Obama Signs Directive Allowing Homeowners to Modify Mortgages While in Bankruptcy

by John Peter Brooke on Dec. 03, 2014

Bankruptcy & Debt Bankruptcy Real Estate  Foreclosure 

Summary: Obama signed a directive in 2010 that allows homeowners to actively seek a loan/mortgage modification while they are in active bankruptcy.

The treasury department handed down Supplemental Directive 10-02 in June of 2010 which states that homeowners "in active Chapter 7 and Chapter 13 cases are eligible for HAMP (Obama) modification on the basis of a bankruptcy filing, whether filed before, during, or after a trial plan. This is a marked departure from Treasury’s prior guidance in HAMP Supplemental Directive 09-01 that borrowers in bankruptcy were eligible for HAMP modifications “at servicer’s discretion." This is great news for homeowners that may have been unable to obtain a loan modification under the Home Affordable Modification Program (HAMP). Previously if you were in bankruptcy most servicers would deny borrowers a loan modification. This was particularly troublesome when the homeowner was denied a loan modification because their back end ratio of debt to income exceeded the 55% percent allowed. This meant that if your debt payments were more than 55% of your income you could not qualifiy for a loan modification. Many homeowners need to file for bankruptcy to eliminate some of their debt payments to qualify and among Supplemental Directive 10-02 things, to be able to afford their new mortgage payment.

Under the new Directive the mortgage servicer also has to send written notification to the borrower if the servicer determines they may be eligible for a loan modification and are behind on the mortgage two or more payments. This new Directive only applies to mortgages that are not owned by either Fannie Mae or Freddie Mac (Non-GSE Mortgages).

The Directive also states that a mortgage servicer may not refer any loan to foreclosure or conduct a scheduled foreclosure sale unless, among other things, the borrower is evaluated for HAMP and is determined to be ineligible for the program.

It should be interesting to see whether or not and to what extend the servicers comply with the Supplemental Directive.

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