Summary of the Obama Administration s MAKING HOME AFFORDABLE PROGRAM

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1 Summary of the Obama Administration s MAKING HOME AFFORDABLE PROGRAM Prepared By: Empire Justice Center Kevin Purcell and Salah Maker The Telesca Center for Justice One West Main Street, Suite 200 Rochester, NY Prepared on

2 1 Home Affordable Refinance Program Guidelines I. Program Goal how does this help borrowers? A. The goal of the program is to provide low-cost refinancing for responsible homeowners suffering from falling home prices 1. Homeowners will have the opportunity to refinance into a 30 or 15-year fixed rate loan II. Eligibility Requirements Who is considered for loan Refinancing? A. The plan is only for those loans owned or guaranteed by Fannie Mae and Freddie Mac 1. To determine if a loan is owned or guaranteed by Fannie or Freddie, contact them via phone or web submission a. Fannie Mae: FANNIE 8am 8pm EST b. Freddie Mac: FREDDIE 8am 8pm EST B. Amount due on mortgage must be less than 105% of the property value

3 2 Home Affordable Modification Program Guidelines I. Program Goal how does this help borrowers? A. The program goal is to lower borrowers Front-End Debt-to-Income ( DTI ) Ratio to 31% 1. Ratio is calculated by dividing the sum of the borrower s PITIA by their gross income a. PITIA includes principal monthly mortgage payments, interest, taxes, insurance and homeowners and association/condo fees b. Income is monthly gross income i. If only net income figures are available, multiply net income by 1.25 for initial estimate II. Eligibility Requirements Who is considered for loan modifications? A. Who is Eligible to be Considered for a Loan Modification? 1. Home must be owner occupied (including co-op, condo, and 1 to 4-unit properties), must be primary residence, must not be investor owned and must not be vacant or condemned 2. Mortgage must have originated before January 3, Borrowers currently in foreclosure may qualify 4. Borrowers in bankruptcy still may qualify, and borrowers in active litigation may still qualify without waiving their legal rights 5. Participating servicers are required to consider ALL eligible loans unless prohibited by rules of applicable Pooling and Service Agreement and/or other service agreements 6. No minimum or maximum Loan-to-Value ratio will limit eligibility B. How Long Will the Program Run? 1. All modifications under this program must be completed prior to December 31, 2012 C. How Many Times Can I Modify a Loan? 1. Loans can only be modified once under the program D. How Big Can The Mortgage Be? 1. First lien loans must have an unpaid balance equal to or less than: a. 1 Unit: $729,750 b. 2 Units: $934,200 c. 3 Units: $1,129,250 d. 4 Units: $1,403,400

4 3 E. What Documentation Must Homeowner Provide? 1. Most recent tax return (or an IRS form that will give permission to the servicer/lender to acquire a copy of the tax return) 2. Two most recent pay stubs 3. Verification that borrower does not have liquid assets to make monthly payments III. Loan Modification Approval Process How Does it Work? A. For Those Eligible to be Considered, How Will the Lender Determine if they Actually Will Modify the Mortgage? 1. The initial step to determine if a servicer must offer a loan modification will be to run a Net Present Value ( NPV ) test B. Net Present Value Test What Is it? 1. An NPV Test will be required on each loan that is facing imminent default or already delinquent 2. The goal of the NPV test is to determine the loss a lender would take on any particular loan if the lender were to foreclose, and compare it to the loss a lender would take if it were to modify the loan in such a way as to satisfy the 31% debt-to-income ratio a. If the loss that would be incurred through loan modification is SMALLER than through foreclosure, the lender MUST modify the loan b. If the loss that would be incurred through loan modification is LARGER than through foreclosure, the lender MAY modify the loan but is not required to do so i. If a lender does not pursue a loan modification in this case, they must seek other foreclosure prevention alternatives (i.e. short sale, deed in lieu of foreclosure) before foreclosing 2. NPV test only applies to lowering of interest rates, and does NOT include anything in it regarding forbearance of principal amount of loan C. NPV Test How Is It Computed? 1. NPV test is a formula, with numerous different variables 2. The Treasury Department is developing a standard model to be used throughout the industry 3. In order to run the NPV test, certain pieces of data will be needed so that they may be plugged in to the formula a. Some of this info will be borrower-specific e.g. the size of the mortgage, original interest rate, current market value of the house, foreclosure costs, etc. b. To determine property value, servicers will use the Freddie Mac/Fannie Mae automated valuation model, although they may use an internal valuation model if it is approved by federal regulators

