Guidelines For Obama Loan Modification Program

Earlier this month the Treasury Department issued regulations governing President Obama's mortgage modification plan, dubbed the Home Affordable Modification Program, which is one aspect of Obama's more comprehensive Homeowner Affordability and Stability Plan, the intent of which is to reduce foreclosures and stabalize the real estate markets.  Since every government program needs a acronym (TARP, TALF, etc.), I will refer to the loan modification program, designed to assist homeowners who are at risk of default and foreclosure avoid it, as "HAMP."

Which mortgages are eligible for HAMP?

To qualify for the HAMP, mortgages must meet the following requirements:

• The mortgage must be a first mortgage encumbering a 1-4 unit residential property that serves as the borrower's current primary residence. 

• The borrower must have had a change in circumstances that causes financial hardship, or be facing a recent or imminent increase in the amount of the borrower's monthly payment that is likely to create a financial hardship.

• The unpaid principal balance of the mortgage must be no more than $729,750 (this
  amount increases proportionately for multiple unit properties.)

• The mortgage can not have been previously modified under the HAMP.

• The mortgage must have been originated on or before January 1, 2009 (mortgages
  are eligible to be modified until December 31, 2012)

Which eligible mortgages must be modified?

After determining that the mortgage is eligible based on the requirements set forth above, a net present value test must be performed on the mortgage. This test determines whether the estimated net present value of the mortgage, as modified, is greater than the estimated net present value of the mortgage absent modification. Relevant parameters for the net present value test include the estimated value of the property upon foreclosure, cure and redefault rates, the amount of any incentive payments made under the HAMP and other information affecting the potential future value of the mortgage. If the net present value test determines that the modified loan is more valuable, as modified, participating servicers are required to offer the borrower a modification. However, servicers have the option of offering borrowers a loan modification even if the modified loan is estimated to be less valuable. The Treasury will release further parameters for the net present value calculation at a later date.

How are loans modified pursuant to the HAMP?

1. Interest rate reduction. First, a servicer must attempt to reduce the interest rate for the mortgage in increments of 0.125% (subject to a floor of 2%) until a mortgage debt-to-income ratio (Front-End DTI Ratio) of 31% is reached. For purposes of calculating Front-End DTI Ratio, mortgage debt includes principal, interest, taxes, insurance, homeowners association and/or condominium fees and certain arrearages. Mortgage insurance premiums and debt service on subordinate liens are not included. If the interest rate required to reach a Front-End DTI Ratio of 31% is above an interest rate cap (set at the lesser of: (a) the original contractual rate, or, (b) the current Freddie Mac Primary Mortgage
Market Survey rate) the modified rate will become the interest rate for the remainder of the term of the mortgage. If the modified interest rate is below the cap set forth above, the modified rate will remain in effect for the first five years and then increase by 1% per year until it reaches the level of the cap, at which time it will be fixed.

2. Extension of term or amortization. If a Front-End DTI Ratio of 31% cannot be reached by lowering the interest rate to 2%, servicers may extend the term of the mortgage to up to 40 years. If loan terms prohibit extending the term, the amortization period can be increased to up to 40 years, which will result in a balloon payment that will be due upon the maturity or other termination of the
loan. 

3. Forbearance of principal. If the above steps still do not result in a Front-End DTI Ratio of less than 31%, servicers may forbear principal, which would then become due upon the maturity or other dermination of the loan. The guidelines mandate that interest cannot accrue on the forbearance amount.

4. Trial period. After the modified interest rate is determined, the borrower engages in a trial period lasting 90 days, or 3 payment periods, during which the borrower must make payments at the modified terms. If the borrower is current at the end of the trial period, the modification is then effective.

What incentives are available in connection with the HAMP?

Acknowledging the failure of prior loan modification programs, the Obama plan provides a variety of incentives to lenders and servicers to gain their participation on more loan modifications.

