Making Home Affordable
Updated Detailed Program Description
The deep contraction in the economy and in the housing market has created devastating consequences for homeowners and communities throughout the country. Millions of responsible families who make their monthly payments and fulfill their obligations have seen their property values fall, and are now unable to refinance to lower mortgage rates. Meanwhile, millions of workers have lost their jobs or had their hours cut, and are now struggling to stay current on their mortgage payments. As a result, as many as 6 million families are expected to face foreclosure in the next several years, with millions more struggling to stay current on their payments.
The present crisis is real, but temporary. As home prices fall, demand for housing will increase, and conditions will ultimately find a new balance. Yet in the absence of decisive action, we risk an intensifying spiral in which lenders foreclose, pushing area home prices still lower, reducing the value of household savings, and making it harder for all families to refinance. In some studies, foreclosure on a home has been found to reduce the prices of nearby homes by as much as 9%.
The Obama Administration’s Making Home Affordable program will offer assistance to as many as 7 to 9 million homeowners making a good-faith effort to make their mortgage payments, while attempting to prevent the destructive impact of the housing crisis on families and communities. It will not provide money to speculators, and it will target support to the working homeowners who have made every possible effort to stay current on their mortgage payments. Just as the American Recovery and Reinvestment Act works to save or create several million new jobs and the Financial Stability Plan works to get credit flowing, the Making Home Affordable program will support a recovery in the housing market and ensure that these workers can continue paying off their mortgages.
By supporting low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac, providing up to 4 to 5 million homeowners with new access to refinancing and creating a comprehensive stability initiative to offer reduced monthly payments for up to 3 to 4 million at-risk homeowners, this plan – which draws off the best ideas developed within the Administration, as well as from Congressional housing leaders and Federal Deposit Insurance Corporation Chair Sheila Bair – brings together the government, lenders, loan servicers, investors and borrowers to share responsibility towards ensuring working Americans can afford to stay in their homes.
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Making Home Affordable
1. Home Affordable Refinance Program for Responsible Homeowners Suffering From Falling Home Prices
2. A Comprehensive $75 Billion Home Affordable Modification Program
A Loan Modification Plan To Reach up to 3 to 4 Million Homeowners
o Shared Effort with Lenders to Reduce Mortgage Payments
o Incentives to Servicers and Borrowers
Clear and Consistent Guidelines for Loan Modifications
Required Participation By Financial Stability Plan Participants
Modifications of Home Mortgages During Bankruptcy
Strengthen Hope for Homeowners and Other FHA Loan Programs
Support Local Communities and Help Displaced Renters
3. Support Low Mortgage Rates by Strengthening Confidence in Fannie Mae and Freddie Mac
U.S. DEPARTMENT OF THE TREASURY
Washington
March 4, 2009
1. A Home Affordable Refinance Program to Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices:
• Provide the Opportunity for Up to 4 to 5 Million Responsible Homeowners to Refinance: Mortgage rates are currently at historically low levels, providing homeowners with the opportunity to reduce their monthly payments by refinancing. But under current rules, most families who owe more than 80% of the value of their homes have a difficult time securing refinancing. (For example, if a borrower’s home was worth $200,000, he or she would have limited refinancing options if he or she owed more than $160,000.) Yet millions of responsible homeowners who put money down and made their mortgage payments on time have – through no fault of their own – seen the value of their homes drop low enough to make them unable to take advantage of these lower rates. As a result, the Obama Administration’s program will provide the opportunity for up to 4 to 5 million responsible homeowners who took out loans owned or guaranteed by Freddie Mac and Fannie Mae (the GSEs) to refinance through the two institutions over time.
• Reducing Monthly Payments: For many families, a low-cost refinancing could reduce mortgage payments by thousands of dollars per year. For example, consider a family that took a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has $200,000 remaining on their mortgage, but the value of that home has fallen 15% to $221,000 – making them ineligible for today’s low interest rates that generally require the borrower to have 20% home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.
2. A $75 Billion Home Affordable Modification Program to Prevent Foreclosures and Help Responsible Families Stay in Their Homes: The Treasury Department, working with the GSEs, FHA, the FDIC and other federal agencies, will undertake a comprehensive multi-part strategy to prevent millions of foreclosures and help families stay in their homes. This strategy includes the following five features:
• A Home Affordable Modification Program to Reach Up to 3 to 4 Million At-Risk Homeowners
• Clear and Consistent Guidelines for Loan Modifications
• Requiring That Financial Stability Plan Recipients Use Treasury Guidelines for Loan Modifications
• Allowing Judicial Modifications of Home Mortgages During Bankruptcy When A Borrower Has No Other Options
• Requiring Strong Oversight, Reporting and Quarterly Meetings with Treasury, the FDIC, the Federal Reserve and HUD to Monitor Performance
• Strengthening FHA Programs and Providing Support for Local Communities
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U.S. DEPARTMENT OF THE TREASURY
Washington
March 4, 2009
A. A Home Affordable Modification to Reach Up to 3 to 4 Million At-Risk Homeowners: This program is intended to reach millions of responsible homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly. In the current economy, in which 3.6 million jobs have been lost over the past 14 months, millions of hard-working families have seen their mortgage payments rise to 40 or even 50% of their monthly income – particularly if they received subprime and exotic loans with exploding terms and hidden fees. The Home Affordable Modification program operates through a shared partnership to help those who commit to make reasonable monthly mortgage payments to stay in their homes, providing families with security and neighborhoods with stability. This plan will also help to stabilize home prices for homeowners in neighborhoods hardest hit by foreclosures. Based on estimates concerning the relationship between foreclosures and home prices, with the average house in the U.S. valued around $200,000, the average homeowner could see his or her home value stabilized against declines in price by as much as $6,000 relative to what it would otherwise be absent the Home Affordable Modification program.
