Bar News - March 18, 2015
Elder, Estate Planning & Probate Law: Getting a Loan Modification for Successor-in-Interest
By: Mary Stewart
Mrs. Jones’s husband died of a heart attack last month. To continue living in her home, Mrs. Jones needs to reduce the monthly payment to an amount she can afford with her reduced income. However, when Mrs. Jones contacts the mortgage company to request a loan modification, she is told that no one can speak to her because “you’re not on the mortgage.”
Although Mr. and Mrs. Jones were both on the title to the property and both signed the mortgage, only Mr. Jones signed the promissory note. Because only Mr. Jones signed the promissory note, only Mr. Jones had the obligation to pay. When Mr. Jones passed away, Mrs. Jones became a successor-in-interest to the property, but not to the obligation to pay the promissory note. Mrs. Jones, however, must pay the promissory note, if she wants to stay in the home.
To modify the payment terms of the promissory note, Mrs. Jones needs to communicate with the mortgage servicer. However, a mortgage loan servicer will only speak with the person(s) who signed the promissory note. This presents a problem for widows and widowers, like Mrs. Jones, who want to stay in their homes but need a loan modification to make it financially feasible. If the mortgage servicer refuses to talk with Mrs. Jones, it is impossible for her to make a reasonable decision about whether to keep or sell the home.
Fortunately, in 2014, the Consumer Financial Protection Bureau (CFPB), issued regulations that all servicers must maintain procedures to work with successor-in-interests when a borrower dies. Under the regulations, the servicer must develop policies and procedures to suspend foreclosure, speak with the successor-in-interest and process loan assumption and loan modification documents simultaneously.
This regulation assists widowers, like Mrs. Jones, as well as other people, such as children or siblings, who inherit property. This article addresses solely the legal status of widows and widowers as successors-in-interest.
In this case, for Mrs. Jones to obtain a modification, she will first need to assume the loan. Generally, contract rights are freely assumable, unless the contract states otherwise. In other words, it is up to Mrs. Jones to decide whether to assume the note. Upon assumption, Mrs. Jones will have all the rights and responsibilities of the original borrower (her deceased husband), including the right to apply for a loan modification.
The Due-on-Sale Clause
Although most mortgage notes do not restrict assumption of the mortgage note, the typical mortgage note restricts the transfer of the property. This is commonly referred to as a “due-on-sale” clause. A due on sale clause allows the lender to demand immediate payment in full when any interest in the property is sold or transferred, without the lender’s prior written consent.
As a practical matter, a due-on-sale clause may limit a person’s ability to assume a mortgage note, because an assumption will likely require a transfer of ownership of the property. Thus, although a party can freely assume the mortgage note, the transfer may trigger the due-on-sale clause and an immediate foreclosure.
Fortunately for Mrs. Jones, under federal law, a due-on-sale clause cannot be enforced when an interest in real property is transferred to a surviving spouse by will or statute. Garn-St. Germain Depository Institution Act and Brush v. Wells Fargo Bank, NA (2013). In other words, in most cases, a widow can freely assume a mortgage note without permission from the lender.
Once the mortgage note is assumed, Mrs. Jones has the right to apply for a loan modification like any other borrower. However, Mrs. Jones does not want to assume the mortgage loan unless she knows the loan will be modified. Unfortunately, she cannot get an answer about modification until the loan is assumed. To address this catch-22, most lenders have adopted servicing guidelines requiring evaluation of the loan modification first, and then simultaneous approval of both the loan modification and the assumption.
The process for modification and assumption will be vary depending on the lender. Although different rules apply if the loan is held by the US Department of Housing and Urban Development (HUD), Fannie Mae, Freddie Mac or a private investor using a Home Affordable Modification Program (HAMP) participating servicer, most loans at a minimum have a procedure to assume and modify the mortgage loan. The best place to start research about the lender is the loan look-up tool on www.makinghomeaffordable.gov.
If the loan is serviced by a HAMP servicer, the Making Home Affordable Handbook outlines the requirements and process loan assumption and modification. Under HAMP, a non-borrower widow or widower may apply for a modification as if he or she was the borrower. If the mortgage is already in a Trial Payment Plan (TPP), the servicer is required to send written notice to the widower outlining the requirements to assume the TPP or to apply for a new HAMP modification based on current income. Importantly, the servicer must stay the foreclosure process while the assumption process goes forward.
If the loan is held by Fannie Mae, the servicer must evaluate a modification request from a widow or widower as if it came from the borrower. Likewise, Freddie Mac guidelines allow for simultaneous assumption and modification after the borrower’s death. Finally, HUD has a general policy allowing loan assumption with a credit review.
In summary, it is possible for a widow or widower to assume and modify a mortgage loan in many circumstances. An important first step is to identify the lender and then to inform the servicer in writing that your client is a successor-in-interest and request information about loan modification options. It may be helpful to include the borrower’s death certificate, proof your client owns the home and/or represents the estate and evidence of homeowner’s insurance in your client’s name.
Mary Stewart is an independent contract attorneys for the NH Bar Association Foreclosure Relief Project. See www.nhfrp.net. For information about assistance with a loan modification, see www.homehelpnh.org.