The following questions and answers about loan modifications should point you in the right direction. If you have any questions or would like help with your loan modification be sure to contact us today.
1. What are the minimum eligibility criteria for a Home Affordable Modification?
2. Do borrowers need to be delinquent in order to qualify for a Home Affordable?
3. Will Home Affordable Modifications help borrowers who can easily afford their current payment but whose property value is now less than the amount they owe?
4. Are borrowers in bankruptcy eligible?
5. Are any property types excluded?
6. How does the modification work?
7. What is included in the front-end mortgage DTI ratio?
8. Is there a total DTI ratio limit on eligibility?
9. Is there a standard Net Present Value (NPV) model?
10. Is there a hardship requirement?
11. Is the modified interest rate permanent?
12. What if reducing the interest rate is not enough to get the borrower's front-end DTI down to 31 percent?
13. Could the borrower face a balloon payment?
14. Are servicers required to offer permanent principal reductions?
15. What if the borrower has a second lien mortgage and would like to apply for a Home Affordable Modification?
16. Is there an escrow requirement?
17. Will delinquency status be reported to credit bureaus during the trial period?
18. What incentives does HAMP provide for borrowers, servicers and investors?
19. What if the borrower does not make all the payments during the trial period?
20. What if the borrower defaults after the modification becomes permanent?
21. Is there a modification fee for this HAMP?
22. Is a loan eligible for more than one Home Affordable Modification?
23. What if a borrower is in foreclosure?
24. If a servicer tells the counselor that a loan cannot be modified because the eligibility requirements were not met, or the investor is not participating in HAMP, what should the counselor do?
25. How long will Home Affordable Modifications be available?
What are the minimum eligibility criteria for a Home Affordable Modification?
A mortgage loan may be eligible for Home Affordable Modification if:
• The mortgage is a first lien conventional mortgage originated on or before January 1, 2009.
• The unpaid principal balance is equal to or less than:
o 1 Unit: $729,750
o 2 Units: $934,200
o 3 Units: $1,129,250
o 4 Units: $1,403,400
• The property is occupied by the borrower as a primary residence (the property may not be vacant or condemned).
• The borrower has a mortgage payment that is not affordable due to a financial hardship that can be documented.
• The borrower has a monthly mortgage payment greater than 31 percent of monthly gross income.
Do borrowers need to be delinquent in order to qualify for a Home Affordable Modification?
No. Responsible borrowers who are struggling to remain current on their mortgage payments are eligible if they are at risk of imminent default.
An example of an imminent default might be that the borrower had or will soon have a significant increase in their mortgage payment that they cannot afford. A servicer participating in the HAMP must screen every current borrower who contacts the servicer to discuss a financial hardship if the borrower meets the minimum eligibility criteria to determine if they are at risk of imminent default.
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Will Home Affordable Modifications help borrowers who can easily afford their current payment but whose property value is now less than the amount they owe?
No. Modifications under HAMP are designed to prevent foreclosures by making mortgage payments affordable for working homeowners struggling to retain their homes. HAMP is not intended to replace equity lost by home price depreciation. However, by preventing avoidable foreclosures, HAMP is expected to stabilize and eventually strengthen property values, which will benefit all homeowners.
Are borrowers in bankruptcy eligible?
A borrower actively involved in a bankruptcy proceeding is eligible at the servicer’s discretion; however, any modification under HAMP entered into while the borrower is in bankruptcy proceedings must be approved by the bankruptcy court before the borrower is allowed to exit the trial modification period and become permanent.
Borrowers who have previously received a Chapter 7 bankruptcy discharge in a case involving the first lien mortgage, who did not reaffirm the mortgage debt under applicable law, are also eligible.
Are any property types excluded?
Nearly every residential property type is eligible, including:
• Single family homes
• Two- to four-unit dwellings, as long as one unit is occupied by the borrower as a primary residence
• Condominiums
• Cooperatives
• Manufactured housing secured by real estate.
Treasury expects that manufactured housing secured by chattel mortgages will be eligible for modifications under HAMP in the near future.
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How does the modification work?
Full details are provided in Supplemental Directive 09-01, dated April 6, 2009, which is available for viewing on www.HMPadmin.com. In summary, participating servicers will (in order):
• Determine whether the loan meets the minimum eligibility criteria (i.e., owner-occupied; originated on or before January 1, 2009; and unpaid principal balance equal to or less than the loan limit for the number of units involved).
• If the loan meets the minimum eligibility criteria, ask the borrower and all co-borrowers about current income, assets and expenses, as well as any specific hardship circumstances to determine if they are unable to make the mortgage payment.
