Q&A: HOME AFFORDABLE MODIFICATION PROGRAM

Q 41. What is a Home Affordable Modification?

A The Home Affordable Modification is a component of the Making Home Affordable Program of the Obama Administration. This $75 billion program aims to help 3 to 4 million homeowners who are at risk of foreclosure modify their loans. It provides financial incentives for both lenders and borrower to modify existing first trust deeds. $50 billion for the program will come from the remaining $350 billion in Troubled Asset Relief Program (TARP) funds and the remaining $25 billion will come from Fannie Mae and Freddie Mac.

Q 42. How does a Home Affordable Modification work?

A The Home Affordable Modification program is a government subsidy for loan modifications. First, a participating lender must voluntarily agree to modify the loan terms for a first trust deed so that the borrower’s monthly mortgage payment does not exceed 38 percent of his or her income. Next, the federal government will match what the lender did dollar-for-dollar to reduce the debt-to-income ratio down to 31 percent.

The borrower will be put on a trial modification at the new payment and terms for three months. If a borrower is current at the end of the trial modification period, the loan servicer will execute a modification agreement, including an impound account for taxes and insurance
As an example, assume a borrower pays 45% of her monthly income for her mortgage payment on a $220,000 loan. If her lender voluntarily agrees to reduce her mortgage payment down to 38% of her income, the federal government will match that, dollar-for-dollar, to bring her debt-to-income ratio further down to 31%. The loan modification could save the borrower over $400 per month on her mortgage payments.

Q 43. What is the purpose of the Home Affordable Modification program?

A The purpose of the Home Affordable Modification program is to prevent foreclosures by making mortgage payments more affordable for working homeowners who are struggling to keep their homes. The program is not intended to replace lost equity. However, if the program prevents avoidable foreclosures, it will stabilize property values which will benefit all homeowners.

Q 44. When does the Home Affordable Modification program take effect?

A The intent is for Home Affordable Modifications to begin immediately. However, the contracts that the Treasury Department will require participating loan servicers to enter into are not expected to be available until April 2009. Once contracts with servicers and investors are signed, a list of participating lenders will be made available to the public at http://www.financialstability.gov/.

Q 45. What are the eligibility requirements for a Home Affordable Modification?

A The eligibility requirements for a Home Affordable Modification are as follows:

• Borrower occupies the property as a primary residence;
• Property is one-to-four units;
• Loan to be modified is a first trust deed;
• Borrower’s monthly mortgage payment (including taxes, insurance, and homeowners association dues) exceeds 31% of the borrower’s gross monthly income;
• Borrower has experienced a significant change in income or expense to the point that the current mortgage payment is no longer affordable;
• Unpaid principal balance is $729,750 or less (for one unit properties and higher for two-to-four units); and
• Loan was originated before January 1, 2009.

In addition to the above, a borrower with a “back end” debt (i.e. monthly housing, credit card, and car payments) of 55% or more of his or her income will be required, as a condition for the modification, to enter into a HUD-certified consumer debt counseling program.

Q 46. How will a participating lender reduce a borrower’s monthly payments?

A A participating lender may elect to reduce the interest rate on a loan down to a 2% minimum. If the borrower’s debt-to-income ratio is still above 31%, the next step for the lender is to increase the amortization period up to 40 years. If the borrower’s debt-to-income ratio is still more than 31% then the lender must forbear (defer) principal.

A lender may always elect to forgive principal rather than lower the interest rate, extend the amortization, or forbear on the principal balance. However, loan servicers are not required to offer permanent principal reductions.

If a lender reduces the interest rate under the Home Affordable Modification program, the interest rate must be a minimum of 2% and fixed for five years, after which the lender could gradually raise the interest rate no more than one percentage point per year until the note rate reaches the Freddie Mac Primary Mortgage Market Survey rate on the date the loan modification was executed. If the modified rate is higher than the Survey rate, the interest rate for the remaining loan term will be the modified rate.

Q 47. How does a forbearance of principal work under a Home Affordable Modification?

A If a participating lender agrees to forbear (defer) principal, the deferred principal will be owed when the house is sold or refinanced or the loan is otherwise paid off. The amount of the deferred principal will be a balloon payment, but it will not accrue interest. If the lender extends the amortization period without extending the loan term, the balloon payment may be even bigger.

Q 48. How do homeowners determine whether they qualify for a Home Affordable Modification?