5 4 c. Some pieces of data are based on assumptions developed by looking at the best available data throughout the industry e.g. percentage drop in housing value due to foreclosure, percentage of borrowers who will redefault after modification, etc. IV. Loan Modification Terms What will they be? A. What Will The New Terms of the Modified Loan Be? 1. The Front-End DTI Target is 31%, and in order to get to this level, the servicer will follow a standard waterfall process 2. Standard Waterfall Process Step-by-Step a. Confirm income and PITIA figures (See Section IA on page 1) b. Capitalize arrearages - servicers may capitalize accrued interest, past due real estate taxes, insurance premiums, delinquency charges paid to 3rd parties, and any required escrow advances already paid by servicers, but may NOT accrue any late fees due by borrower c. Reduce the interest rate on the loan in increments of 0.125% until the DTI ratio is 31%, subject to a floor of a 2% interest rate d. If a 31% DTI ratio has not been reached, extend the term of the loan to 40 years e. If a 31% DTI ratio has still not been reached, reduce principal until a 31% DTI level is reached i. If this step is necessary, the amount of principal reduction will be set up as a balloon payment due on maturity date of loan, sale of property, or at time of refinancing ii. No amount of interest shall accrue on the reduction amount during the life of the loan 3. The resulting interest rate of the loan will remain in place for 5 years, at which point the interest rate will increase 1% per year until it reaches the Interest Rate Cap a. The Interest Rate Cap is the lesser of (1) the original contractual rate and (2) the current Freddie Mac Primary Mortgage Market Survey rate of 30-year fixed rate conforming mortgage loans, rounded to the nearest 0.125% as of the date the modification document is prepared B. Is There a Trial Period? 1. Yes, a trial period of 90 days (3 modified payments) is required, after which the modification is considered effective on the first day of the following month C. Are There Any Fees To Take Part In The Program? 1. No modification fees for borrower 2. Any late fees owed by borrower are waived 3. The cost of obtaining borrower s credit report will be covered by servicer 4. Any modification fees to the servicer will be reimbursed by investor

6 D. What If The Borrower Defaults After Modifying Loan? 5 1. A loan will be considered to have redefaulted when the borrower reaches a 90-day delinquency status and redefaulting loans will be terminated from the program E. Are There Any Other Consumer Protections in the Plan? 1. Loan Counseling a. Borrowers who have a Back-End DTI of 55% or higher must complete HUD-approved counseling before modification is effective i. Back-End DTI is the ratio of borrower s TOTAL monthly debt (including PITIA, other mortgage payments, payments on all installment debts, alimony and car lease payments) 2. Disclosure: Servicers must provide borrowers with information designed to help them regarding modification terms and processes, and servicers must provide borrowers with clear and understandable written information about terms, conditions, costs, risk, etc. 3. Fair Lending: Modifications must comply with Equal Credit Opportunity Act and Fair Housing Act 4. Consumer Inquiries and Complaints: Servicers should have procedures and systems in place to be able to respond to inquiries and complaints relating to loan modifications 5. Documentation/Data Collection a. Servicers will be required to maintain records of key data points for verification/compliance reviews b. Borrowers will be required to provide declarations under penalty of perjury attesting to the truth of the information that they have provided to the servicer c. Servicers will be required to collect and transmit borrower and property data in order to ensure compliance with the program as well as to measure its effectiveness 6. Anti-Fraud Measures a. Fraud detection measures, such as documentation and audit requirements, will be described in the servicer guidelines and the program guidelines in the financial agency agreements with Fannie Mae and Freddie Mac b. Participating servicers and lenders/investors are not required to modify the loan if there is reasonable evidence indicating the borrower submitted false or misleading information or otherwise engaged in fraud in connection with the modification F. How should servicers incorporate the Hope for Homeowners program in the modification process? 1. Servicers will be required to consider a borrower for refinancing into the Hope for Homeowners program when feasible 2. Incentive payments will be paid for Hope for Homeowner refinances (See Section V. below for more information on incentive payments)