Who the Program Reaches:
Focusing on Homeowners At Risk: Homeowners at risk, such as those suffering serious hardships, decreases in income, increases in expenses, payment “shock,” high combined mortgage debt compared to income, who are “underwater” (with a combined mortgage balance higher than the current market value of the house), or who show other indications of being at risk of default may be eligible for a loan modification. Eligibility for the program will sunset at the end of three years.
Reaching Homeowners Before They Have Missed Payments: Delinquency will not be a requirement for eligibility. Rather, because loan modifications are more likely to succeed if they are made before a borrower misses a payment, modifications for households at risk of imminent default despite being current on their mortgage payments are eligible to participate, in addition to those who have fallen behind.
Common Sense Restrictions: Only owner-occupied homes qualify; no home mortgages larger than the FHFA conforming limit of $729,750 will be eligible. This program will focus solely on supporting responsible homeowners willing to make payments to stay in their home – it will not aid speculators or house flippers.
Special Provisions for Families with High Total Debt Levels: Borrowers with high total debt qualify, but only if they agree to enter HUD-certified consumer debt counseling. Specifically, homeowners with total “back end” debt (which includes not only housing debt, but other debt including car loans and credit card debt) equal to 55% or more of their income will be required to agree to enter a HUD-certified counseling program as a condition for a modification.
How the Program Works
• The Home Affordable Modification program has a simple goal: reduce the amount homeowners owe per month to sustainable levels to stabilize communities. This
program will bring together lenders, investors, servicers, borrowers, and the government, so that all stakeholders share in the cost of ensuring that responsible homeowners can afford their monthly mortgage payments – helping to reach up to 3 to 4 million at-risk borrowers in all segments of the mortgage market, reducing foreclosures, and helping to avoid further downward pressures on overall home prices. The program has several key components:
i. Shared Effort to Reduce Monthly Payments: Treasury will partner with financial institutions and investors to reduce homeowners’ monthly mortgage payments.
- The lender will have to first reduce monthly payments on mortgages to a specified affordability level (specifically, the lender must bring down monthly payments so that the borrower’s monthly mortgage payment is no greater than 38% of his or her income).
- Next, the program will match further reductions in monthly payments dollar-for-dollar, from 38% down to 31% debt-to-income ratio for the borrower.
- To ensure long-term affordability, the modified payments will be kept in place for five years and the loan rate will be capped for the life of the loan. After five years, the interest rate can be gradually stepped-up by 1% per year to the conforming loan survey rate in place at the time of the modification.
- To reach the target affordability level of 31%, interest payments will first be reduced down to as low as 2%. If at that rate the debt to income level is still over 31%, lenders then extend the term or amortization period up to 40 years, and finally forbear principal at no interest, until the payment is reduced to the 31% target.
- Treasury will share the costs of reducing the payment from 38% DTI to 31% DTI dollar for dollar.
- Note: Lenders can also bring down monthly payments to these affordability targets through reducing the amount of mortgage principal. The program will provide a partial share of the costs of this principal reduction, up to the amount the lender would have received for an interest rate reduction as long as the lender reaches the target rate of affordability at 31% debt-to-income.
ii.“Pay for Success” Incentives to Servicers:
- Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. Servicers will also receive “pay for success” fees –as long as the borrower is successful at staying in the program – of $1,000 each year for three years, subject to a de minimis threshold.
- Servicers will get similar incentives if they modify FHA, VA, or Agriculture Department loans, or refinance loans according to the Hope for Homeowners or similar FHA programs.
iii. Responsible Modification Incentives:
- Because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include an incentive payment of $1,500 to mortgage holders and $500 for servicers for modifications made while a borrower at risk of imminent default is still current on their payments.
- The servicer portion of this incentive will also be available for modifications of FHA, VA, or Agriculture Department loans, or refinance loans under the Hope for Homeowners or similar FHA programs.
iv. Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time under the modified loan, the initiative will provide a monthly pay for performance success payment that goes straight towards reducing the principal balance on the mortgage loan.
- As long as the borrower stays current on his or her payments, he or she can get up to $1,000 each year for five years, subject to a de minimis threshold.
- As with the servicer incentives, these borrower incentives are also available for modifications of FHA, VA, or Agriculture Department loans, or refinance loans under the Hope for Homeowners or similar FHA programs.
v. Home Price Decline Payments: To encourage the modification of more mortgages and enable more families to keep their homes, the Administration -- together with the FDIC -- has developed an innovative payment that provides compensation that can partially offset losses from failed modification when home prices decline, but is structured as a simple cash payment on every eligible loan. The Treasury Department will make payments totaling up to $10 billion to discourage lenders, servicers and investors from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on. This initiative provides servicers with the security to undertake more mortgage modifications by assuring that if home price declines continue to occur or worsen, investor losses are partially offset. Holders of mortgages modified under the program would be provided with an additional payment on each modified loan, linked to declines in the home price index.
vi. Second Liens: While eligible loan modifications will not require any participation by second lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program, in order to reduce the overall indebtedness of the borrower and improve loan performance. Servicers will be eligible to receive compensation when they contact second lien holders and extinguish valid junior liens (according to a schedule to be specified by the Treasury Department, depending in part on combined loan to value). Servicers will be reimbursed for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.
How It Will Be Effective
Protecting Taxpayers and Communities: To protect taxpayers, the Home Affordable Modification program will focus on sound modifications. No payments will be made unless the modification lasts for at least three months, and all the payments are designed around the principal of “pay for success.” Borrowers, servicers and lenders/investors all have aligned incentives under the program to get successful modifications at an affordable and sustainable level.
