HAMP PROBLEM SOLVING. Problems

Transcription

1 HAMP PROBLEM SOLVING Jeff Gentes, Connecticut Fair Housing Center Adam Cohen, MFY Legal Services, New York Diane Thompson, NCLC, Moderator NCLC Mortgage Conference Washington, D.C July 17, 2012 Problems Banks are bad at math Blame the investor Blame the IRS Blame the family The servicer is always right Excessive excessive forbearance denials Don t forget that you can forgive principal What mod? 1

2 Issues in Servicer Calculations of Income Self employment income Amount homeowner business owner pays self versus amount of net profit of business each month (5.1.2) Counsel client on rule at intake! Contribution Income (5.1.9) Some servicers try to limit contributions to spouses or family members, which is improper Some servicers require proof that homeowner deposits rental income into bank account for several months. Other issues Ask for servicer s income calculation worksheet and check the math! It s often wrong!! Improper Treatment of Rental Income governs rental income proof Proving rental income usually requires submission of current lease agreements plus 2 3 months of bank statements showing continuous deposits of the rental income amount, or cancelled checks also indicates that Schedule E of the borrower s tax return is proof of rental income, though servicers usually require leases plus bank statements Consider Passive and Non Wage Income Rule (20%) (5.1.8) when strategizing 2

3 Improper Treatment of Rental Income (Cont.) Treating rental income as contribution income Sometimes, servicers will claim that one or more of the homeowner s tenants are boarders rather than renters This distinction is not in the MHA Handbook When servicers treat one or more renters as boarders, the servicer requires the renter to prove his or her income as if they were a contributor Requires a lot more income documentation (pay stubs, bank statements, tax returns, contribution letters, etc.) Blame the Investor The Investor doesn t allow us to reduce principal The Investor doesn t permit a second modification The Investor has withdrawn its MHA delegation 3

4 Standard Clause Sample restriction: Consistent with the terms of this Agreement, the Servicer may waive, modify or vary any term of any Mortgage Loan or consent to the postponement of strict compliance with any such term or in any manner grant indulgence to any Mortgagor if in the Servicer's reasonable determination such waiver, modification, postponement or indulgence is not materially adverse to the Certificateholders; provided, however, that the Servicer shall not make future advances (other than Servicing Advances) and, unless the Mortgagor is in default with respect to the Mortgage Loan or such default is, in the judgment of the Servicer, reasonably foreseeable, the Servicer shall not permit any modification with respect to any Mortgage Loan that would (i) change the Mortgage Interest Rate, defer or forgive the payment thereof of any principal or interest payments, reduce or increase the outstanding principal amount (except for actual payments of principal) or extend the final maturity date with respect to such Mortgage Loan HAMP Rules on Investor Restrictions Restrictions must come from Pooling and Servicing Agreements (PSAs) or written servicing agreement HAMP was designed with these provisions in mind honoring contracts BUT, the program follows (or tries to influence usual and customary industry standards If the PSA only prohibits a step in the HAMP waterfall, servicer must still modify, omitting only the prohibited step If investor forbids modification, servicer must request waiver 15 U.S.C. 1639a creates safe harbor from investor litigation for servicers who modify under HAMP and makes HAMP standard industry practice 4

5 Checking for PSAs Often publicly disclosed on sec.gov: 1. Type in the year hyphen part of the pool name into the search for box on the top right e.g., 2007 AB1, , 2005 WFHE4 2. Pick the company name that resembles your pool 3. Look at each 8 K, starting near the bottom 4. When you find the PSA, and confirm that it s the correct PSA by verifying the name of the pool + pool trustee, search for terms like modify or reduce. Servicing standards are usually in Section 3. Loan Level Reports Many trustees make these reports available to the public, sorted by deal name (i.e., the name of the investor pool) U.S. Bank trustinvestorreporting.usbank.com Deutsche Bank tss.sfs.db.com/investpublic Bank of New York gctinvestorreporting.bnymellon.com Wells Fargo Bank of America etrustee.net Citi sf.citidirect.com Help confirm that the investor permits modifications Original interest rate vs. current interest rate (<5.0%) Maturity Dates (to see term length) Principal reduction (sometimes) 5