7 6 3. If the underwriting process for Hope for Homeowners refinance would delay eligible borrowers from receiving modifications, servicers will use Standard Waterfall to begin the Home Affordability Modification 4. Consideration for a Hope for Homeowners refinance should NOT delay eligible borrowers from receiving a modification offer and beginning the Trial Modification Period V. Compensation Why WOULD SERVICERS/lenders go along with this plan? A. Servicer Compensation 1. One-Time Payments a. Upfront Incentive Payment - $1,000 for each eligible modification meeting guidelines b. Current Borrower One-Time Incentive Payment i. For loans modified while still current, the servicer will receive $500 ii. Servicer has to maintain records that show Trial Period modifications were made while borrower was less than 30 days delinquent iii. Compensation is paid to the servicer that performs the loss mitigation or modification activities following a successful trial period 2. Recurring Payments a. Pay for Success Fees i. Up to $1,000 a year for up to 3 years as long as borrower stays in the program ii. To qualify for Pay for Success Payments, the modification must reduce the monthly payment by a minimum of 6% iii. Payments will be the lesser of a $1,000 OR half the reduction in the borrower s annualized monthly payment B. Borrower Compensation 1. Pay for Performance Payments a. Up to $1,000 a year for up to 3 years as long as borrower stays in the program i. This payment will be directed to the servicer, who shall apply it directly and entirely to reduce the principal balance ii. To qualify for Pay for Performance Payments, the modification must reduce the monthly payment by a minimum of 6% iii. Payments will be the lesser of a $1,000 OR half the reduction in the borrower s annualized monthly payment C. Lender/Investor Compensation 1. One-Time Payments

8 7 a. Current Borrower One-Time Incentive Payment i. For loans modified while still current, the lender/investor will receive $1, Recurring Payments a. Borrower/lender is only compensated if Front-End DTI is 31% or lower (see section I-A-1 on page 1for definition of DTI) i. Treasury will pay one half of every dollar difference between the monthly payment for a 31% Front-End DTI Ratio and a 38% Front-End DTI Ratio D. Program Payment Conditions 1. No payment to lender, investor, servicer or borrower will be made until servicer has entered into program agreements with Treasury s financial agent, which must occur before December 31, Any reduction below 31% will not be covered by Payment Reduction Cost Share VI. Other Program Features MORE DETAILS TO BE PROVIDED IN THE FUTURE A. Home Price Depreciation Payments: To encourage lenders/investors to modify more mortgages, compensation will be provided to partially offset probable losses from home price declines This will be structured as simple cash payments on each modified loan while the loan remains active in the program B. Payments for Short Sales and Deeds-in-Lieu: Compensation will be provided to servicers and borrowers in order to facilitate short sales or deeds-in-lieu in those cases in which borrowers either fail the NPV test or fail to qualify, or default under the modification program C. Second Lien Elimination Payments: To reduce the borrowers overall indebtedness and improve loan performance, additional incentives will be provided to extinguish junior liens on homes with first-lien loans that are modified under the program D. Government Loan Programs: FHA, VA and rural housing loans will be addressed through standalone modification programs run by those agencies

9 8 Useful Websites: Guidelines can be found at: Website for homeowners: Website for servicers: To find Freddie Mac s Primary Mortgage Market Survey rate (PMMS) for 30-year fixed-rate conforming loans: To submit questions:

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