Counseling and Outreach to Maximize Participation: Under the plan, the Department of Housing and Urban Development will also make available funding for non-profit counseling agencies to improve outreach and communications, especially to disadvantaged communities and those hardest-hit by foreclosures and vacancies. Borrowers with high debt-to-income levels must agree to use counseling services.
Creating Proper Oversight and Tracking Data to Ensure Program Success: Fannie Mae and Freddie Mac will be responsible – subject to Treasury’s oversight and the Federal Housing Finance Agency’s conservatorship – for monitoring compliance by servicers with the program. Every servicer participating in the program will be required to report standardized loan-level data on modifications, borrower and property characteristics, and outcomes. The data will be pooled so the government and private sector can measure success and make changes where needed. Treasury will meet quarterly with the FDIC, the Federal Reserve, the Department of Housing and Urban Development and the Federal Housing Finance Agency to ensure that the program is on track to meeting its goals.
Limiting the Impact of Foreclosure When Modification Doesn’t Work: Servicers will receive incentives to take alternatives to foreclosures, like short sales or taking of deeds in lieu of foreclosure. For those borrowers unable to maintain homeownership, even under the affordable terms offered, the plan will provide incentives to encourage families and servicers to avoid the costly foreclosure process and minimize the damage that foreclosure imposes on financial institutions, borrowers and communities alike. Servicers will be eligible for a payment of $500 and can make reimbursable payments up to $1000 to extinguish other liens, and borrowers are eligible for a payment of $1500 in relocation expenses in order to effectuate short sales and deeds-in-lieu of foreclosure. Such methods reduce vacancy, neighborhood decline, and overall costs for financial institutions, borrowers, and affected communities alike.
Treasury will also work with the GSEs to provide data on foreclosed properties to streamline the process of selling or redeveloping them, thereby ensuring that they do not remain vacant and unsold.
B. Clear and Consistent Guidelines for Loan Modifications: A lack of common standards has limited loan modifications, even when they are likely to both reduce the chance of foreclosure and raise the value of the securities owned by investors. Mortgage servicers – who should have an interest in instituting common-sense loan modifications – often refrain from doing so because they fear lawsuits. Clear and consistent guidelines for modifications are a key component of foreclosure prevention..
Clear and Consistent Guidelines for Loan Modifications: Working with the FDIC, other federal banking and credit union regulators, the FHA and the Federal Housing Finance Agency, the Administration today announced guidelines for sustainable mortgage modifications that may be used by all federal agencies and the private sector – bringing order and consistency to foreclosure mitigation. The guidelines include detailed protocols for loss mitigation and will serve as standard industry practice.
Applied Across Government and the Private Sector: Treasury today issued Guidelines for loan modifications that should serve as standard industry practice across the mortgage industry by working closely with the FDIC and other banking agencies and building on the FDIC’s pioneering role in developing a systematic loan modification process last year. The Guidelines – to be posted online – will be used for the Administration’s new foreclosure prevention plan. Moreover, all financial institutions receiving Financial Stability Plan financial assistance going forward will be required to implement loan modification plans consistent with Treasury Guidelines. Fannie Mae and Freddie Mac will use these guidelines for loans that they own or guarantee, and the Administration will work with regulators and other federal and state agencies to implement these guidelines across the entire mortgage market. Ginnie Mae, the Federal Housing Administration, Treasury, the Federal Reserve, the FDIC, The Department of Veterans’ Affairs and the Department of Agriculture also have agreed to seek to apply these guidelines when permissible and appropriate to all loans owned or guaranteed by these agencies. In addition, it is expected that the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Reserve, the Federal Deposit Insurance Corporation and the National Credit Union Administration where possible and appropriate will encourage the institutions that they supervise to participate in the loan modification program and use the Treasury Guidelines.
Mortgage Insurer Participation. The major mortgage insurance firms have agreed to develop a mechanism by which they will make partial claims on modified loans where appropriate in order help prevent avoidable foreclosures.
C. Requiring All Financial Stability Plan Recipients to Use Guidelines for Loan Modifications: The Treasury Department will require all Financial Stability Plan recipients going forward to participate in foreclosure mitigation plans consistent with Treasury’s loan modification guidelines.
D. Allowing Judicial Modifications of Home Mortgages During Bankruptcy for Borrowers Who Have Run Out of Options: The Obama administration will seek carefully crafted changes to bankruptcy provisions which will help to facilitate the goals of the Making Home Affordable program
• How Judicial Modification Works: Appropriately tailored bankruptcy legislation provides a mechanism for homeowners who are out of other options to file for bankruptcy and implement a responsible plan to pay the debts that they are able to pay. After borrowers have tried unsuccessfully to obtain affordable loan modifications from their lenders or servicers, in the appropriate circumstances, a bankruptcy judge should be able to reduce the outstanding principal balance of a primary residence home mortgage loan to current fair market value—just as is done with vacation homes or investment properties--when a person has no other options.
• Bolster FHA and VA Authority to Protect Issuers and Ensure Loan Modifications Occur: Legislation will provide the FHA and VA with the authority they need to provide partial claims in the event of bankruptcy or voluntary modification so that issuers guaranteed by the FHA and VA are not disadvantaged.