6 Checking Investor Restrictions Blame the IRS Tax Liens The Nobody Wants to Go First Dilemma: Servicer requires subordination of IRS tax lien before it will execute permanent modification IRS wants copy of modification so it knows the terms, particularly the principal balance of the modified lien, before it agrees to subordinate Potential Solutions: Obtain unexecuted modification agreement from servicer, provide copy of to IRS, suggest that IRS provide subordination certificate that limits subordination to the loan number and precise amount of the modified lien balance contained in the unexecuted copy of the modification If they say no, keep asking (strenuously, but politely) If the IRS Advisory Group Agent refuses, contact the IRS Office of the Taxpayer Advocate: 6

7 Blame the Family Widows, Orphans and Divorcees Signatures of dead or divorced borrower should not be required on any modification documents Garn St. Garmain, 12 U.S.C. 1701j 3(d) generally provides that servicers cannot accelerate the entire balance of the mortgage loan when property is transferred to spouse or child Implicit in this rule is the right of spouse or child to assume the note and mortgage Regs only provide one limitation on the right to assume continued payment of mortgage insurance Prior, unrelated acceleration should be irrelevant to assumption Discussion of strategies to deal with this issue handle family law and estate issues to get title into client s name, power of attorney, outreach to elected officials, outreach to press in compelling cases. The Servicer Is Always Right Fannie Mae Loans: resource_center@fanniemae.com Phone: FANNIE Freddie Mac Loans: Freddie_mac_borrower_help@freddiemac.com Phone: FREDDIE Non GSE Loans HAMP Solution Center: escalations@hmpadmin.com Phone: ; Fax:

8 HAMP Solution Center What it can do: get you a denial reason help escalate your case within the servicer + identify an escalated contact (occasionally) reverse an investor restriction, if you have evidence of its non existence In some cases, give your client the chance to apply again for HAMP What it can t: fix HAMP s flaws, such as the myriad ways servicers can avoid converting pre June 2010 trial plans into permanent ones (usually) force servicers to convert to permanent mods alleviate pure runarounds HAMP Solution Center Improve your chances by: Being sure your inquiry was received Using the HSC s approved authorization form Exhausting what the servicer provides: appeal adverse servicer decisions, to the servicer, within the initial 30 days Documenting your problem servicer must be proved wrong beyond a reasonable doubt Citing to the Handbook section that was violated Being clear, concise, and persistent Don t be stopped by an initial response that doesn t address your inquiry and/or attempts to close your inquiry without your input 8

9 Fannie / Freddie Servicers Best Friends Don t expect much from the Resource Centers Why are you calling us? Fannie Mae rules don t apply to Fannie Mae loans You need to take your question to the servicers Try to get to a Level Two representative Take careful notes Enlist federal help Write a letter to the congressman or senator (pick one of the 3) Talk to the relevant aide in advance Ask your contact to pass your letter to FHFA Excessive Excessive Forbearance Denials Rule 6.3 of the MHA Handbook sets forth steps of the standard modification waterfall that servicer must follow when reducing monthly mortgage payment to 31% of homeowner s gross monthly income Mandatory Waterfall Steps = Capitalization (6.3.1), rate reduction to 2% (6.3.2), term extension to 40 years from modification effective date (6.3.3), and principal forbearance (6.3.4). 9

10 Principal Forbearance Limits Servicers are not required to forbear more than the GREATER of 30% of the capitalized principal balance, or an amount that reduces the interest bearing principal balance to 100% of the value of the home (6.6.1) The principal forbearance set aside does not accrue interest during the modified loan term and servicer does not apply any portion of homeowner s regular monthly payment amount to reduce the set aside Principal Forbearance Example Homeowner w/ gross monthly income of $2,550 Capitalized principal balance of $203,322 31% Target payment = $ PITIA ($2,550 X.31) Assume monthly escrow requirement of $300 Rate reduction to 2% and term extension to 40 years from modification effective date only reduces payment to $ Therefore, must proceed to principal forbearance stage and forbear approximately $41,322 to reach target payment of $ Since $41,322 is only 20.32% of the capitalized principal balance of $203,322, it is within the principal forbearance limit set forth in Section

