On March 4, the Obama Administration announced the new U.S. Treasury Department guidelines to enable servicers to begin modifications of eligible mortgages under the Administration's Homeowner Affordability and Stability Plan. The “Making Home Affordable” guidelines will implement financial incentives for mortgage lenders to modify existing first mortgages and set standards for modifications on existing mortgages owned by Fannie Mae or Freddie Mac.
Servicers that modify loans according to the guidelines will receive an up-front fee of $1,000 for each modification, plus “pay for success” fees on still-performing loans of $1,000 per year. Under the terms of the program, servicers will follow a specified sequence of steps in order to reduce the monthly payment to no more than 31% of gross monthly income (DTI). The program will share with the lender/investor the cost of reductions in monthly payments from 38% DTI to 31% DTI. The program will include incentives for extinguishing second liens on loans modified under this program. Modifications can begin immediately and may be done through December 31, 2012, and loans can be modified only once under the program.
Eligibility and verification requirements associated with this program include:
- Loans must have originated on or before January 1, 2009.
- First-lien loans on owner-occupied properties must have an unpaid principal balance less than or equal to $729,750. Higher limits are allowed for owner-occupied properties with 2-4 units.
- All borrowers must fully document income and sign an affidavit of financial hardship.
- Property owner occupancy status will be verified through borrower credit report and other documentation; no investor-owned, vacant, or condemned properties.
Loan modification terms and procedures of the program include:
- Participating servicers are required to service all eligible loans under the rules of the program unless explicitly prohibited by contract; servicers are required to use reasonable efforts to obtain waivers of limits on participation.
- Participating loan servicers will be required to use a net present value (NPV) test on each loan that is at risk of imminent default or at least 60 days delinquent. The NPV test will compare the net present value of cash flows with modification and without modification. If the test is positive (NPV of expected cash flow is greater with the modification), the servicer must modify absent fraud or a contract prohibition. Parameters of the NPV test are spelled out in the guidelines.
- The modification sequence requires first reducing the interest rate (subject to a rate floor of 2%), then if necessary extending the term or amortization of the loan up to a maximum of 40 years, and then if necessary forbearing principal.
- Servicers must enter into the program agreements with Treasury's financial agent on or before December 31, 2009.
The program includes measures to prevent and detect fraud, such as documentation and audit requirements. Servicers will be required to collect, maintain and transmit records for verification and compliance review, including borrower eligibility, underwriting and incentive payments.