Consumers Must Prove Income Up Front for Loan Modification Program

February 11, 2010

Homeowners facing foreclosure had hoped the government’s loan modification programs would work smoothly making it possible to remain in their homes with lowered payments. Though the process has been slow, thousands have managed to get the paperwork completed despite a lot of paperwork delays. But thousands more have been unable to close the new loans.

Consumers have faced a paperwork nightmare with mortgage companies frequently losing documents. The hold ups in paperwork mean that only 66,500 homeowners have managed to get their mortgage payments permanently lowered. That represents 7 percent of the total number of applications – low by anyone’s standards.

There had been hope the Obama administration would step in and work with lenders to get the process speeded up. New rules were recently issued and now consumers are told that beginning June 1 they will have to prove income up front before any processing will begin. This is a change from current policy. Right now consumers can verbally tell the mortgage company what their income is with the understanding documentation must follow immediately after.

Instead, mortgage companies are saying they have not received income verification documents and that is one reason why so many applications are not being processed to completion. Consumers are saying that in many cases they send the documents and the mortgage companies are losing them forcing borrowers to resend them more than once.

The new rules require the borrower to provide two paycheck stubs as proof of income before paperwork processing begins. In exchange for the easier proof of income requirement, mortgage borrowers will have to give the IRS permission to provide recent tax returns to the lenders. This will help those who are unable to quickly find copies of necessary tax forms needed to qualify for a loan.

There are other regulations put into place too. Now lenders must acknowledge receipt of a loan modification request within 10 days. They only have 30 days, instead of months like now, to make a decision. Once the homeowner is given approval for the program, he or she must then make three months of new payments before the loan is permanently modified.

Unfortunately there are no penalties assessed against lenders who don’t follow the regulations. That means loan processors that take months to make a decision still will not be penalized. That leaves little incentive for lenders swamped with foreclosures and refinancing requests to cooperate.

The loan modification program was funded at $75 billion. The purpose of the program is to lower mortgage payments for consumers so they can afford to stay in their homes. It is hoped that the new rules concerning income verification will improve the loan modification program results. So far it has been a real disappointment to those who though it would help stem the flow of foreclosures.

The federal government has been at odds with the financial industry during the last recession on several fronts. The loan modification program has proven to be another situation where the best intentions of the government ran into a lending bureaucracy every bit as daunting as the one that supports the government itself.