Yesterday, Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan announced two new programs under the umbrella of the Making Home Affordable (MHA) Program. The two new programs: (i) provide incentives for mortgage servicers to pursue alternatives to foreclosure and (ii) give additional incentives to mortgage servicers that modify mortgage loans in the nation’s hardest hit areas.
Foreclosure Alternative Program: Under the Foreclosure Alternative Program, servicers are required to evaluate each borrower that does not qualify for modification under the Home Affordable Modification Program (HAMP) or was unable to maintain payments during the mandatory trial period for modification. During the evaluation, the servicer must determine whether a short sale is appropriate, and if not, the servicer can proceed with a deed-in-lieu transaction. Specifically, the Foreclosure Alternative Program:
- Provides for the following incentives: (i) servicers can receive up to $1,000 for successful completion of a short sale or deed-in-lieu, (ii) borrowers can receive up to $1,500 to assist with relocation expenses; and (iii) Treasury will share the cost of paying junior lien holders to release their claims, matching every $1 for every $2 paid by the investors, up to a total Treasury contribution of $1,000.
- Requires servicers to independently value the property and the minimum acceptable net return in accordance with investor guidance and to provide instruction to the borrower regarding the list price and any permissible price reductions.
- Requires that servicers give borrowers at least 90 days (but no more than one year) to market and sell their home.
- Allows for the deduction of reasonable and customary real estate commissions and selling costs.
- Allows borrowers to be accepted into the program until December 31, 2012.
- Prohibits servicers from charging borrower fees.
- Requires that all junior liens be cleared prior to a short sale or deed-in-lieu transaction.
- Permits the servicer to include a condition in the short sale agreement that provides that the borrower agrees to deed the property to the servicer in exchange for a release from the debt f the property is not sold within the time specified in the Agreement.
The program will publish standardized documentation, including a short sale agreement and an offer acceptance letter.
Home Price Decline Protection Incentives: This program will permit lenders to receive incentives for modifying mortgages in areas where homes have lost the most value. The Home Price Decline Protection (HPDP) incentives are intended to address investor concerns that recent home price declines may persist:
- Payments will be based on the total number of modified loans that successfully complete the modification trial period and remain in the modification program.
- Each successful modification will be eligible for a HPDP incentive, up to a cap for all HPDP incentives of $10 billion.
- 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. HPDP incentive payments will be made at the end of the first and second year of the modification.
A Fact Sheet accompanying the announcement details the progress made thus far under the MHA. To date, fourteen servicers, including the five largest, have signed contracts and have started modifying mortgage loans under the MHA.