Lenders (or whoever owns the mortgage in this era of securitization) are eligible for the following incentive payments from the government:

• A payment in the amount of one-half of the difference between the borrower's monthly payment, as modified, and the lesser of: (a) the monthly payment of the loan at a 38% Front-End DTI Ratio, or, (b) the borrower's current monthly payment. This compensation will be paid for up to five years. 

• A bonus incentive of $1,500 for any loan modified while the borrower is still current (including less than 30 days delinquent), subject to de minimis restraints.

• Compensation to partially offset probable losses from home price declines for loans that have already been modified.

2. Servicers. Servicers, including lenders that service their own loans, are eligible for the following incentive payments:

• An initial payment of $1,000 for each successful modification. 

• Annual payments of up to $1,000 for the first three years following successful modification, provided the borrower stays in the program.

• A bonus incentive of $500 for any loan modified while the borrower is still current (including less than 30 days delinquent), subject to de minimis restraints.

Even borrowers, who have already obtained the benefit of having their loans modified, get sweeteners from the governent.  For example, if the borrower makes mortgage payments on time during the first five years after the modification, the principal on the loan will be reduced by an additional $1,000 each year. 

What are the potential problems with HAMP?

In addition to obvious moral hazard seemingly present in all of the government bailouts, loan modifications create problems for investors in mortgage-backed securities.  Most of the mortgages in this country are owned in some way or another by investors who have already taken huge losses on their investments in these securities.  Loan modifications may be opposed by investors, and may result in litigation as it did when Countrywide (now owned by Bank of America) settled predatory lending charges by various State Attorneys General by agreeing to modify thousands of mortgages.  Investors in the mortgage-backed securities containing these Countrywide loans banded together and brought litigation to prevent the modifications.  The Treasury guidelines do not really address this, but state that servicers must comply with the terms contained in servicing agreements (including pooling and servicing agreements) for eligible mortgages, or make reasonable efforts to remove any prohibitions or obtain waivers from any necessary party.

The plan also presents additional problems for lenders and servicers.  The guidelines prohibit servicers from passing along most charges in connection with loan modifications. For instance, while notary fees, property valuation and other required fees may be reimbursable from a lender or investor, servicers cannot pass these costs to borrowers. In addition, servicers cannot require a borrower to contribute cash to the closing of a loan modification, and must waive any unpaid late fees.  Servicers participating in the HAMP are required to enter into service contracts with Treasury's financial agent prior to December 31, 2009. These service contracts are likely to require servicers to offer loan modifications to all eligible mortgages in a servicer's loan portfolio. Treasury expects to circulate examples of these contracts in April 2009.  Servicers performing loan modifications will also be subject to detailed data gathering and recordkeeping requirements. Treasury will issue details on these requirements at a later date.

Additional information is available on the Treasury Department's website here, here and here.

Comments

[beachdude]

The most common mortgage modifications are listed below:

lowering the mortgage interest rate
reducing the mortgage principal balance
fixing adjustable interest rates within the mortgage
increasing the loan term throughout the mortgage
forgiveness of payment defaults and fees
or any combination of the above

Check out this public service site: http://mortgagemodificationinfo.org

[Loan Modification Zoom]

Great summary of Home Affordable Modification Program. One important factor though is the NPV Analysis, this is going to play a crucial role in whether the Lender will agree to modify the mortgage or not... http://www.modificationzoom.com

[Bonnie Hathaway]

It would be amazing if this Govt would get back to putting the citizen's interests first rather that bowing to the ugly 'bribe contributions' of the too greedy conglomerations. This will only bring ruin, as it is, to our existence.

[Glena Dee - (866) 943-5835]

Great summary! However as stated above, "Servicers have the option of offering borrowers a loan modification EVEN IF the the modification is ESTIMATED TO BE LESS VALUABLE." This is the reason why attoneys (not just mere negotiators or processors, but attorneys) can help homeowners negotiate for better terms with their lenders.

[Los Angeles Loan Modification]

nice post

[Loan Modification]

The proposal hasn't seemed to work...

