Can I get a loan after a loan modification?
In the majority of instances, acquiring a mortgage to purchase an additional property following a loan modification is feasible, provided you have maintained an unblemished payment record over the preceding year, subject to the particular requirements set by your lending institution.
Is a loan modification a second loan?
In contrast, a loan modification is essentially the same loan rather than a new one. However, the existing loan will have some alterations to its terms. The alterations in a modification can vary. In some instances, it just involves taking payments that have been missed and re-amortizing them into a new loan.
How long after a loan modification can I refinance?
If you've already been through the loan modification process with your lender, you'll typically have to wait 12 to 24 months after the loan modification to qualify for a refinance.
How long does a loan modification stay on your credit report?
If the lender reports the modification as a settlement, that could remain on your credit report for seven years, also affecting your score.
Are servicers mandated to implement the updates outlined in the VA Servicer Handbook, M26-4, Chapter 5, prior to offering the Veterans Affairs Streamline Refinance (VASP)? Can servicers partially adopt elements of the new VA Home Retention Waterfall, or is it necessary for them to concurrently implement the Traditional Modification, the 30/40-year Streamline Modification, and the VASP? The Veterans Affairs (VA) must provide clarity regarding the enforcement of the policy during the transitional period from May 31 to October 1.
Effective May 8, 2024, Chapter 5 will be in force. Prior to offering the Veterans Affairs Streamline Refinance (VASP), servicers are encouraged to evaluate borrowers for all eligible options outlined in Chapter 5. In cases where borrowers appear to qualify for VASP, servicers should retain these files until they are operationally prepared to process VASP applications.
Regarding borrower financials that have been gathered or will be collected prior to the implementation of the new waterfall process, guidance from the Veterans Affairs (VA) is necessary. Specifically, the VA should provide direction on how to handle in-process or in-trial modifications, including whether servicers should reassess these modifications in accordance with the revised guidelines.
Unless there are Consumer Financial Protection Bureau (CFPB) requirements mandating the collection of new documents for the borrower (i.e., existing documents may be too outdated to make an informed decision), the servicer may utilize the documents already in their possession. Servicers can continue to process loss mitigation options that are currently in-process or in-trial.
According to Chapter 9 of the VA Servicer Handbook, servicers are instructed to pay all taxes, insurance, and Homeowners Association (HOA) fees due within the next 90 days, and to include these amounts in the payoff statement. However, the VA needs to clarify how servicers should manage tax and insurance bills that are not available 90 days prior to the due date. Furthermore, if the borrower is current with their HOA payments, should servicers still advance the HOA funds and include them in the total indebtedness? In scenarios where borrowers are responsible for their own HOA payments each month, this could lead to duplicate payments.
We acknowledge that there may be instances where the servicer is unaware of or unable to make early payments for taxes and insurance. In cases where the loan has not been transferred, servicers should pay these bills as they fall due. This will be addressed and reconciled during the service transfer process. If the borrower is current with their HOA payments, no further action is required by the servicer. However, if the HOA payments are in arrears, servicers should reinstate the HOA and include the outstanding amount in the payoff. It is important to note that if the HOA has placed a lien on the property that threatens the VA's first lien position, the loan will not be eligible for the Veterans Affairs Streamline Refinance (VASP) until the lien is resolved.
During the COVID-19 pandemic, several federal agencies, including the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the government-sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac, and Ginnie Mae, offered mortgage forbearance for a period of 12 to 18 months to borrowers experiencing financial hardships. Upon exiting forbearance, borrowers had access to a range of options to facilitate the resumption of payments, including:
Repaying the funds immediately, if financially capable,
Making higher payments for a specified duration,
Deferring the missed payments to the end of the mortgage term, or
Reducing payments through a mortgage modification.
If borrowers were ineligible for any of these loss mitigation options, the agency would refer the mortgage for foreclosure or an alternative foreclosure process.
With the expiration of pandemic-era emergency powers and funding, the GSEs and FHA have made the waterfall strategy a permanent fixture of their loss mitigation programs. However, the VA is struggling to develop a comprehensive loss mitigation package within its existing authority. The VA has proposed an alternative program, the VA Servicing Purchase (VASP), but this option has its flaws and faced criticism during a recent House hearing. Despite its imperfections, the VASP represents the best the agency can offer with its limited authority.
Policymakers who wish to support veterans and active-duty service members facing payment difficulties should consider providing the VA with the necessary tools (through legislative action) and funding to maintain a loss mitigation program that is comparable to those offered by the GSEs and FHA.
Differences in Federal Loss Mitigation Strategies
The GSEs and FHA were able to leverage lessons learned from the pandemic to enhance their loss mitigation programs, but the VA faces statutory obstacles that hinder similar efforts. The GSEs have the flexibility to implement the pandemic-era waterfall strategy easily because they maintain a portfolio of loans. They can purchase mortgages from securitized pools, place them in their portfolio, and then determine the best path to preserve the borrower's ability to stay in their home while minimizing losses.
The FHA also has the authority to use up to 30% of the mortgage amount for loss mitigation. This "partial claim" authority, combined with low interest rates, enabled FHA borrowers to access a waterfall of options similar to those available to GSE borrowers during the pandemic, with this program continuing through April 30, 2025.
