On November 30, 2009 the administration released the Home Affordable Foreclosure Alternatives Program, (“HAFA”) which simplifies procedures and offers financial incentives for completing short sales.  (A “short sale” occurs when a lender agrees to accept less than the amount owed in exchange for releasing its mortgage.)

The new federal guidelines seek to eliminate many of the barriers that have often derailed short sales.  Banks will have a time limit to approve an offer, the claims of subordinate lenders (2^nd mortgage holders) have been capped, and borrowers will be released from the remaining debt—at least on first mortgages.

There are now financial incentives for approving short sales and deed-in-lieu transactions, including a payment of $1000 to the mortgage servicer and other incentives.  In addition, the borrower can receive $1500 for moving expenses.

Many realtors, buyers, and sellers have long been frustrated by the red tape of a short sale because of the exhausting negotiations involved.  It’s hard enough to reach an office consensus on what toppings to put on a pizza, but try to get a buyer, seller, lender, and a mortgage insurance company to agree is to the terms of a deal is almost impossible—at least in a reasonable amount of time.  Lenders often complain about the sales price and distribution of proceeds. They also squabble over whether the borrower can be responsible for the remaining debt.  And that’s if you are even lucky enough to get a response from the lender.

The good news for realtors is that mortgage servicers may not reduce the commissions paid to realtors.  This is welcome news to real estate agents and good news for homeowners looking to do a short sale.

With the new rules in place, mortgage servicers have ten days to consent to a request for a short sale, and upon completion of the sale, the borrower must be fully released from the mortgage note.  That means no more personal liability following the seller.  This is excellent news for borrowers.  Before the new rules, the mortgage servicer could accept less for the house, then sue the former homeowner for the rest of the money owed.

Remember, these new guidelines apply only to lenders subject to federal oversight.  If your bank is state chartered, then they will not be held to these rules, but most of the big lenders will.

Wondering if your home is eligible?  According to the Home Affordability Modification Program, a loan meets the basic eligibility criteria if all of the following conditions are met:

• The property is the borrower’s principal residence;
• The mortgage loan is a first lien mortgage originated on or before January 1, 2009;
• The mortgage is delinquent or default is reasonably foreseeable;
• The current unpaid principal balance is equal to or less than $729,750; and
• The borrower’s total monthly mortgage payment (as defined in Supplemental Directive 09-01) exceeds 31 percent of the borrower’s gross income.

The full set of guidelines can be found here.

While I hope this program will actually help to streamline short sales or other loan modifications, I’m highly skeptical.  Like all other federal programs dealing with mortgage modification, the HAMP program and the HAFA initiatives are voluntary.  In addition, HAMP and HAFA don’t apply to laons guaranteed by Fannie Mae or Freddie Mac–about half of all mortgages are guaranteed by these two giants.  (However, Fannie and Freddie are to issue their own progam guidelines in the near future.)

The deadline for banks to enroll in this program is April 1, 2010.  The program takes effect on April 5, 2010 and terminates on December 31, 2012.  Many believe that since lenders have only ten days to respond to a short sale request, lenders will decline to participate.   Here’s a list of financial institutions participating in HAFA.

Let’s hope this added feature to the HAMP program is effective.  At this point, HAMP has been widely regarded as a failure.

Photo by Marissa DeMott

You or your client has a document entitled “general durable power of attorney.”  Will it be sufficient for the closing? 

First, let’s discuss exactly what a general durable power of attorney is and what it’s not.  Powers of attorney are documents giving attorneys-in-fact or agents power to act on behalf of the principal.  By way of example, if Mom names Son as her attorney-in-fact, Son may act on her behalf.  Exactly what Son may do depends on how the document is drafted.  That’s what the “general” means in a general durable power of attorney: that the attorney-in-fact has authority to do anything the person granting it can do.   The attorney-in-fact can buy property, sell property, file tax returns, bring lawsuits, open and close accounts-anything.  A general durable power of attorney is a lot like Grandma’s night shirt: it covers everything. 

Where’s the “durable” come in?  Durable means that the authority remains even if the principal-in our example, Mom-becomes physically or mentally incapacitated.  A typical durability provision might read like this: “This durable Power of Attorney is not affected by my physical disability or mental incompetence which renders me incapable of managing my own affairs and shall continue in effect until my death or until revoked by me in writing.”  This makes perfect sense, because the reason general durable powers of attorney are given is to insure that the principal’s affairs will be managed if she can’t act on her own behalf.  If Mom has a stroke or gets into an auto accident, she wants Son to be able to manage her financial affairs.