[Bad Credit Home Loan]

Good informative article. Thanks for sharing this info blog.

[Angela]

This is a great program. I was just approved for it and it is completely legit.

[Joanne]

It is not news that there are hundreds of thousands of troubled homeowners in the country. It is not even news that the lenders refuse most who request help.

But, are you aware of the fraudulent practices that the lenders are using to deny loan modifications?

Here is my story:
In July 2007, we re-financed with Countrywide in order to get out of an ARM that was about to go up astronomically.

In order to get the loan through, the value of our home was appraised over what is was really worth. In addition, only my husband's name was put on the loan since the credit cards are in my name.

The loan is an interest only arm that does not include taxes and insurance. The payment is $3407 and my husband takes home $1300 per week. I am a stay at home mom with 2 young children.

In September of 2008, we were struggling to pay our bills. The value of our home was plummeting. We weren't behind yet, but were about to be. We pro-actively contacted Countrywide in October 2008 and asked for help.

Here is a time-line of events:
October 2008 - Sent Countrywide hardship letter. Husband withdraws $25K from his retirement fund to pay bills. This money must be repaid quarterly - $1000.
December 2008 - Countrywide refuses loan mod without a reason.
March 2009 - Obama plan underway. Contact Countrywide again. They say they can't help because we make too much money. Because they added husband's net income to his gross income and used that figure! Request that they re-open our case.
May 2009 - Told by Bank of America rep John McFarland that they will not help us since it is not their fault we are over-extended.
July 2009 - Contact Bank of America's Barbara Desoer to request a loan mod. Cannot pay August mortgage payment. Faxed new hardship letter and required documents.
August 2009 - Assigned Bank of America Negotiator Melissa Henderson.
August 21, 2009 - BOA Melissa Henderson calls to inform me that our request is being denied. She informed that we meet all of the requirements under President Obama's HAMP program, however, because my husband borrowed money from his retirement plan (which is depleted and we are still repaying), we do not qualify for a loan modification. She said that we are current on credit cards and car payments and therefore do not fall under the guidelines for assistance.

This is outright fraud. The HAMP stipulates that retirement accounts cannot be used to determine financial status and in addition, being behind on anything (credit cards, mortgage, etc.) is not a HAMP requirement.

Think I am only one person? Wrong, go out to www.loansafe.org and read the thousands of horror stories.

The lenders feet must be held to the fire! If we continue to let this happen, our country will be in worse shape than it is now!

Joanne in Hopewell

[dbol42@yahoo.com]

I was denied because :Your property equity exceeds our program guidelines.

My house is worth about $200,000 and my mortgage is $140,000. What kind of bull is that.

I can't afford to take the equity because my payment will be higher. I'm going to fight this

Debbie Carroll

[Home Loan Modification]

Nice article for Home Affordable Modification Program. Thanks for sharing. That information is helpful for those people who are want to invest in real estate.

[Frank]

Does anyone know if you receive a Loan Modification if it will affect your credit score? Most people that get them already have negative credit due to late payments, etc. but does just qualifying and receiving the Mod lower your score?

Frank Wright

[Deb K]

To Joanne:

Didn't you know that your interest only ARM was going to go up? Why only put your husband on the mortgage? Sounds like lying by ommission to me.

[Kathy W.]

If you are over the age of 18, you are responsible for thoroughly reading and signing any contract, including loan docs.
I would bet that anybody that accepted an adjustable rate loan within the past 10 years was buying more house than they really could afford. The 30 year fixed rate has been historically low for years. Not many folks with a fixed rate mortgage are having this issue.
The blame should not all be put on the lenders as the purchasers also share a large portion of responsiblity.

