HAMP is designed to help as many as four million financially struggling homeowners by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. The program provides clear and consistent loan modification guidelines that the entire mortgage industry can use.

Indeed, Hetherington describes the program as “an organized way to look at how to reduce payments.”

Borrower eligibility for a HAMP modification is based on meeting specific criteria including:

1) The borrower is delinquent on his or her mortgage or faces imminent risk of default.
2) The property is occupied as the borrower's primary residence.
3) The mortgage was originated on or before Jan. 1, 2009, and the unpaid principal balance is no greater than $729,750 for one-unit properties.

After determining a borrower’s eligibility, a servicer participating in HAMP takes a series of steps to adjust the monthly mortgage payment to 31 percent of a borrower's total pretax monthly income:

• First, reduce the interest rate to as low as 2 percent.
• Next, if necessary, extend the loan term to 40 years.
• Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.

Servicers may elect to forgive principal under HAMP on a stand-alone basis or before any modification step in order to achieve the target monthly mortgage payment. Hetherington sees this as a last resort, saying IBM Southeast EFCU hasn’t yet had to go so far.

Despite being highly structured, the program can be tricky to implement, Hetherington notes. “The guidelines are so tight.”

While it’s great in theory that the government wants to get payments down, in some cases borrowers’ mortgage payments are already below 31 percent of their monthly income. “It’s because they have so much other debt,” Hetherington explains.

In these cases, IBM Southeast EFCU will do a customized modification to help a member. An average of 18 members a month fill out paperwork requesting some kind of assistance with their mortgage. Of those 18, seven will get denied because their mortgage debt isn’t really a problem for them or their income just can’t be appropriately verified; one will turn into a HAMP modification; and 10 will be assisted with a custom modification from the credit union.

In all, about 40 percent of workout applications are denied, Hetherington says. “The good news is the rest we find some other way to help.”

Hetherington underscores the importance of communicating to members that it’s worth it to have a proactive conversation about possible financial troubles on the horizon. She encourages putting marketing pieces out that explain a credit union’s willingness to talk with members and to work things out if at all possible.

Three people work directly on the workout program for IBM Southeast EFCU, with some application-taking support from regular loan officers. Hetherington says the workout staffers need to have outstanding listening skills and be very gentle in the way they work with members in what is likely a very difficult time in their lives. She feels fortunate to have been able to staff the program with experienced lenders who have the patience to spend a long time on the phone with members when necessary.

While HAMP includes monetary incentives for servicers, Hetherington says credit unions don’t get in this for the money since the incentives don’t even cover the costs of having the programs.

“Mortgage servicer incentives are not the reason we’re in this,” she says. “We’re in this to help keep people in their homes.”

Lisa Hochgraf is a CUES editor.