So if a general durable power of attorney covers everything, won’t it work for closings?  The answer depends on whether the title insurance company permits the document to be used.  Usually, a general durable power of attorney can be used if it’s not more than two or three years old and, of course, grants the necessary powers to the attorney-in-fact.  However, different title insurance companies have different policies regarding general powers of attorney.  To complicate things further, some lenders allow them to be used, and others don’t.

However, “special” powers of attorney are almost universally allowed by title insurance companies and lenders.  If a general power of attorney is like grandma’s night shirt, a special power of attorney is more like a string bikini: it covers very little, just the essentials.  A special power of attorney will provide that the attorney-in-fact has authority to purchase (or sell) the particular property at issue in the closing.  Beyond that, it won’t say anything more.  Nothing about tax returns, bank accounts, or anything else.  It’s clear, therefore, that the person granting the speicial power of attorney knowingly authorizes the attorney-in-fact to do the one thing the form deals with: buy or sell property.

The lesson here is that with either type of power of attorney, you need to check with the closing attorney to make sure the document is properly drafted, properly executed, and acceptable to the necessary parties to the transaction.  And remember, sometimes less is more!

–Russ DeMott

Photo by Michael Mulligan

In my last post, “Can’t Get No Satisfaction (Part One),” we examined the legal effect of an unsatisfied mortgage.  This post will address one commonly used solution to an unsatisfied mortgage, as well as the penalties a lender faces under South Carolina law for failure to satisfy a mortgage once full payment has been made.

First, if there’s no satisfaction recorded, you should contact the prior closing attorney.    If the attorney paid off the mortgage at closing, the attorney may issue an “Attorney Satisfaction.”  See  S.C. Code Ann. §29-30-330.  When the Attorney Satisfaction is recorded, it has the same legal effect as if the lender recorded the satisfaction; that is, title is rendered marketable.

Second, South Carolina law has a stiff penalty for lenders who fail to issue a satisfaction once the mortgage note is paid in full and the borrower has made a valid request for the satisfaction.  If the lender fails to satisfy the mortgage within three months of a valid request, the lender must pay the borrower either $25,000 or one-half of the mortgage note amount, whichever is less, along with any other damages, costs, and attorney’s fees.  See  S.C. Code Ann. §29-3-320.

The South Carolina Supreme Court recently outlined the process of triggering the lender’s liability in Dykeman v. Wells Fargo Home Mortg., Inc. (S.C. 2009) 2009 WL 294745.   The Court held that for the penalty to apply, a borrower must show: “(1) that he has made full payment of his debts, including any applicable damages, costs, and charges, (2) that he has made a ‘request by certified mail or other form of delivery’ that the mortgage be satisfied of record, (3) that he has made a ‘tender of fees of office for entering satisfaction,’ and (4) that the mortgagee has failed to ‘enter satisfaction in the proper office on the mortgage’ within three months of the request.” The request for satisfaction has no standard format, and need only convey an “affirmative desire” on the part of the borrower to have the mortgage satisfied. The fee required to record a mortgage satisfaction in South Carolina is $5.

–Russ DeMott

Photo by Michael Mulligan

There is good news for any tenant facing eviction after foreclosure.  The Protecting Tenants at Foreclosure Act of 2009, which became law on May 20, guarantees almost all tenants at least 90 days after receiving notice of foreclosure before they can be evicted from their homes. This applies even to month-to-month leases.  And even better news for some tenants is that they may be able to remain in their homes for the remainder of their lease terms, giving them an opportunity to make alternative housing arrangements.  Of course, this does not bode well for lenders, who may find themselves reluctantly managing rental properties over the next three years.    

So if you’re the tenant, how do you know how long you can stay in the house if the bank forecloses?  

• If the new owner plans to use the property as a personal residence, you get at least 90 days to vacate.  If you’re living in the property month-to-month, you also get 90 days to vacate.
• If your lease is up next month, guess what? You still get 90 days to vacate.
• If, however, the new owner isn’t going to use the property as a personal residence, you get to stay in the home until your lease expires.