E. Strengthening FHA Programs and Providing Support for Local Communities
• Ease Restrictions in FHA Programs and Improve Hope for Homeowners
An improved Hope for Homeowners program can offer an important avenue for struggling borrowers to obtain a sustainable mortgage. In order to ensure that many more borrowers are able to participate in Hope for Homeowners, we will work to improve the program and actively pursue legislation so that the FHA may reduce fees paid by borrowers, increase flexibility for lenders to refinance troubled loans, permit borrowers with higher debt loads to qualify, and address additional challenges that could limit uptake under the program. We will also ensure servicers consider borrowers for refinancing into the improved Hope for Homeowners program whenever feasible, and make similar incentives available to servicers for Hope for Homeowners refinance loans in order to encourage servicers to use this program.
• Strengthening Communities Hardest Hit by the Financial and Housing Crises: As part of the recovery plan signed by the President, the Department of Housing and Urban Development will award $2 billion in competitive Neighborhood Stabilization Program grants for innovative programs that reduce foreclosure. Additionally, the recovery plan includes an additional $1.5 billion to provide renter assistance, reducing homelessness and avoiding entry into shelters
3. Support Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac:
• Ensuring Strength and Security of the Mortgage Market: Using funds already authorized in 2008 by Congress for this purpose, the Treasury Department increased its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability.
o Provide Forward-Looking Confidence: The increased funding will enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure
mortgage affordability for responsible homeowners, and provide forward-looking confidence in the mortgage market.
o Treasury is increasing its Preferred Stock Purchase Agreements to $200 billion each from their original level of $100 billion each.
• Promoting Stability and Liquidity: In addition, the Treasury Department will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace.
• Increasing the Size of Mortgage Portfolios: To ensure that Fannie Mae and Freddie Mac can continue to provide assistance in addressing problems in the housing market, Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.
• Support State Housing Finance Agencies: The Administration will work with Fannie Mae and Freddie Mac to support state housing finance agencies in serving homebuyers.
• No EESA or Financial Stability Plan Money: The $200 billion increase in Treasury's GSE stock purchase funding commitments are being made under the Housing and Economic Recovery Act and do not use any money from the Financial Stability Plan or Emergency Economic Stabilization Act/TARP.
Summary of Guidelines
Making Home Affordable will offer assistance to as many as 7 to 9 million homeowners, making their mortgages more affordable and helping to prevent the destructive impact of foreclosures on families, communities and the national economy.
The Home Affordable Refinance program will be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac. Normally, these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-to-value ratios above 80%. Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan.
GSE lenders and servicers already have much of the borrower’s information on file, so documentation requirements are not likely to be burdensome. In addition, in some cases an appraisal will not be necessary. This flexibility will make the refinance quicker and less costly for both borrowers and lenders. The Home Affordable Refinance program ends in June 2010.
The Home Affordable Modification program will help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. Working with the banking and credit union regulators, the FHA, the VA, the USDA and the Federal Housing Finance Agency, the Treasury Department today announced program guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications. This program will work in tandem with an expanded and improved Hope for Homeowners program.
With the information now available, servicers can begin immediately to modify eligible mortgages under the Modification program so that at-risk borrowers can better afford their payments. The detailed guidelines (separate document) provide information on the following:
Eligibility and Verification
• Loans originated on or before January 1, 2009.
• First-lien loans on owner-occupied properties with unpaid principal balance up to $729,750. Higher limits allowed for owner-occupied properties with 2-4 units.
• All borrowers must fully document income, including signed IRS 4506-T, two most recent pay stubs, and most recent tax return, and must 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.
• Incentives to lenders and servicers to modify at risk borrowers who have not yet missed payments when the servicer determines that the borrower is at imminent risk of default.
• Modifications can start from now until December 31, 2012; loans can be modified only once under the program.
Loan Modification Terms and Procedures
• 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
– meaning that the net present value of expected cash flow is greater in the modification scenario – the servicer must modify absent fraud or a contract prohibition.
• Parameters of the NPV test are spelled out in the guidelines, including acceptable discount rates, property valuation methodologies, home price appreciation assumptions, foreclosure costs and timelines, and borrower cure and redefault rate assumptions.
• 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 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. Principal forgiveness or a Hope for Homeowners refinancing are acceptable alternatives.
• The monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner’s association and/or condominium fees. Monthly income includes wages, salary, overtime, fees, commissions, tips, social security, pensions, and all other income.
• Servicers must enter into the program agreements with Treasury's financial agent on or before December 31, 2009.
Payments to Servicers, Lenders, and Responsible Borrowers
• The program will share with the lender/investor the cost of reductions in monthly payments from 38% DTI to 31% DTI.
• 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.
• Homeowners who make their payments on time are eligible for up to $1,000 of principal reduction payments each year for up to five years.
• The program will provide one-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers for modifications made while a borrower is still current on mortgage payments.
• The program will include incentives for extinguishing second liens on loans modified under this program.
• No payments will be made under the program to the lender/investor, servicer, or borrower unless and until the servicer has first entered into the program agreements with Treasury’s financial agent.
• Similar incentives will be paid for Hope for Homeowner refinances.
Transparency and Accountability
• Measures to prevent and detect fraud, such as documentation and audit requirements, will be central to the program.
• Servicers will be required to collect, maintain and transmit records for verification and compliance review, including borrower eligibility, underwriting, incentive payments, property verification, and other documentation.
• Freddie Mac will audit compliance.
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Home Affordable Modification Program Guidelines
Trial loan modifications consistent with these Guidelines may be offered to homeowners beginning on this date, March 4, 2009, and may be considered for acceptance into the Home Affordable Modification Program upon completion of the trial period and other conditions. These Guidelines, however, do not constitute a contract offer binding on the Department of the Treasury.