The partial claim covers arrearages, allowing borrowers to defer payments. After covering the arrearages, the remaining balance on the partial claim can be used to further reduce payments. However, since the FHA does not have a portfolio, when the lender removes the loan from the pool for a mortgage modification, they must offer the borrower the prevailing market interest rate. As interest rates rose, it became increasingly difficult to provide borrowers with a significant payment reduction. The FHA addressed this issue through its Payment Supplement loss mitigation program, which keeps the loan in the pool and allows borrowers to retain their original interest rate if it is lower than the market rate, using the remaining partial claim after covering arrearages to subsidize the mortgage payment for three years.
The VA has even fewer tools than the FHA. Established in 1944, the VA mortgage program was designed as a guarantee product that protects lenders from a portion of the losses on a home in the event of borrower default. The VA was not intended to play a major role in loan management.
Although the VA historically lacked partial claim authority, it acquired funds to allow for this flexibility during the pandemic, but those funds expired in October 2022. Since the VA also does not have a portfolio, its COVID-19 Refund Modification program, like the FHA's, relied on lowering a borrower's interest rate. However, as interest rates have risen, it has become more challenging to provide borrowers with a modification. Currently, VA borrowers do not have a deferral option (which would allow them to maintain constant payments) or a modification option that is effective in a high-interest rate environment. On November 17, 2023, the VA extended its COVID-19 Refund Modification program until May 2024 and instructed servicers not to foreclose on any borrower, in hopes of developing a more permanent solution.
Analyzing the VA's Proposed Loss Mitigation Plan
The VA has proposed the VASP program, in which it will purchase defaulted loans from servicers and reduce the interest rate to 2.5%, provided that the borrower receives at least a 20% payment reduction. If lowering the interest rate to 2.5% does not meet the 20% reduction requirement, the VA will extend the loan term to 40 years. This plan would allow veterans and active-duty members to benefit from a more generous home retention program than that offered by the GSEs.
However, this plan has two significant weaknesses. First, offering a one-size-fits-all approach may increase program costs. Without a deferral option, borrowers who need relief but can resume their original payments will be provided with the more generous payment reduction option, which could increase the number of borrowers opting for loss mitigation and the costs associated with providing it. Second, all loans acquired by the VA must be transferred to a single VA servicer, which could face capacity issues, leading to delays and increasing the likelihood of lending errors for veterans and active-duty members.
A more satisfactory loss mitigation waterfall would require the VA to receive congressional approval and funding for a program similar to the FHA's. However, any program must acknowledge the differences between the government guarantors. Unlike FHA mortgages, where the FHA is responsible for 100% of the loss, the VA covers only the first 25% of the loan amount. Programs cannot count the amount covered in forbearance options toward the 25% cap, as it would leave servicers vulnerable to losses.
As policymakers consider additional loss mitigation options, the VASP, despite its imperfections, can offer veterans and active-duty service members loss mitigation that is at least as generous as the alternatives offered by the GSEs and FHA.
VA’s VASP Program
Effective as of May 31, 2024, the Veterans Affairs Supportive Payment (VASP) program will be incorporated as the ultimate home retention alternative in the VA's Home Retention Waterfall framework. Under this arrangement, the VA has the discretion to expedite the purchase of a loan from the servicer, contingent upon the servicer's loan assessment and fulfillment of specified criteria. Unlike traditional VA purchases, a trial payment period (TPP) may precede the VA's acquisition of the loan.
Crucially, borrowers do not have the option to opt into the VASP program. Instead, servicers must adhere to the VA's prescribed home retention waterfall to ascertain the most suitable retention solution. If the waterfall concludes with VASP, servicers must then ascertain if the loan fulfills particular eligibility criteria, including:
The loan being 3 to 60 months past due on the date the servicer submits either a VASP TPP event or a VASP without TPP event to VALERI.
The property being occupied by the owner.
No obligors being in active bankruptcy at the time of the applicable VASP event.
The default reason having been addressed, and the borrower affirming their ability to resume regular payments.
The loan holding first-lien status, unimpeded by other liens or judgments that could compromise the VA's first-lien position.
The borrower having made at least six monthly payments since loan origination.
The borrower being the current legal owner of record for the property.
The borrower and all other obligors consenting to the terms of the VASP modification.
Upon confirming loan eligibility for VASP, servicers must determine suitable terms to offer the borrower. Until further notice, all VASP loans will be modified to a fixed interest rate of 2.5%, with either a 360-month term or, if this does not achieve a minimum 20% reduction in principal and interest payments, a 480-month term. Borrowers unable to afford resumed monthly payments at the 480-month term should be evaluated for and offered suitable foreclosure alternatives. A TPP comprising three payments will be mandatory if the loan is 24 months or more delinquent or if the monthly payment's principal and interest component is not reduced by at least 20%. Borrowers failing three TPPs within a single default episode become ineligible for VASP.
Once the VA has certified the VASP payment, servicers have 60 days to execute a standard transfer to the VA's contractor and subsequently report the transfer event in VALERI.
Significantly, servicers failing to appropriately assess loans in accordance with VA requirements may face enforcement actions, temporary or permanent refusal by the VA to guarantee or insure loans originated by them, and may be barred from servicing or acquiring guaranteed loans. The VASP program's technical requirements pose operational challenges for servicers, further escalating the risk of enforcement.