(Servicers may initially accept verbal income and expense information. However, borrowers will need to provide verifying documentation before a final modification is approved.)
• Determine if the borrower’s front-end debt-to-income (“DTI”) ratio is greater than 31 percent. If so, apply the standard modification waterfall steps to reduce the borrower’s monthly mortgage payment to a point that it represents no more than 31 percent of the borrower’s gross monthly income.
• Apply a Net Present Value (“NPV”) test to determine whether the value of the loan to the investor will be greater if the loan is modified (factoring in the government’s incentive payments). If the modified loan is not of greater value, the investor and servicer may still modify the loan. However, modification in such cases is not required.
If yes, the servicer must offer a HAMP modification to the borrower, and, if the borrower accepts the offer, the servicer will put the borrower on a trial modification (typically three months) at the new payment level.
• If the borrower makes all of the required trial payments during the trial period and the income and expense information provided by the borrower is determined to be accurate, the servicer will execute a permanent modification agreement.
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What is included in the front-end mortgage DTI ratio?
The front-end mortgage DTI ratio is explained in detail in Supplemental Directive 09-01. Generally, the front-end ratio is the ratio of PITIA to monthly gross income.
PITIA includes principal, interest, property taxes, all property-related insurance (hazard, flood, earthquake, etc.) and any required homeowners’ association dues or similar assessments which could create a lien on the property, but excludes mortgage insurance premiums.
Monthly gross income is the total of the borrower’s and all co-borrowers’ income before any payroll deductions, including base pay, commissions, fees, tips, bonuses, housing allowances, and any other compensation. Alimony and child support are considered only if the borrower chooses to include such income.
In some cases, non-borrower household income can be included, at the borrower’s discretion, if said income can be supported by documentation that it has and will continue to be relied upon to support the mortgage payment. If a borrower is relying on income from an individual that is not a co-borrower, they may request, but are not required, to have that individual added to the note as a co-borrower.
All borrowers will be required to provide a signed Form 4506 T (Request for Transcript of Tax Return) and a signed copy of their most recent tax return if it is available. If the borrower filed his or her taxes electronically, an unsigned copy and evidence of electronic filing will be accepted. Income for wage earners will be verified by the two most-recent pay stubs.
For self-employed borrowers, or for those with non-wage income, the borrower’s income must be verified by third party documents providing reasonably reliable evidence. The income documentation may not be more than 90 days old. Borrowers must also attest that they do not have sufficient liquid assets to make their monthly mortgage payments.
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Is there a total DTI ratio limit on eligibility?
No. A high total DTI (back-end) ratio will not prohibit a borrower from getting a modification. However, as a condition of the modification, borrowers whose back-end ratio equals or exceeds 55 percent must agree to participate in a housing counseling program to help them create a sustainable financial plan.
The back-end ratio is described in detail in Supplemental Directive 09-01. Generally, it is the ratio of the borrower's total monthly debt payments (such as PITIA, mortgage insurance premiums, junior or secondary lien payments, and payments on other debts, i.e. credit cards, auto and student loans) to the borrower's gross monthly income.
Is there a standard Net Present Value (NPV) model?
Treasury developed a base NPV model that servicers must use to determine whether a Home Affordable Modification provides the investor with a better financial result than if the modification had not occurred. If the NPV test is positive, the servicer must modify the loan. If the NPV test is negative, the servicer has the option of modifying the loan, but is not required to do so.
While most assumptions in the model will be the same for all users, each servicer has limited discretion to use a discount rate that is appropriate for their portfolio not to exceed 250 basis points above the Freddie Mac Primary Mortgage Market Survey rate.
Additionally, servicers that have at least a $40 billion servicing book have the option to use estimated cure rates and re-default rates based on their own experience, rather than using the rates in the base NPV model. A plain English description of the NPV model can be found at http://www.hmpadmin.com/.
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Is there a hardship requirement?
Yes. Every borrower and co-borrower, whether in default or not, must complete a Home Affordable Modification Program Hardship Affidavit. This document can be found at www.HMPadmin.com, in the “Modification Documents” section.
Is the modified interest rate permanent?
If the modified rate is below the market rate as determined from the Freddie Mac Primary Mortgage Market Survey rate on the date the modification agreement is prepared, the modified rate will be fixed for a minimum of five years as specified in the modification agreement.
Beginning in year six, the rate may increase no more than one percentage point per annum until the note rate reaches the market rate at the time of the modification. If the modified rate exceeds the market rate at the time the modification agreement is prepared, however, the rate for the remaining term of the loan is the modified rate.