Program Elements Described in the Guidelines
Monthly Payment Reduction Cost Share:
Treasury will partner with financial institutions to reduce homeowners’ monthly mortgage payments. The lender will have to first reduce payments on mortgages to no greater than 38% Front-End Debt-to-Income (DTI) ratio. Treasury will match further reductions in monthly payments dollar-for-dollar with the lender/investor, down to a 31% Front-End DTI ratio for the borrower.
Servicer Incentive Payments and Pay for Success Fees:
Servicers will receive an up-front Servicer Incentive Payment of $1,000 for each eligible modification meeting guidelines established under this initiative. Servicers will also receive Pay for Success payments –as long as the borrower stays in the program – of up to $1,000 each year for up to three years.
Similar incentives will be paid for Hope for Homeowner refinances.
Borrower Pay-for-Performance Success Payments:
Borrowers are eligible to receive a Pay-for-Performance Success Payment that goes straight towards reducing the principal balance on the mortgage loan as long as the borrower is current on his or her monthly payments. Borrowers can receive up to $1,000 of Pay-for-Performance Success Payments each year for up to five years.
Current Borrower One-Time Bonus Incentive:
One-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers will be provided for modifications made while a borrower is still current on mortgage payments. The servicer will be required to maintain records and documentation evidencing that the Trial Period payment arrangements were agreed to while the borrower was less than 30 days delinquent. The servicer must comply with any express pooling and servicing contractual restrictions for modifying current loans.
1 Program Payment Conditions
No payments under the program to the lender/investor, servicer, or borrower will be made unless and until the servicer has entered into the program agreements with Treasury’s financial agent. Servicers must enter into the program agreements with Treasury's financial agent no later than December 31, 2009.
Eligibility Requirements
Pooling and Servicing Agreements:
The program guidelines reflect usual and customary industry standards for mortgage loan modifications contained in typical servicing agreements, including pooling and servicing agreements (PSAs) governing private label securitizations. Participating servicers are required to consider all eligible loans under the program guidelines unless prohibited by the rules of the applicable PSA and/or other investor servicing agreements. Participating servicers are required to use reasonable efforts to remove any prohibitions and obtain waivers or approvals from all necessary parties.
Origination Date of Loan Subject to Modification:
The mortgage to be modified must have been originated on or before January 1, 2009.
Program Expiration:
New borrowers will be accepted until December 31, 2012. Program payments will be made for up to five years after the date of entry into a Home Affordable Modification. Monitoring will continue through the life of the program.
Qualification Terms:
• The home must be an owner occupied, single family 1-4 unit property (including condominium, cooperative, and manufactured home affixed to a foundation and treated as real property under state law).
• The home must be a primary residence (verified with tax return, credit report, and other documentation such as a utility bill).
• The home may not be investor-owned.
• The home may not be vacant or condemned.
• Borrowers in bankruptcy are not automatically eliminated from consideration for a modification.
• Borrowers in active litigation regarding the mortgage loan can qualify for a modification without waiving their legal rights.
• First lien loans must have an unpaid principal balance (prior to capitalization of arrearages) equal to or less than:
o 1 Unit: $729,750
o 2 Units: $934,200
o 3 Units: $1,129,250
o 4 Units: $1,403,400
In Foreclosure Process:
Any foreclosure action will be temporarily suspended during the trial period, or while borrowers are considered for alternative foreclosure prevention options. In the event that the Home Affordable Modification or alternative foreclosure prevention options fail, the foreclosure action may be resumed.
Current LTV:
There is no minimum or maximum LTV ratio for eligibility purposes.
Loan Type Exclusions:
Loans can only be modified under the Home Affordable Modification program once.
Subordinate Financing:
Subordinate liens are not included in the Front-End DTI calculation, but they are included in the Back-End DTI calculation.
Solicitation to Borrowers/ Incoming Inquiries:
Servicers should follow any existing express contractual restrictions with respect to solicitation of borrowers for modifications.
Underwriting Analysis
Front-End DTI Target:
Front-End DTI is the ratio of PITIA to Monthly Gross Income. PITIA is defined as principal, interest, taxes, insurance (including homeowners insurance and hazard and flood insurance) and homeowners association and/or condominium fees. Mortgage insurance premiums are excluded from the PITIA calculation.
The Front-End DTI Target is 31%. The Standard Waterfall step that results in a Front-End DTI closest to 31%, without going below 31%, will satisfy the Front-End DTI Target. There is no restriction on reducing Front-End DTI below 31%, but any portion of the reduction below 31% will not be covered by the Payment Reduction Cost Share.
Property Value:
The servicer may use, at its discretion, either one of the government sponsored enterprises (GSEs) automated valuation model (AVM) – provided that the AVM renders a reliable confidence score – or a broker price opinion (BPO).
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As an alternative, the servicer may rely on the AVM it uses internally provided that (i) the servicer is subject to supervision by a Federal regulatory agency, (ii) the servicer’s primary Federal regulatory agency has reviewed the model and/or its validation and (iii) the AVM renders a reliable confidence score.
If the GSE or servicer AVM is unable to render a value with a reliable confidence score, the servicer must obtain an assessment of the property value utilizing a property valuation method acceptable to the servicer’s Federal regulatory agency, e.g. in accordance with the Interagency Appraisal and Evaluation Guidelines (as though such guidelines apply to loan modifications), or a BPO.
In all cases, the property valuation may not be more than 60 days old.
Income and Asset Validation:
The borrower’s income will be verified by requiring a signed Form 4506-T (Request for Transcript of Tax Return) and obtaining the most recent tax return on file for each borrower on the note. For wage earners, the two most recent pay stubs for each wage earner on the note will also be required. For self-employed borrowers or for non-wage income, the borrower’s income will be verified by obtaining other third party documents that provide reasonably reliable evidence of income.