One important point: leases have to be “bona fide” in order for the tenant to qualify for this protection.  If you’re living in the house for a dollar a month because your cousin really likes you (or because he lost a bet), you’re probably not protected by this Act.  To be considered a bona fide lease, three requirements must all be met: “(1) the mortgagor or the child, spouse, or parent of the mortgagor under the contract is not the tenant; (2) the lease or tenancy was the result of an arms-length transaction; and (3) the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property or the unit’s rent is reduced or subsidized due to a Federal, State, or local subsidy.”  Consequently, new owners may have a valid defense in some circumstances.

 Check out the National Low Income Housing Renters in Foreclosure Toolkit at  http://www.nlihc.org/template/page.cfm?id=227

–Russ DeMott

–Russ DeMott

Subsequently on April 6, 2009, Treasury issued Supplemental Directive 09-01,[2] which provided additional guidance to servicers for adoption and implementation of the HMP for residential mortgage loans that are not owned, securitized or guaranteed by Fannie Mae or Freddie Mac.  For this latter category, the HMP is only applicable if the servicer has agreed to participate in the HMP.[3]

If applicable, the HMP requires the temporary suspension of foreclosure actions.[4]  The HMP is scheduled to expire on December 31, 2012, and has no application to a mortgage originated after January 1, 2009.

On May 4, 2009, I issued a temporary restraining order (TRO) based on a motion filed by Fannie Mae.[5]  This TRO had to be issued on an ex parte basis, and it was anticipated that it would be replaced by a subsequent order. 

To insure that eligible homeowners have been afforded the benefits available under the HMP, the procedures for handling issues relating to the HMP are handled uniformly throughout the State, and mortgage foreclosure actions are not unnecessarily dismissed or delayed while HMP issues are resolved, I direct the following:

(1) Actions Filed After May 4, 2009.  In all mortgage foreclosure actions filed after May 4, 2009, the complaint (or amended complaint) seeking foreclosure shall contain “a short and plain statement of the facts”[6] regarding the applicability of the HMP to the matter.  For mortgages involving commercial property, the complaint may simply allege that the property is commercial and that the HMP is inapplicable.[7]

For mortgages involving residential property, the complaint shall state if the mortgage loan is owned, securitized or guaranteed by Fannie Mae or Freddie Mac, or if the servicer is participating in the HMP.  If so as to either, the complaint shall state the facts showing that the loan is not subject to modification under the HMP,[8] or state the facts showing that the HMP modification process specified by the Guidelines or Supplemental Directive has been completed without resulting in a modification.[9]  If these allegations are contested by the answer or the judge allows the issue to become contested at some later stage of the proceeding, any dispute regarding the eligibility of the mortgage loan for modification under the HMP or the satisfaction of the requirements of the HMP if it applies, shall be resolved like any other contested issue in a mortgage foreclosure case.  Sections (3) and (4) of this order relate to the effect of the HMP determinations made by the judge.   

(2) Actions Pending on May 4, 2009.  In all mortgage foreclosure actions pending on May 4, 2009, the party seeking foreclosure should have served the affidavit required by the TRO by May 15, 2009.  If the affidavit was timely served under the TRO, any counter affidavit asserting that the loan is subject to modification under the HMP or that the requirements of the HMP have not been meet, should be served by May 22, 2009.

If the party seeking a foreclosure did not serve the affidavit by May 15, 2009, as required by the TRO, the matter will be stayed until the party seeking foreclosure serves and files an affidavit regarding the applicability of the HMP to the matter.  For mortgages involving commercial property, the affidavit may simply allege that the property is commercial and that the HMP is inapplicable.

For residential mortgages, the affidavit shall state if the mortgage loan is owned, securitized or guaranteed by Fannie Mae or Freddie Mac, or if the servicer is participating in the HMP.  If so as to either, the affidavit shall state the facts showing that the mortgage loan is not subject to modification under the HMP, or state the facts showing that the HMP modification process specified by the Guidelines or Supplemental Directive has been completed without resulting in a modification.  In the alternative, the affidavit may concede that the matter should be stayed until the HMP modification process is completed.  If the affidavit is not served within ninety (90) days of the date of this order, the foreclosure action may be dismissed.   If the affidavit is served, any other party to the action shall have ten (10) days to serve a counter affidavit.

A copy of any affidavit or any counter affidavit (whether served before or after this order), along with proof of service, shall immediately be filed with the court where the action is pending.