What if reducing the interest rate is not enough to get the borrower's front-end DTI down to 31 percent?
If the rate is reduced to as low as the 2 percent floor and the DTI is still above 31 percent, Supplemental Directive 09-01 specifies that the servicer may next extend the term and reamortize the mortgage loan by up to 40 years. If the DTI still exceeds 31 percent, then the servicer must forbear (defer) a portion of the principal.
The deferred amount does not accrue interest, but will result in a balloon payment at the maturity of the loan. Servicers and investors should carefully review the section of Supplemental Directive 09-01 titled “Standard Modification Waterfall” and should seek approval from Fannie Mae, as Treasury’s Financial Agent, before deviating from the standard payment reduction guidance.
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Could the borrower face a balloon payment?
Yes. If the servicer forbears principal, the amount of the deferred principal will be owed when the loan is paid off or refinanced, or when the house is sold. Any balloon payment will be in the amount of the deferred principal, with no interest accrued.
If the servicer extends the amortization period but not the term, the size of the balloon will be increased. Clear disclosure to borrowers about the balloon payment is important.
Are servicers required to offer permanent principal reductions?
No. At their option, servicers or investors may forgive principal to achieve the affordability target of 31 percent front-end DTI. The servicer may forgive principal on a standalone basis or before any step in the process described above.
The Program will reimburse servicers who offer principal reduction to achieve an affordable payment in an amount comparable to the reimbursement the lender or investor would have earned had they followed the standard modification waterfall to achieve affordability.
What if the borrower has a second lien mortgage and would like to apply for a Home Affordable Modification?
Only first lien mortgages are eligible for modifications under HAMP. If a borrower has a junior lien, the servicer may, based on the requirements of the investor or the terms of the applicable servicing agreement, need to obtain subordination agreements from the junior lien holder.
Treasury recently announced an expansion to MHA that would increase affordability for borrowers whose servicers are participating in the program. Under the 2nd Lien Modification Program (2MP), if a borrower's servicer is a program participant, the second lien will automatically be eligible for a modification when the first lien is modified under HAMP.
A detailed outline of the 2nd Lien Modification Program is available on http://www.financialstability.gov/.
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Is there an escrow requirement?
Yes. All loans modified under HAMP must include an escrow account for payment of future property taxes and hazard insurance, unless prohibited by state law. If the existing loan does not include an escrow account, one will be established. A new escrow account may require collection of a sufficient reserve to pay the taxes and insurance on or before they are next due.
The reserve amount cannot be capitalized into the modified loan amount. The servicer may give the borrower the option of paying the reserve amount at the time the loan is modified or the option of spreading the amount over a period of 60 months and including it in the monthly escrow payment.
Will delinquency status be reported to credit bureaus during the trial period?
Yes. Servicers will continue to report a “full file” status report to the four major credit repositories for each loan in accordance with the Fair Credit Reporting Act.
For borrowers who are current when they enter the trial period, the servicer will report the borrower as current, but on a modified payment, if the borrower makes a trial period payment by the last day of the month in which the trial payment is due.
If the borrower is delinquent when the trial period begins, the servicer will continue to report the account as delinquent until the modification is complete, at which point the servicer will report payments received on time as current under a modified plan.
Counselors should discuss the potential impact of this reporting with borrowers who are considering HAMP, especially borrowers who are current on their payments, but believe they are at imminent risk of default.
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What incentives does HAMP provide for borrowers, servicers and investors?
Borrowers, servicers and investors are all eligible to receive financial incentives for successful modifications under HAMP. No incentives are available to any party, however, until after successful completion of the trial period.
• Borrowers whose monthly payment for principal, interest, taxes and insurance is reduced through the modification by six percent or more will receive success incentives for making timely payments on their modified loans, including timely payments made during the trial period. For every month the borrower is current and makes a timely payment, the borrower will accrue a principal balance reduction payment equal to the lesser of $83.33 or 50 percent of the reduction in the monthly payment. A borrower can earn up to $1,000 per year in mortgage principal reduction for each of the first five years of the modification. Success payments will accrue monthly, but will only be applied to the borrower’s account annually. If a loan ceases to be in good standing, no further success payments will be paid, including accrued but unpaid amounts. (Refer to Question 20 below for the definition of “good standing”.)
• Servicers will receive a one-time incentive payment of $1,000 for each modification of a delinquent loan, plus an additional $500 incentive payment if the modified loan is current when the borrower enters the trial period. The servicer also is eligible for success incentives if the borrower’s monthly payment is reduced through the modification by six percent or more. For each month a borrower remains in good standing, the servicer earns a “success payment” equal to the lesser of $83.33 or 50 percent of the reduction in the monthly payment. The servicer can earn success payments for 3 years after the modification. The success payments accrue monthly and are paid annually. If a loan ceases to be in good standing, no further success payments will be paid, including accrued but unpaid amounts.
