On Friday, July 31, 2009, the Treasury Department released Supplemental Directive 09-04 (Directive), “Home Affordable Modification Program – Home Price Decline Protection Incentives (HPDP), a component of the Home Affordable Modification Program (HAMP). HAMP, part of the Obama Administration’s Home Affordability and Stability Plan, assist eligible homeowners at risk of foreclosure by modifying their mortgage payments to more “affordable” and sustainable levels and provides incentives to investors / lenders, servicers and homeowners for successful modifications. Specifically, HPDP permits lenders to receive incentives for modifying mortgages in areas where homes have lost the most value. These incentives are intended to address investor concerns that recent home price declines may continue. The Treasury Department has allocated $10 billion for the program, but the actual amount will depend on home price trends.
Commenting on the Directive, Assistant Secretary for Financial Institutions, Michael Barr commented, “[t]his is an important next step in our multi-faceted efforts to bring relief to struggling homeowners and stabilize the housing market.” He went on state, “[h]ome price decline protection can help homeowners who may not have been reached otherwise.”
The program applies to all modifications made through HAMP after September 1, 2009, but not to loans owned or guaranteed by Fannie Mae or Freddie Mac. No incentives will be paid if (i) the servicer has not executed a Servicer Participation Agreement to participate in HAMP, (ii) the borrower did not successfully complete the trial period and execute a HAMP modification agreement or (iii) the HAMP modification did not reduce the borrower’s monthly mortgage payment by at least six percent.
The HPDP incentive payments, made by Treasury are calculated based upon the following three characteristics of the mortgage loan receiving a HAMP modification (i) an estimate of the cumulative projected home price decline over the next year, as measured by changes in the home price index over the previous two quarters in the applicable local market (MSA or non-MSA region) in which the related mortgaged property is located; (ii) the unpaid principal balance (UPB) of the mortgage loan prior to modification under HAMP; and (iii) the mark-to-market loan-to-value ratio (MTM-LTV) of the mortgage loan based on the UPB of the mortgage loan prior to modification under HAMP.
HPDP Incentive Compensation
Incentive compensation under HPDP will be determined in the following ways: (i) if the trial modification remains successful, 1/24th of the HPDP incentive will accrue to the lender/investor each month for up to 24 months; (ii) HPDP incentive payments will be made at the end of the first and second year of the modification; (iii) the amount of money available to servicers to pay HPDP and all other incentives under HAMP modifications will be capped according to the Program Participation Cap included in the Servicer Participation Agreement; (iv) the funds remaining available for a servicer’s modifications under that servicer’s Program Participation Cap will be reduced by the maximum amount of incentive payments, including HPDP, potentially payable with respect to each HAMP modification upon entering into a trial period; and (v) in the event the HPDP or other incentive payments actually paid with respect to a HAMP modification are less than the maximum amount potentially payable, the funds remaining available for a servicer’s HAMP modifications will be increased by the difference between such amounts.
Freddie Mac will serve as the compliance agent for HAMP. As compliance agent, Freddie Mac will use its own employees and contractors to conduct independent compliance assessments of the HPDP in conjunction with HAMP.