Borrowers must also represent and warrant that they do not have sufficient liquid assets to make their monthly mortgage payments.
Monthly Gross Income:
The borrower’s Monthly Gross Income is the amount before any payroll deductions includes wages and salaries, overtime pay, commissions, fees, tips, bonuses, housing allowances, other compensation for personal services, Social Security payment, including Social Security received by adults on behalf of minors or by minors intended for their own support, annuities, insurance polices, retirement funds, pensions, disability or death benefits, unemployment benefits, rental income and other income.
Monthly net income can be used for preliminary screening and qualification. If used, the servicer will need to multiply net income by 1.25 to get to an estimate of Monthly Gross Income.
Back-End DTI:
The Back-End DTI is the ratio of the borrower’s total monthly debt payments (such as Front-End PITIA, any mortgage insurance premiums, payments on all installment debts, monthly payments on all junior liens, alimony, car lease payments, aggregate negative net rental income from 4
all investment properties owned, and monthly mortgage payments for second homes) to the borrower’s Monthly Gross Income. The servicer must validate monthly installment, revolving debt and secondary mortgage debt by pulling a credit report for each borrower or a joint report for a married couple. The servicer must also consider information obtained from the borrower orally or in writing concerning incremental monthly obligations.
Borrowers who otherwise qualify for a modification under this program, but who would have a post-modification Back-End DTI greater than or equal to 55%, will be provided with a letter stating that they are required to work with a HUD-approved counselor and the modification will not take effect until they provide a signed statement indicating that they will obtain counseling.
Reasonably Foreseeable / Imminent Default:
Every potentially eligible borrower who calls or writes in to their servicer in reference to a modification must be screened for hardship. This screen must ascertain whether the borrower has had a change in circumstances that causes financial hardship, or is facing a recent or imminent increase in the payment that is likely to create a financial hardship (payment shock). If the borrower reports a material change in circumstances, the servicer must ask about current income and assets, and current expenses as well as the specific circumstances relating to the claimed financial hardship. Each of these elements shall be verified through documentation.
If the servicer determines that a non-defaulted borrower facing a financial hardship is in Imminent Default and will be unable to make his or her mortgage payment in the immediate future, the servicer must apply the NPV Test.
Required Modifications and Optional Modifications:
A standard NPV Test will be required on each loan that is in Imminent Default or is at least 60 days delinquent under the MBA delinquency calculation. This NPV Test will compare the net present value (NPV) of cash flows expected from a modification to the net present value of cash flows expected in the absence of modification. If the NPV of the modification scenario is greater, the NPV result is deemed positive.
The NPV Test applies to the Standard Waterfall only and does not require consideration of principal forgiveness. However, the servicer may choose to forgive principal if the servicer determines that principal forgiveness improves the likelihood of loan performance and the value of modification. Required parameters for the NPV Test will be published separately.
If the NPV Test generates a positive result when applying the Standard Waterfall, the servicer is required to offer a Home Affordable Modification to the borrower. If the NPV Test generates a negative result, modification is optional, unless prohibited under contract. The monthly payment reduction incentive is available for any Home Affordable Modification, whether or not NPV positive, that meets the eligibility requirements and is performed according to the waterfall described below.
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.
Loan Modification and Standard Waterfall
Overview:
Servicers will follow the Standard Waterfall described below to reduce monthly payments to the 31% Front-End DTI Target defined above. The initiative will reimburse lenders/investors for one half of the cost of reducing monthly payments from a level consistent with a 38% Front-End DTI Ratio (or less, if the unmodified DTI is less than 38%) down to a level consistent with a 31% Front-End DTI Ratio. This Payment Reduction Cost Share can last for up to five years.
Hope for Homeowners:
Servicers will be required to consider a borrower for refinancing into the Hope for Homeowners program when feasible. Servicer incentive payments will be paid for Hope for Homeowner refinances.
If the underwriting process for a Hope for Homeowners refinance would delay eligible borrowers from receiving a modification offer, servicers will use the Standard Waterfall to begin the Home Affordability Modification and work to complete the Hope for Homeowners refinance during the Trial Modification Period.
Consideration for a Hope for Homeowners refinance should not delay eligible borrowers from receiving a modification offer and beginning the Trial Modification Period.
Standard Waterfall Process:
Step 1a: Request Monthly Gross Income as specified above.
Step 1b: Validate total first lien debt and monthly payments (PITIA). For
purposes of making a provisional modification offer during the trial modification period, the borrower’s unverified income and debt payments can be used. Provisional information and modification terms will be verified in a timely manner.
Step 2: Capitalize arrearage. Servicers may capitalize accrued interest, past due real estate taxes and insurance premiums, delinquency charges paid to third parties in the ordinary course of servicing and not retained by the servicer, any required escrow advances already paid by the servicer and any required escrow advances by the servicer that are currently due and will be paid by the servicer during the Trial Period. Late fees are not capitalized.
Step 3: Target a Front-End DTI of 31%. The lender/investor shall follow steps 4, 5, and 6 to reduce the borrower’s payment to the level corresponding to the Front-End DTI Target.
Step 4: Reduce the interest rate to reach the Front-End DTI Target (subject to a floor of 2%). The note rate should be reduced in increments of 0.125 %, and should bring the monthly payment as close as possible to the Front-End DTI Target without going below 31%. If the resulting modified interest rate is at or above the Interest Rate Cap, this modified interest rate will be the new note rate for the remaining loan term. If the resulting modified interest rate is below the Interest Rate Cap, this modified interest rate will be in effect for the first five years, followed by annual increases of 1% (100 basis points) per year or such lesser amount as may be needed until the interest rate reaches the Interest Rate Cap, at which time it will be fixed for the remaining loan term.