• Investors will receive a subsidy equal to one half of the difference between the borrower’s monthly payment at a 31 percent DTI ratio and the lesser of (1) the payment at a 38 percent DTI ratio or (2) the borrower’s current monthly payment. This subsidy will continue for 5 years after the modification (or until the loan is paid off), so long as the loan is in good standing. The investor also will receive a one-time incentive payment of $1,500 if the modified loan is current when the trial period begins.
• Incentive payments and interest reimbursements are only earned and payable when the borrower has successfully completed the trial period and the modification agreement has been signed by the borrower and the servicer.
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What if the borrower does not make all the payments during the trial period?
A borrower must be current at the end of the trial period in order to get a modification under HAMP. “Current” is defined as the borrower having made all required trial period payments no later than 30 days from the date the final payment is due.
A borrower could, for example, make the first trial period payment on time, miss the second month’s payment, make two payments in the third month of the trial period and still be considered current. However, if a borrower is not current at the end of the trial period, the borrower will not be eligible for the permanent modification.
In the event a borrower defaults during the trial period, the servicer must evaluate the borrower for any other available loss mitigation alternatives prior to commencing or restarting foreclosure proceedings. Treasury recently announced an expansion to MHA that includes incentives for short sales and deeds in lieu of foreclosure.
The Foreclosure Alternatives Program encourages servicers to work with borrowers to avoid an often difficult legal foreclosure process by encouraging short sales and deeds-in-lieu of foreclosure. The program provides servicers with financial incentives to participate in foreclosure alternatives and will provide borrowers with $1,500 to help with relocation to more affordable housing.
A program outline is available on http://www.financialstability.gov/.
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What if the borrower defaults after the modification becomes permanent?
If, following a successful trial period, a borrower defaults on a modification under HAMP (three monthly payments are due and unpaid on the 90th day from the last paid installment date), the loan is no longer considered to be in “good standing”. A loan that is not in good standing is not eligible to receive borrower, servicer or investor incentives and reimbursements.
Once lost, good standing can never be reinstated, even if the borrower brings the loan payments current. Good standing, however, only applies to incentive payments. The modification is not impacted and the borrower still has the benefits and responsibilities of the modified loan terms.
The servicer must work with the borrower to attempt to reinstate the loan using all available loss mitigation options. If reinstatement is not feasible, the servicer must evaluate the borrower for any other alternatives prior to commencing foreclosure proceedings, including the Foreclosure Alternatives Program described in Question 19.
Is there a modification fee for this HAMP?
No. Borrowers who qualify for a modification under HAMP will never be required to pay a modification fee or pay past-due late fees. If there are costs associated with the modification, such as payment of back taxes, the servicer will give borrowers the option of capitalizing them onto the mortgage or paying some or all of the expenses in advance.
Is a loan eligible for more than one Home Affordable Modification?
No. Each loan can only be modified once under HAMP, even if the borrower encounters a change in circumstances after the loan is modified.
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What if a borrower is in foreclosure?
To ensure that a borrower currently at risk of foreclosure has the opportunity to apply for a modification under HAMP, participating servicers may not proceed with a foreclosure sale on an eligible loan until the borrower has been evaluated for HAMP and, if eligible, a trial modification offer has been made.
Participating servicers must use reasonable efforts to contact borrowers facing foreclosure to determine their eligibility, including in-person contacts at the servicer’s discretion. Generally, foreclosure sales will be suspended while the loan is being considered for a modification, as well as for the duration of the trial period.
If a servicer tells the counselor that a loan cannot be modified because the eligibility requirements were not met, or the investor is not participating in HAMP, what should the counselor do?
If modification under the plan is not an option because the borrower does not meet the eligibility criteria, or because the investor is not participating in HAMP, the counselor should discuss all loss mitigation options with the borrower, including loan modification scenarios outside this program, opportunities to refinance, or the availability of local resources such as rescue grants and loans.
If homeownership retention is not possible, the counselor should discuss foreclosure alternatives including the short sales and deed-in-lieu of foreclosure options described in Question 19 as ways to help a borrower transition to more affordable housing.
How long will Home Affordable Modifications be available?
The program closes to new participants on December 31, 2012. Trial modifications in place by that date can later be converted to permanent modifications. However, no new trial modifications will be made after that date.
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(Q&A courtesty of US Department of Treasury and FinancialStability.gov)
