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Details of Massive Modification Plan Emerge

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The Obama administration today released more details on its $75 billion loan modification program.

The Homeowner Affordability and Stability Plan was originally unveiled by the U.S. Department of the Treasury last month. The modification portion of the plan is expected to help between 3 and 4 million borrowers.

“Today, we are providing servicers with the details they need to begin helping eligible borrowers,” Treasury Secretary Timothy Geithner said in an announcement today.

Geithner was confirmed by the U.S. Senate as President Barack Obama’s Treasury Secretary in January.

Several major servicers, as well as Fannie Mae and Freddie Mac, had suspended foreclosures pending today’s announcement.

A set of guidelines from the U.S. Department of the Treasury were released with today’s statement.

The plan includes government-subsidized loan modifications on loans originated prior to Jan. 1, 2009. Eligible borrowers have until Dec. 31, 2012, to participate no more than one time.

Servicers must perform a net present value test on borrowers who are either 60 days past due or at risk of imminent default. The test, which factors in mortgage insurance coverage, compares the expected cash flow after a modification with the cash flow projected if no modification is done. Modifications are optional on loans where the test is negative.


U.S. Embassy photo of Barack Obama

“If the NPV Test result is negative and a Home Affordable Modification is not pursued, the lender/investor must seek other foreclosure prevention alternatives, including alternative modification programs, deed-in-lieu and short sale programs,” the guidelines said.

Servicers, which are first required to make modifications that bring the front-end debt-to-income ratio down to 38 percent, will split with the government the cost of modifying the loan to bring the ratio down to 31 percent for up to five years. Income will be verified with Form 4505-T, the most recent tax returns and the two most recent paystubs. Other third-party documents will suffice on self-employed borrowers. Monthly gross income will be estimated by multiplying net income by 1.25.

The debt-to-income ratio must first be reduced by decreasing the interest rate in increments of 0.125 percent to a little as 2 percent. The rate will be fixed for five years and increase 1 percent annually after that until the interest rate cap is reached. That cap is either the rate in Freddie Mac’s Primary Mortgage Market Survey or the maximum contract rate.

If the DTI still exceeds 31 percent, then the loan term, or at least the amortization, should be extended up to 40 years.

If the front-end ratio still is above 31 percent, then the servicer should provide interest-free forebearance on the principal — which will become due as a balloon payment at maturity, when the property is sold or when the interest-bearing balance is paid off.

“If the modification does not pass the NPV test and the servicer chooses to modify the loan, the modified balance must be no lower than the current property value,” the guidelines said. “Principal forgiveness can be used on a standalone basis or before any step in the Standard Waterfall process.”

Borrowers who exceed a 55 percent backend DTI will be required to go through counseling before a modification can take effect.

Bankruptcy doesn’t necessarily disqualify a borrower for a modification, while borrowers in pending litigation with a servicer won’t waive their legal rights by participating.

The plan includes incentives to extinguish second liens behind loans that will be modified. But junior liens that remain after the modification will be included in the back-end DTI calculation.

Mortgages on owner-occupied single-family properties are eligible up to $729,750 — which is the high-cost conforming loan limit. The maximum loan amount rises on multi-unit properties to $1,403,400 for owner-occupied four-unit properties. Loan-to-value is not considered, but property values must be established through Fannie Mae’s or Freddie Mac’s automated valuation models or a broker price opinions. Federally regulated institutions, however, may utilize in-house AVMs that have been approved by their regulators.

Borrowers who qualify for the Hope for Homeowners program must instead use that program — though servicers will also receive incentive payments for these.

Once a provisional modification offer is made, arrearages — including past due property taxes and insurance — must be capitalized. No fees can be charged to the borrower under the program. But investors may reimburse servicers for fees they are charged in association with the modification such as appraisals and notary fees.

A trial period with payments made at the modified amounts will last 90 days before the modification is executed.

Modified loans that subsequently become 90 days past due will cause the modification to terminate.

Servicers must escrow for taxes and insurance and waive any outstanding late charges. Any loans that were assumable prior to a modification lose their assumability after a modification.

Servicers will be required to collect and report data on the modification terms, the underwriting analysis and the loan modification and waterfall analysis.

In addition to a $1,000 incentive for servicers that successfully process a modification and additional $1,000 annual incentives for keeping the loan current for up to three years, lender-investors will be paid $1,500 after the successful completion of the trial period on loans that are modified before they become delinquent.

Cash compensation will also be available to lender-investors that complete modifications on loans secured by properties in areas where home prices are declining.

Incentive payments are paid after a successful trial period and will require that the servicer first enter a program agreement with the Treasury’s financial agent by Dec. 31, 2009. Servicers are required to consider all eligible loans where allowed by pooling and servicing agreements, and they must make a good faith effort to eliminate prohibitions or obtain waivers when the agreements prohibit wide-scale modifications.

Borrowers will be credited on their loans up to $1,000 for each year they remain current after the loan modification. Payments are possible for a maximum of five years.

The Treasury said it has already reached out to counselors and mortgage servicers in order to quickly implement the program. Scripts for call centers, a training plan and detailed guides have all been developed with the help of servicers and counselors.

“It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets, just as we work to stabilize our financial system,” Geithner stated.

Related:

Massive Foreclosure Plan Unveiled
The Obama administration plans to throw $75 billion at the country’s foreclosure problem. As many as 9 million mortgages could be impacted, including conforming loans that have been paid on-time and at-risk mortgages. The plan — which could be a boon for laid-off mortgage employees — includes loan-to-value exceptions on conforming refinances, bankruptcy cramdowns and cash payments for successful modifications.

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