The judge shall consider the affidavit and any counter affidavit that may be filed to determine if there is any contested issue that must be resolved regarding the eligibility of the loan for modification under the HMP or satisfaction of the requirements of the HMP if it applies.  If so as to either, the judge shall resolve this issue like any other contested issue in a mortgage foreclosure action.  If a counter affidavit is not timely served, the determination of whether there are HMP issues which need to be resolved before foreclosure is ordered or the sale is commenced shall be based on the affidavit alone unless the judge allows the late service and filing of the counter affidavit or allows the issue to become contested at some later stage of the proceeding.   Sections (3) and (4) of this order relate to the effect of the HMP determinations made by the judge.

(3) Determination that the HMP is Applicable But the HMP Process Has Not Been Completed.  If a judge determines that the HMP is applicable but that the process to determine if a modification will be made under the HMP has not been completed, the foreclosure action shall not be dismissed but shall be stayed until the HMP process is completed (including any trial period before a modification becomes effective).  If the action is stayed, the party seeking foreclosure will advise the court of the status of the matter every thirty (30) days; the failure to do so may result in dismissal of the action.  If the loan is modified under the HMP, the parties shall immediately notify the judge so that the mortgage foreclosure action can be dismissed.  Nothing in this order shall be construed as preventing the party seeking foreclosure from voluntarily dismissing the foreclosure action.[10]

(4) Determination that Mortgage Loan is Not Subject to Modification under the HMP.  If a judge determines that the HMP is either inapplicable to the mortgage loan or that the HMP requirements have been satisfied without resulting in a modification, the foreclosure action may continue.  This includes the consummation of any sales conducted on or prior to May 4, 2009.

(5) TRO Rescinded.  The TRO previously issued by me on May 4, 2009, is hereby rescinded.  Instead, the provisions of this Administrative Order shall govern foreclosure actions potentially affected by the HMP.[11]

(6) Judicial Sales in Mortgage Foreclosure Cases.  Nothing in this order shall be construed as preventing a judge from setting additional sales days under S.C. Code Ann. §15-39-680 (2005).  Further, where an order of foreclosure was issued on or before May 4, 2009, nothing in this order shall be construed as preventing the judge from directing the advertising of the property for sale so long as any issue regarding the HMP is resolved before the sale occurs.

For the purpose of this order, the term “judge” shall include a circuit court judge, master-in-equity and special referee.  If this order requires service of an affidavit or counter affidavit upon a party, service shall be accomplished as provided by Rule 5(b)(1), SCRCP, and service shall be made on all parties to the action.

 IT IS SO ORDERED.

Columbia, South Carolina
May 22, 2009

[2] Available at www.hmpadmin.com/docs/Supplemental_Directive_09-01.pdf.

[3] A list of those servicers who have agreed to participate may be found at http://makinghomeaffordable.gov/contact_servicer.html. 

[4]   The Guidelines state:

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.

In relevant part, the Supplemental Directive states:

To ensure that a borrower currently at risk of foreclosure has the opportunity to apply for the HMP, servicers should not proceed with a foreclosure sale until the borrower has been evaluated for the program and, if eligible, an offer to participate in the HMP has been made. Servicers must use reasonable efforts to contact borrowers facing foreclosure to determine their eligibility for the HMP, including in-person contacts at the servicer’s discretion. Servicers must not conduct foreclosure sales on loans previously referred to foreclosure or refer new loans to foreclosure during the 30-day period that the borrower has to submit documents evidencing an intent to accept the Trial Period Plan offer. Except as noted herein, any foreclosure sale will be suspended for the duration of the Trial Period Plan, including any period of time between the borrower’s execution of the Trial Period Plan and the Trial Period Plan effective date.  

[5] This order and the motion are available at www.sccourts.org/whatsnew/displaywhatsnew.cfm?indexID=526.

[6]  Rule 8(a), SCRCP.

[7]   For example, the complaint could simply state:  “Since this foreclosure action involves a mortgage on a commercial office building, the Home Affordable Modification Program is inapplicable.”

