Treasury Releases Loan Mod Details

The ""Treasury Department"":http://www.treasury.gov/press/releases/tg48.htm released ""guidelines"":http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf on Wednesday that will enable servicers to begin modifications of eligible mortgages under the administration's Homeowner Affordability and Stability Plan - announced by President Barack Obama just two weeks ago.
The loan modification component of the federal government's housing recovery plan is intended to help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. The ""Making Home Affordable"":http://www.treasury.gov/press/releases/reports/housing_fact_sheet.pdf program, as it has been dubbed by the administration, is expected to become standard industry practice in performing affordable and sustainable mortgage modifications. The program will work in tandem with the GSE Home Affordable Refinance program, which will allow another 4 to 5 million homeowners with mortgages owned by Fannie Mae or Freddie Mac refinance into lower interest loans.
The Making Home Affordable loan mod program involves a $75 billion commitment from the federal government, materialized in the form of incentive payments to lenders, servicers, and investors, as well as principal reduction payments for homeowners who remain current on their modified loan. Additional incentives are given to servicers on modifications made for borrowers at imminent risk of default but who have not yet missed payments.
Eligible mortgages include loans originated on or before January 1, 2009 for owner-occupied properties with unpaid principal balances up to $729,750. Modifications can be made for first liens only, but the program does now include an optional incentive that allows servicers to offer second lien holders a partial payment for the modification in exchange for dissolution of that second lien.
All borrowers must fully document income and must sign an affidavit of financial hardship. Owner occupancy status will be verified through borrower credit report and other documentation to ensure no investor-owned, vacant, or condemned properties are included in the program. Servicers are also expected to put procedures in place to prevent fraud, and detailed records must be kept for audit and verification, administration officials said.
Modifications can start from now until December 31, 2012, and loans can be modified only once under the program. Government officials did say, however, that borrowers who have already received mortgage modifications that are not consistent with the new guidelines are eligible for re-modifications under the Making Home Affordable program.
A senior representative from the Department of Housing and Urban Development (HUD) participating in the announcement to the media this morning stressed that access to the program is free, warning homeowners to beware of rescue scams that claim to charge a fee for a government modification.
Servicers are encouraged to modify all eligible loans under the rules of the program unless explicitly prohibited by the mortgage's servicing contract or agreement, and if this is the case, servicers are required to use ""reasonable efforts"" to obtain waivers for any limitations on participation in the government program.
Loan servicers will be required to use a standard net present value (NPV) test on each loan that is at risk of imminent default or is at least 60 days delinquent. The NPV test will compare the net present value of cash flows with and without modification. If the test is positive - meaning that the net present value of expected cash flow is greater with a modification - the servicer must modify. If the NPV test returns a negative result, modification is optional. Parameters of the NPV test are provided in the ""guidelines"":http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf, including acceptable discount rates, methods of property valuation, 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 homeowners' monthly payments, first bringing the amount down to 38 percent of gross monthly income. The government will then share in the obligation to lower payments even further to 31 percent of borrowers' income. The first step in the process involves reducing the interest rate (with a floor level of 2 percent). Then, the term of the loan can be extended up to 40 years, and if necessary, the principal can be reduced. The homeowner's monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner’s association and/or condominium fees.
On a Treasury conference call with the media, Mike Heid, co-president of Wells Fargo Home Mortgage, said systems and process changes to fully implement the new program could take a couple of weeks, but he said that Wells Fargo and other major servicers have already begun taking steps to quickly put the new program into place. Heid added that he expects significant increases in calls and responses related to the Making Home Affordable program - a ""flood of activity,"" he said, advising consumers to remain patient, but persistent to obtain the help they need.
James B. Lockhart III, director of the Federal Housing Finance Agency (FHFA) said that Fannie Mae and Freddie Mac will be participating in the Making Home Affordable loan mod program, both for loans that they own or guarantee and as administrators on behalf of the Treasury Department for all loan modifications made under the program. ""This program is a major step forward in reducing preventable foreclosures and stabilizing the housing market,"" Lockhart said.
Lockhart added, ""With the concerted effort of mortgage servicers, mortgage insurers, Fannie Mae, Freddie Mac and all other holders of first and second mortgages, we will be able to prevent millions of foreclosures.""
Senior Treasury officials said the new program will not only bring relief to responsible homeowners struggling to make their mortgage payments, but will prevent neighborhoods and communities from suffering the negative spillover effects of foreclosure, such as lower housing prices, increased crime, and higher taxes.
In conjunction with the release of the new ""guidelines"":http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf, the Treasury, HUD, and other members of a broad inter-agency task force have prepared consumer friendly Q&A and eligibility assessment tools for borrowers available at ""FinancialStability.gov"":http://www.financialstability.gov. To ensure the program can be implemented as quickly as possible, the agencies also have conducted extensive outreach with housing counselors and mortgage servicers, including the development of call center phone scripts, a training plan, and detailed guides, to prepare them for incoming inquiries from borrowers in the wake of the guidelines release.
In addition, an expanded online resource will soon be available for borrowers, and agency representatives will fan out across the country in the coming weeks to conduct outreach at homeownership events in communities hardest hit by the housing crisis.