Step 5: If the Front-End DTI Target has not been reached, extend the term of the loan up to 40 years. If term extension is not permitted extend amortization. The 40-year term begins at the start of the modification (after the borrower successfully completes the Trial Period). Note that the servicer should only extend to a term that is necessary to reach the Front-End DTI Target; there is no requirement to extend to a 40-year term.
Step 6: If the Front-End DTI Target has not been reached, forbear principal. If there is a principal forbearance amount, a balloon payment of that forbearance amount is due on the maturity date, upon sale of the property, or upon payoff of the interest bearing balance. 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.
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Principal Reduction Option:
There is no requirement to use principal reduction under the Home Affordable Modification program; however, servicers may forgive principal to achieve the Front-End DTI Target.
Principal forgiveness can be used on a standalone basis or before any step in the Standard Waterfall process. If principal forgiveness is used, subsequent steps in the Standard Waterfall may not be skipped. If principal is forgiven and the rate is not reduced, the rate will be frozen at its existing level and treated as a modified rate for the purposes of the Interest Rate Cap.
In the event of principal forgiveness, the Payment Reduction Cost Share continues to be based on the change in the borrower’s monthly payment from 38% to 31% Front-End DTI ratio and is limited to five years.
Modification Terms
Interest Rate Floor:
The Interest Rate Floor for modified loans is 2%.
Interest Rate Cap:
The modified interest rate must remain in place for five years, after which time the interest rate will be gradually increased 1% (100 basis points) per year or such lesser amount as may be needed until it reaches the Interest Rate Cap.
The Interest Rate Cap for the modified loan is the lesser of (i) the fully indexed and fully amortizing original contractual rate or (ii) the Freddie Mac Primary Mortgage Market Survey rate for 30-year fixed rate conforming mortgage loans, rounded to the nearest 0.125%, as of the date that the modification document is prepared.
If the modified rate exceeds the Freddie Mac Primary Mortgage Market Survey rate in effect on the date the modification document is prepared, the modified rate will be the new note rate for the remaining loan term.
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Principal Forbearance:
No interest will accrue on the forbearance amount.
If the option to forebear principal is selected, the servicer shall forbear on collecting the deferred portion of the Capitalized Balance until the earliest of (i) the maturity of the modified loan, (ii) a sale of the property, or (iii) a pay-off or refinancing of the loan.
Redefaulting Loans:
A loan will be considered to have redefaulted when the borrower reaches a 90-day delinquency status under the MBA delinquency calculation. Redefaulting Loans will be terminated from the program, and no further payments of any kind will be made to the lender/investor, servicer, or borrower. Redefaulting Loans should be considered for other loss mitigation programs prior to being referred to foreclosure.
Approval Conditions
Trial Period Required:
Successful completion of the trial modification period and entry into program agreements between the servicer and Treasury’s financial agent are prerequisites for any payments to the lender/investor, servicer, or borrower.
Modification is effective the first calendar month following the successful completion of the Trial Period. Successful completion means that the borrower is current (under the MBA delinquency calculation) at the end of the Trial Period.
Borrowers in foreclosure restart states will be considered to have failed the Trial Period if they are not current at the time the foreclosure sale is scheduled.
No payments under the program to the lender/investor, lender, or borrower will be made during the Trial Period. No payments under the program to the lender/investor, servicer, or borrower will be made if the Trial Period is not completed successfully. No payments under the program to the lender/investor, servicer, or borrower will be made unless and until the servicer has entered into the program agreements with Treasury’s financial agent.
Length of Trial Period:
The Trial Period will last 90 days (three payments at modified terms) or longer if necessary to comply with investor contractual obligations. The
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borrower must be current at the end of the Trial Period to obtain a Home Affordable Modification.
Escrows:
Servicers are required to escrow for modified borrowers’ real estate taxes and mortgage-related insurance payments immediately if they have the capability of processing these payments or are already using a third-party vendor for this purpose. Servicers who do not have this capacity must implement an escrow process within six months of the program agreement.
Counseling Requirements:
For borrowers with a Back-End DTI of 55% or higher, the servicer must inform the borrower of the availability and advantages of counseling and provide a list of local HUD-approved counselors. The servicer must provide the borrower with a letter stating that counseling is a requirement of the modification terms. This letter may be required by counselors in order to begin counseling. The modification will not take effect until the borrower represents in writing that he or she will obtain counseling.
Assumable:
If the modified loan was assumable prior to modification, a Home Affordable Modification cancels this feature.
Fees/Charges
Modification Fees and Charges to Borrower:
There are no modification fees or charges borne by the borrower.
Modification Fees and Charges Reimbursable by Investor:
Modification fees and charges to the servicer will be reimbursable by the investor. These include notary fees, property valuation and other required fees. Servicer reimbursement by the investor will take place within the normal process between the servicer and the investor.
Unpaid Late Fees Waived:
Unpaid late fees will be waived for the borrower. These include late fees prior to the start of the Trial Period and accrued during the period.
Credit Report:
The servicer will cover the cost of the credit report.
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Compensation
Servicer Compensation:
Compensation is provided to the servicer that performs the loss mitigation or modification activities. Upon modification following successful completion of the Trial Period, and contingent on signing the program servicer agreement, the servicer will receive an incentive fee of $1,000 for each eligible modification meeting Home Affordable Modification guidelines.
Servicers will also receive Pay for Success fees – payable 12 months from the effective date of the Trial Period as long as the borrower continues in the program – of up to $1,000 each year for three years. Servicers will no longer receive Pay for Success incentive payments for Redefaulting Loans or for loans that have paid off subject to certain de minimis constraints (discussed below).