[8]  Despite the fact that the loan is owned, securitized or guaranteed by Fannie Mae or Freddie Mac, or the servicer is participating in the HMP, there are numerous other requirements that may prevent the loan from being eligible for modification under HMP.  For example, modification under HMP is not available if the property is not a single family 1 – 4 unit property, the property is not the primary residence of the homeowner, the mortgage originated after January 1, 2009, the unpaid principal balance exceeds certain specified amounts, the property is vacant or condemned, or the loan has been previously modified under the HMP.  For specifics on these and other requirements, the Guidelines and Supplemental Directive should be consulted.  For homeowners, there is an interactive website to assist them in determining if the mortgage loan is potentially subject to modification under the HMP:  http://makinghomeaffordable.gov/modification_eligibility.html.

[9]  If the HMP is applicable and the modification process has not been completed, the action should not be filed.

[10]   I am concerned that there may be a significant number of actions that may be stayed while the HMP process is completed.  I expect the party seeking foreclosure to complete the process and make a determination if the mortgage loan will be modified in a prompt and diligent manner.  If this is not done and the number of cases stayed reaches an unacceptable level, this order may be modified to allow for the dismissal of actions which are stayed and not resolved in a reasonable period of time.   

[11] In response to the TRO, six law firms (the Scott Law Firm, P.A.; Rogers, Townsend, Thomas, P.C.; the Finkel Law Firm, L.L.C.; Fleming & Whitt, P.A.; the Korn Law Firm, P.A.; and the Weston Adams Law Firm) have filed a motion seeking a state-wide scheduling order.  The South Carolina Department of Consumer Affairs, South Carolina Legal Services, the law firm of Harrison & Radeker, P.A., and the South Carolina Appleseed Legal Justice Center have filed returns to the motion.  In addition, the six law firms have filed a reply and an amended reply. These filings have been considered in issuing this order.

In its return, Consumer Affairs points out that, in addition to HMP, other parts of the MHAP may provide relief to homeowners.  This includes Fannie Mae and Freddie Mac allowing refinancing of mortgage loans that they own or that they placed in mortgage backed securities where homeowners are current on their loans, Short Sales/Deeds-in-Lieu Program and the Home Price Decline Protection Incentives.  While these programs are beyond the scope of this order, the following links provide information about those programs: www.freddiemac.com/sell/factsheets/relief_refi.html;  www.efanniemae.com/sf/mha/mharefi/pdf/refinancefaqs.pdf; http://makinghomeaffordable.gov/refinance_eligibility.html; www.treas.gov/press/releases/docs/05142009FactSheet-MakingHomesAffordable.pdf.

To avoid confusion I have deleted the letter from my blog.  I suspect FHA rules will be quickly modified to allow the borrower to tap into the credit at closing.  The $8,000 is a great incentive, but those who would typically qualify for this program tend to need cash for the downpayment.  If they will be getting the credit when they file their taxes for that year, what harm would be caused by allowing them to access those funds when they really need them? 

Hopefully, the letter will be quickly reinstated with some guidance from HUD and FHA.  This reminds me of the saying, “We’re from the governrment and here to help.”  Wouldn’t it be nice if it helped more than corporate America?  But I digress…..

–Russ DeMott

Photo by Michael Mulligan

Below I have reproduced an outline done by my colleague, O. Max Gardner, on the Home Affordable Modification Program.  As usual, Max has done a great job at distilling important information.   I hope you find it useful.

The HAMP and HARP Programs

O. Max Gardner III

PO Box 1000

Shelby NC 28150

maxgardner@maxgardner.com

www.maxgardnerlaw.com

April 27, 2009

Home Affordable Modification Program (HAMP):

General Eligibility: 

The eligibility limitation to Fannie/Freddie loans is only on the refinancing program (HARP), not the modification program.  HAMP will apply to all mortgages originated before January 1, 2009.  No loans originated after that date will be eligible.  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 the HAMP.  Monitoring, however, will continue for the life of the loan.

General Qualification Terms:

• 1. The home must be owner-occupied, single family 1 to 4 unit property (including condominium, cooperative, and manufactured home affixed to a foundation and treated as real property under current state law).
• 2. The home must be the primary residence (verified by tax return, credit report, and other documentation such as utility bills).
• 3. The home may not be investor-owned.
• 4. The home may not be vacant or condemned.
• 5. Borrowers in a current bankruptcy case are not automatically eliminated from consideration for HAMP.
• 6. Borrowers in active litigation regarding the mortgage loan can qualify for a modification without waiving any legal rights.
• 7. First lien loans must have an unpaid principal balance (prior to capitalization of the arrears) equal to less than:
• a. 1 Unit—$729,750
• b. 2 Units–$934,200
• c. 3 Units–$1,129,250
• d. 4 Units–$1,403,400

Pending Foreclosures:

Any foreclosure action will be temporarily suspended during the trial HAMP period, or while borrowers are considered for alternative foreclosure prevention options.  In the event that HAMP or the alternative foreclosure prevention options fail, the foreclosure action may be resumed.