[Donna Moreen]

Frank,
It can affect your credit score. I just recently finished the trial period successfully and then was called one month after the trial period to say I was denied. GMAC told me the treasury dept was unable to obtain a net present value result. Now I'm told I can reapply but in the mean time the 3 month trial payments were not the full amt of the original payment and it may be reported as late. Can you believe that. I am going to reapply but this time when they give me the trial payment I am going to struggle to make my original payment incase there is another problem(I don't want to get farther behind) Does anyone know how they can not get a NPV result? I have read that there are positive and negative but not getting one I saw nothing on. I also thought they only had to obtain a NPV is the account was delinquent 60 days, and mine wasn't. Anyone know?
thanks
Donna NJ

[Donna Moreen]

oh by he way my credit score was 720 when I started the trial period in June this year

[olturu]

I am currently on a Hamp program Trial period, and I am doing my paperwork with Saxon Mortgage. The Saxon Mortgage Rep was very understanding and drop it down from $2,100.00 to $1400.00 and we were very thankful for that. However I am trying to work on our paperwork and submit it tomorrow. We were approved and became effective on Sept. 1st but there were lots of things going on in my family and trying to get it out overnight. Can anyone help me...I dont know what is the 31% they are talking about that mortgage payment cannot exceed your gross income, since my husband is the only one that is working full time in our family.
olturu

[danny k]

WWW.WEFIXMORTGAGES.COM is a counseling company on loan modifications for the(HAMP)Program I dealt with a guy named Eric J he got mine done in 2 weeks. Def worth giving them a call.

[Dottie Kile]

Petition to Congress from homeowners at www.loansafe.org

“Tens of thousands of homeowners across this nation have spent hundreds of hours dealing with mortgage servicers who have little incentive to actually help them/us achieve permanent loan modifications; while in the process of obtaining a modification, many homeowners have been lied to, misled, foreclosed upon or threatened with foreclosure.

We propose an immediate halt to all foreclosures until new, mandatory guidelines are established and that these guidelines are overseen by a new Consumer Protection Agency, which was recently recommended by President Obama and endorsed by Sheila Bair, chair of the FDIC. We also demand that these guidelines include not only a simple 31% of the borrower’s gross monthly income, but that the Net Present Value (NPV) test: (a) be created and administered by the government, not the banks, (b) have its data, assumptions and formula published so that they may be verified by the public, and (c) be made available at www.makinghomeaffordable.gov in a calculator form so that people can learn immediately, with the other eligibility questions available there now, whether they’re eligible for HAMP. We are also strongly advocating that additional guidelines be formulated that would open the door for modifications at an even a lower rate in significant hardship conditions and for write downs of principal when homes are severely underwater.

We propose there be clear and enforceable guidelines regarding the time between the initial request for a modification and the achievement of a permanent modification, and that there be no reward to the bank for a trial modification. The rewards, if any, should be only for successful permanent modifications.”

Add your name to the petition at the URL below:
http://www.petition2congress.com/2/2564/

[crystal waldrum]

I was on the hamp trial period and made all my payments ontime and my mortgage company just notified me that I was cancelled because when she resubmitted my info, I did not make enough money to qualify. She told me I had to make up all delinquent payments and the difference of my modified payments I had been making adding up to 5,600 dollars and had one week to make the full payment or they would forclose. I sent in new paystubs showing a recent raise that I could now be within the guidelines but they said I could not reapply and they would not work with me. Is this right? is there anything I can do?

[Timaru]

Can someone tell me if its good or bad my husband is the only one who claimed his income on HAMP. We filed separate return. Our lender asked if I want to include my income than I send in my T-4506 and copy of tax return, can anyone help me with this or any information will be helpful

[Larry]

http://www.associatedcontent.com/article/2381656/why_obamas_home_affordability_program.html?cat=3

The truth about Obama's HAMP..the "Hurting Any Modification Possibility" Program

[Melba Solis]

this is really a nice post..i love this page..

[Nancy Carlson]

nice post..it will help others..thanks for posting..

[victoria samuels]

try this site also if you want to learn about hardship letters..nice reference for business and personal letters..

http://hardshiplettersample.com/