For loans modified while still current under the MBA delinquency calculation, the servicer will receive a Current Borrower One-Time Incentive of $500 following successful completion of the Trial Period.
Lenders that service their own loans are eligible for these incentives. Throughout this document the term “servicer” means the party that is responsible for performing the modification activities.
Similar incentives will be paid for Hope for Homeowner refinances.
Borrower Cash Contribution:
The investor may not require the borrower to contribute cash.
Lender/Investor Compensation:
Lenders/investors will be compensated only in the event that the Front-End DTI Target or a lower Front-End DTI is achieved. Lenders/investors will follow the Standard Waterfall specified above to reach a monthly payment that satisfies the Front-End DTI Target. As described above, Treasury will provide compensation based on one half of the dollar difference between the monthly payment for a 31% Front-End DTI Ratio and the lesser of (i) the monthly payment for a 38% Front-End DTI Ratio or (ii) the borrower’s current monthly payment. This compensation will be provided for up to five years or until the loan is paid off.
Upon a modification becoming effective following successful completion of the Trial Period by a borrower who was current prior to the start of the Trial Period, lenders/investors will be paid a $1,500 Current Borrower One-Time Incentive, subject to certain de minimis constraints (discussed below).
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No monthly lender/investor payments will be made during the Trial Period. Monthly lender/investor payments will begin after the Trial Period is successfully completed, the servicer signs a service agreement with Treasury, and formal modification begins. No monthly lender/investor payments will be made if the Trial Period is not completed successfully.
Borrower Compensation:
Borrowers will be eligible to accrue up to $1,000 each year in Pay-for-Performance Success Payments for up to five years, a total of up to $5,000 over five years, subject to certain de minimis constraints (discussed below). Accruals are based on on-time payment performance. The first annual principal balance reduction will be effective 12 months after entering the Trial Period as long as the borrower is not terminated from the program. In any given month, the borrower’s mortgage payment must be made on time, accounting for standard servicer grace periods, in order to accrue the monthly Pay for Performance Success Payment. The borrower will receive information on a monthly basis regarding the accrual of these payments.
The payment will be directed to the servicer, who will reduce the principal balance by the payment amount (but not by more than $1,000 per year) for five years if the borrower continues in the program. Payments are to be applied directly and entirely to reduce the principal balance, and any applicable prepayment penalties on partial principal prepayment made by the government must be waived. The equivalent of three months of Pay-for-Performance Success Payments will be made upon successful completion of the Trial Period, contingent upon the servicer signing a service agreement with the Treasury.
Borrowers who are terminated from the program lose their right to outstanding accruals.
De Minimis Constraint:
To qualify for servicer Pay for Success payments and borrower Pay for Performance Success Payments, the modification must reduce the monthly payment by a minimum of 6 %. The monthly payment is the PITIA payment, as used in defining DTI, with the loan fully indexed and fully amortized.
When paid, servicer annual Pay for Success payments and borrower Pay for Performance Success Payments will be the lesser of (i) $1,000 or (ii) half the reduction in the borrower’s annualized monthly payment.
The de minimis constraint does not apply to the up-front Servicer
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Incentive Payment, the Payment Reduction Cost Share, or the Home Price Depreciation Reserve Payment.
Consumer Protection
Disclosure
When promoting or describing loan modifications, servicers should provide borrowers with information designed to help them understand the modification terms that are being offered and the modification process. Servicers also must provide borrowers with clear and understandable written information about the material terms, costs, and risks of the modified mortgage loan in a timely manner to enable borrowers to make informed decisions.
Fair Lending
Servicers’ modifications under this program must comply with the Equal Credit Opportunity Act and the Fair Housing Act, which prohibit discrimination on a prohibited basis in connection with mortgage transactions. Loan modification programs are subject to the fair lending laws, and servicers and lenders should ensure that they do not treat a borrower less favorably than other borrowers on grounds such as race, religion, national origin, sex, marital or familial status, age, handicap, or receipt of public assistance income in connection with any loan modification. These laws also prohibit redlining.
Consumer Inquiries and Complaints
Servicers should have procedures and systems in place to be able to respond to inquiries and complaints relating to loan modifications. Servicers should ensure that such inquiries and complaints are provided fair consideration, and timely and appropriate responses and resolution.
Monitoring
Documentation:
Servicers will be required to maintain records of key data points for verification/compliance reviews. These documents may include, but are not limited to, borrower eligibility and qualification, underwriting criteria, and incentive payments. These documents also include a hardship affidavit, which every borrower is required to execute.
Borrowers will be required to provide declarations under penalty of perjury attesting to the truth of the information that they have provided to the servicer to allow the servicer to determine the borrower’s eligibility for entry into the Home Affordable Modification Program.
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Detailed guidance on data requirements will be released separately.
Anti-Fraud Measures:
Measures to prevent and detect fraud, such as documentation and audit requirements, will be described in the servicer guidelines and the program guidelines in the financial agency agreements with Fannie Mae and Freddie Mac. Additional fraud protection measures will be announced by Treasury.
Participating servicers and lenders/investors are not required to modify the loan if there is reasonable evidence indicating the borrower submitted false or misleading information or otherwise engaged in fraud in connection with the modification. Servicers should employ reasonable policies and/or procedures to identify fraud in the modification process.
Data Collection:
Servicers will be required to collect and transmit borrower and property data in order to ensure compliance with the program as well as to measure its effectiveness. Data elements may include data needed to perform underwriting analysis, loan modification and waterfall analysis, and modification terms. In addition, borrower profiles and property level information may be included. Detailed guidance on data requirements will be released separately.
Accounting and Legal:
The provisions of the Program s
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