11 Spotting an Excessive Forbearance Denial Standard language in denial letter says: We are unable to offer you a Home Affordable Modification because we are unable to create an affordable payment equal to 31% of your reported monthly gross income without changing the terms of your loan beyond the requirements of the program Some servicers refer to excessive forbearance as insufficient income, which is an insufficient basis for denying a homeowner under HAMP. Low income can cause NPV failure or excessive forbearance denial, but there is no recognized denial based solely on having a low income. Improper Excessive Forbearance Denials Substituting the phrase LESSER OF for GREATER OF in interpreting rules governing principal forbearance limits contained in Sometimes the servicer will attempt to limit the forbearance set aside to an amount that reduces the interest bearing principal balance to 100% of the home value even though that amount is less than 30% of the capitalized principal balance In the prior example, the servicer initially denied the homeowner because the value of the property was about the same as the amount owed. 11

12 Improper Excessive Forbearance Denials (Cont.) Limiting the amount of principal forbearance to 30% where homeowner s property is severely underwater. In some cases where the homeowner is severely underwater, the servicer must forbear more than 30% up to the point where the interest bearing modified principal is the same as the value of the home Improper Excessive Forbearance Denials (Cont.) Bogus investor restrictions Servicers often claim that an investor restriction prohibits them from fully utilizing the rate reduction or term extension steps of the standard modification waterfall Skipping or limiting rate reduction and term extension leads to a larger forbearance amount to reduce homeowner s payment to 31% of gross monthly income 12

13 Improper Excessive Forbearance Denials (Cont.) Improper/Inflated Force Placed Insurance (FPI)Premiums Improper assessment of FPI premiums to borrower s escrow account causes monthly escrow payment to rise The higher the escrow payment, the more principal forbearance needed to reduce borrower s payment to 31% of gross monthly income Servicer delay in evaluation can also lead to excessive forbearance denials due to high arrears Improper Excessive Forbearance Denials (Cont.) Miscalculation of Homeowner Income In many cases, the servicer will not include portions of the homeowner s reported gross monthly income in the monthly income figure recognized by the servicer. Contribution income is commonly ignored Not including all sources of monthly funds in the servicer s calculation of homeowner s income results in a lower target payment (31% of gross monthly income), which in turn requires more principal forbearance to reach the target payment 13

14 Don t Forget that You Can Forgive Principal Because 1. HAMP PRA incentives tripled 2. AG Settlement Incentivized to do more during the 1 st year of the settlement (through 2/28/13) test cases to show reduced redefault rates GSEs take note? principal is forgiven in more than 50% of HAMP mods with non GSE/portfolio loans Solves excessive forbearance problems Tax issues beyond the scope of this session Homeowner Who Needs Principal Reduction House value= $250K Debt = $400K, 25 yrs left, 7% Income = $3,500 31% = $1,085 TIA + repay of shortage = $385 Target P&I = $700 14

15 Standard Waterfall We re going for $700 P&I $400K reduce down to 2%...$ Extend term to 40 years $ Forbear $150K (max) $ = Not Enough a/k/a excessive forbearance Check Income Ask about principal forgiveness Principal Reduction Waterfall We re going for $700 P&I Forgive principal down to 115% LTV 115% of $250,000 $287,500 What s payment now? $2,031 Lower interest rate down to 2%...$ Extend term to 40 years $ Forbear principal $54,345 gets you to $700 P&I PRA mod = 2%, 40 years, $112,500 forgiven over 3 years + $5,000 forgiven through standard incentives over the first 5 years, $54,345 forborne 15

16 Value of Foreclosure $250,000 home Less costs of foreclosure Less REO discount (30 40%) Less time to sell / time value of money ($150K in 12 months is worth less than $150K now) Value of Foreclosure could be $125K or less Wouldn t receive HAMP PRA incentives of $20,250 What mod? Assume there will be hiccups: fees that relate to pre mod activities are added post mod, monthly statements aren t updated, coupons aren t sent, borrower isn t receiving incentive payments Initially pay via Western Union or other traceable method of payment Push to get the countersigned agreement FCRA, FDCPA, UDAP, reciprocity of collection fee provisions all can lead to atty fees 16