A A self-assessment tool is available for homeowners to determine whether they are eligible for a Home Affordable Refinance or Modification at http://www.financialstability.gov/makinghomeaffordable/.

Q 49. Are loans other than Fannie Mae or Freddie Mac loans eligible for a Home Affordable Modification?

A Yes. Most conventional loans including prime, subprime, adjustable, loans owned by lenders, and loans in securities, are eligible for a Home Affordable Modification. FHA and VA loans are not eligible for a Home Affordable Modification, but these agencies may offer other modification programs to help borrowers stay in their homes.

Q 50. Does a Home Affordable Modification cost anything for the borrower?

A No. The borrower incurs no modification fee or charge for a Home Affordable Modification.

Q 51. Does a borrower have to be delinquent on his or her mortgage payments to qualify for a Home Affordable Modification?

A No. Borrowers who are delinquent or simply struggling to remain current on their mortgage payments may qualify for a Home Affordable Modification if they are at risk of imminent default. As an example, a couple may qualify because they have had or will soon have a significant increase in their mortgage payment that they cannot afford.

Q 52. Is a borrower with both a first and second trust deed eligible for a Home Affordable Modification?

A Yes. A borrower with both a first and second trust deed can still apply for a Home Affordable Modification, but only the first trust deed will be modified. The second trust deed lender will be required to subordinate to the modified loan. The Home Affordable Modification program provides an incentive payment of up to $1,000 to pay off junior lien holders.

Q 53. Is a borrower eligible for a Home Affordable Modification if he or she is currently upside down on the property (i.e. owes more on the mortgage loan than the property is worth)?

A Yes, but a lender under this program is not required to reduce the principal balance.

Q 54. Is a lender required to modify a loan under the Home Affordable Modification program?

A No, in most cases. A mortgage lender may generally choose whether to participate in the Home Affordable Modification program. However, participation in the program is mandatory for any institution that accepts future funding from the Treasury’s Financial Stability Program.

Once a lender participates in the program, it must screen any borrower who contacts the servicer and meet the minimum eligibility criteria to determine if he or she is at risk of imminent default. During this screening, the loan servicer must ascertain whether a 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). All loans that meet eligibility requirements must be modified, unless there is fraud or modification is prohibited by the loan servicing agreement.

Q 55. Are mortgage insurance companies required to participate in the Home Affordable Modification program?

A No. However, the major mortgage insurance firms have agreed to help prevent foreclosures by developing a procedure for them to make partial claims on modified loans where appropriate.

Q 56. What are the monetary incentives for a Home Affordable Modification?

A Monetary incentives will be given to loan servicers, lenders, and borrowers under the Home Affordable Modification program. Loan servicers will receive $1,000 as an upfront fee for every eligible modification. They also will receive up to $1,000 per year for three years as a “pay for success fee” awarded monthly if the borrower stays current on the loan. They will also receive $500 and the mortgage holders will receive $1,500 if they modify an at-risk loan before the borrower becomes delinquent. The loan servicer is also eligible to receive $500 for efforts made to extinguish second liens on loans modified and an extra $250 for obtaining a release of a valid second lien.

The Home Affordable Modification program also has monetary incentives for borrowers. After a 90-day trial period, borrowers with modified loans will receive $1,000 per year for five years as success incentives to stay current on their mortgage loan. This incentive will be provided to a borrower in the form of a monthly reduction in the principal balance owed.

Q 57. Are monetary incentives available for short sales and deeds in lieu of foreclosure?

A Yes. Participating loan servicers will receive incentives to take alternatives to foreclosure, like short sales or deeds in lieu of foreclosure. Loan servicers will be eligible for a $500 incentive and can make reimbursable payments up to $1,000 to extinguish other liens. Borrowers are eligible for a payment of $1,500 in relocation expenses if they effectuate short sales and deeds in lieu of foreclosure. These incentives for short sales and deeds in lieu of foreclosure are available to encourage families and loan servicers to avoid the costly foreclosure process and minimize the damage that foreclosure inflicts on lenders, borrowers, and communities.

Q 58. What is the Home Price Decline Reserve Fund?

A Under the Home Affordable Modification Program, the U.S. Treasury Department will establish a $10 billion reserve fund to encourage lenders to modify loans. In a down market, lenders may opt to foreclose rather than restructure a loan when they fear that home values will fall later on. This insurance fund will encourage a lender to modify the loan instead by making an insurance payment to the lender in cash for any decline in a home price index for each modified loan.