There is a new manual governing HAMP loan modification practices, and the changes, often subtle but important, are worth noting.
The United States Department of Treasury created the Home Affordable Modification Program (“HAMP”) to assist homeowners in default (or at risk of default) on their mortgages. HAMP is structured to provide financial incentives to loan servicers to modify the terms of borrowers loans who qualify for the program. Although participation in the program is voluntary, HAMP imposes a number of requirements on participating servicers, including notice and reporting requirements. Until now, such requirements could be found only in what some perceived to be confusing and contradictory “Supplemental Directive” letters available on the HAMP website for servicers, www.HMPadmin.com. The Treasury Department has now released a Servicing Handbook that combines the former Supplemental Directives while also amending or revising prior guidelines. The new Servicer Handbook is available at https://www.hmpadmin.com/portal/docs/hamp_servicer/mhahandbook.pdf.
The new Servicer Handbook does not merely collect prior guidelines — it establishes entirely new rules, in some cases clarifying or superseding prior Supplemental Directives.
Among the major new guidelines or clarifications:
• More Than One HAMP Application allowed — Prior rules stated that borrowers could only be considered for HAMP once, but the rule left vague the question of whether a borrower who applied but did not submit documents, or applied and was denied, were considered to have exhausted their one-HAMP opportunity. For example, if a borrower who applied and was denied later obtained new employment that generated more income, it was unclear whether the borrower could reapply under the new and possibly qualifying financials. New rules clarify that borrowers remain eligible despite prior applications unless and until they fail a trial period plan (“TPP”) either by non-payment or failing to send required and requested documents. As written, the new guidelines effectively allow unlimited application and reapplication opportunities prior to being offered a TPP.
• Considering the Income of Co-borrowers and Family — The income of co-borrowers (persons on the original Note) may be considered regardless of occupancy status, and income of third persons, such as relatives, assisting with the mortgage (persons not on the original Note) may be considered if the person is occupying the property with the borrower.
• Non-HAMP Servicers Must Still Meet HAMP Guidelines — Non-HAMP servicers are now required to meet all HAMP guidelines with respect to any loans assigned to them from a participating HAMP servicer. Non-HAMP servicers are considered to have met their HAMP obligations if a full HAMP solicitation occurred (e.g., letters, calls) and the borrower failed to apply for HAMP in a timely manner by the time of assignment. Loans assigned to non-HAMP servicers while a HAMP application are pending.
• Document Retention Standards Enhanced — The guidelines now explicitly require servicers to retain all records of their HAMP efforts, including solicitations, postponement of foreclosures, correspondence with borrowers (including all financial information provided), communications with investors demonstrating good-faith attempts to seek investor waiver of impediments to HAMP, and written records of NPV and waterfall calculations.
• HAMP for HELOCs — The manual adds new provisions for HAMP-style modifications of HELOCs:
• Document Requests — Requests for additional documents must allow the borrower 30 days to submit the documents and, if the borrower fails to do so, a follow-up letter granting an additional 15 days is now required.
• Financial Data Must be Current — Financial information is deemed to be current if it is less than 90 days old. Prior guidelines provided differing timelines and were generally vague about what was required.
• Foreclosure Halt During Application Process — While the previous guidelines arguably required a suspension of foreclosure proceedings during the pendency of a HAMP application or trial, a slew of new rules provide servicers greater detail. Most importantly, the new rules state that foreclosure sales may not go forward if the borrower applies less than one week prior to the sale, effectively setting a final application deadline, and defeating arguments raised by some borrowers that a post-sale application of an eligible borrower requires the servicer to unwind the sale. For the month prior to the sale, the servicer may impose special requirements on the application package (e.g., that the borrower send it to the foreclosing attorney).
• Demographic Reporting Requirements — Government reporting requirements, particularly with regard to race of applicants, have been extensively revised. One guideline requires that, if borrowers refuse to identify their race or ethnicity on the provided forms, servicers must make a visual determination or evaluate race based on surname. The new Handbook even requires servicers to train employees on making visual race determinations for purposes of government monitoring in regard to fair lending. Assistant Attorney General Perez, in testimony before Congress, promised to use such data to investigate disparate impact in HAMP loan modification procedures. See http://www.justice.gov/crt/speeches/2010/crt-speech-100429.html.
• Expenses to be Verified — In addition to income, expenses must also now be verified via bank statements and credit reports, to the extent practicable.
• Waterfall Details — The basic waterfall thresholds have stayed the same except that the maximum forbearance rules have been revised slightly to match Fannie Mae’s HAMP forbearance rules which do not require forbearance that would cause LTV to exceed 100%. The guidelines also clarify rounding issues when reducing the interest rate to as low as 2% as well as more fully describing the amounts properly capitalized in step one of the waterfall process.
• ARMs — The new guidelines clarify the original payment amount for adjustable rate mortgages that are set to adjust. The original payment is now considered to be the whatever is the higher payment amount based on the current index if the ARM is scheduled to adjust within 120 days after the time of the HAMP evaluation.
• Property Valuations — A new valuation of the property must be conducted for purposes of the NPV calculation. Use of an AVM, as opposed to a full appraisal, is permitted, but only for federally regulated servicers who submit their AVM model for review by their federal regulator. State chartered servicers must get a BPO or conduct an appraisal, and the cost is not reimbursed or chargeable to the borrower.
• Timeliness of Trial Payments — Under previous guidelines, borrowers who missed trial payments could catch up by making all payments before the end of the trial while still remaining eligible. Now, a borrower’s failure to make any single trial payment will result in a HAMP denial.