For HAMP borrowers, there is no minimum or maximum Loan to Value (LTV) ratio for eligibility purposes.  Borrowers, however, can only exercise one modification of their mortgage under HAMP.  If the HAMP modification fails, then there are no additional HAMP options.

Debt to Income Ratios:

Front-End DTI is the ratio of the Principal, Interest, Taxes and Insurance Payments (PITIA) to the Monthly Gross Income.  PITIA is defined under the program as principal, interest, taxes, insurance (including homeowners insurance and hazard and flood insurance) and homeowners association and condominium fees.  Mortgage insurance premiums (PMI Insurance) 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 41%, 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 offered by the Treasury.

Home Valuations:

The Servicer may use, at its discretion, either one of the government sponsored enterprises’ (GSEs) automated valuation models (AVM)-provided that the AVM Renders a reliable confidence score-or a Broker Price Opinion to determine the Property Value for the DTI Test.

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 Broker Price Opinion (BPO). 

In all cases the property valuation may not be more than 60 days old.

Verification of Income:

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 borrowers, 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 (MGI) is the amount before any payroll deductions and includes wages and salaries, overtime pay, commissions, fees, tips, bonuses, housing allowances, other compensation for personal services, Social Security payments, including Social Security received by adults on behalf of minors or by minors intended for their own support, annuities, insurance policies, retirement funds, pensions, disability or death benefits, unemployment benefits, rental income and any other income.

Monthly Net Income (MNI) can be used for preliminary screening and qualifications. If used, the servicer will need to multiply net income by 1.25 to get an estimate of Monthly Gross Income (MGI).

Back-End DTI:

The Back-End DTI is the ratio of the borrowers’ total monthly debt payments (such as Front-End PITIA, any mortgage insurance premiums, payments on all installment debts, monthly payments on all junior liens or mortgages, alimony, car lease payments, aggregate negative net rental income from all investment properties owned, and monthly mortgage payments for second homes) to the borrower’s MGI.  The servicer must validate each monthly installment payment, 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 the 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 such 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 a 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 mortgage payment that is likely to create a financial hardship (e.g., payment rate 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 that a non-defaulted borrower is 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.

The NPV Test:

A Standard NPV Test will be required for 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 the cash flows expected from a modification to the net present value of cash flows expected in the absence of a 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 the modification.  Required parameters for the NPV Test will be published in a few weeks.

If the NPV Test generates a positive result when applying the Standard Waterfall, the servicer is required to offer a HAMP to the borrower.  If the NPV Test generates a negative result, modification is optional, unless prohibited by the service contracts.  The monthly payment reduction incentive is available for any HAMP, whether or not NPV is positive, that meets the eligibility requirements and is performed according to the Waterfall described below.

If the NPV Test result is negative and a HAMP 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:

Servicers will follow the Standard Waterfall described below to reduce the monthly payments to 31% Front-End DTI Target defined below.  The initiative will reimburse lenders/investors for one half of the costs of reducing monthly mortgage 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 from the HAMP modification effective date.

HARP Program:

Services will be required to consider a borrower for refinancing into the HARP Program when feasible. Servicer incentive payments will be paid for HARP refinances.

If the underwriting process for a HARP refinance would delay eligible borrowers from receiving a HAMP offer, servicers will use the Standard Waterfall to begin the HAMP process and work to complete the HARP refinance during the Trial Modification Period.

Consideration for HARP should not delay eligible borrowers from receiving a HAMP offer and beginning the Trial Modification Period.

The Standard Waterfall Process:

• 1. Request MGI from borrower.
• 2. 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.
• 3. Capitalize the arrearage. Servicers may capitalize the 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.
• 4. Target a Front-End DTI of 31%. The lender/investor shall follow steps 5, 6 and 7 below to reduce the borrower’s payment to the level corresponding to the Front-End DTI Target.
• 5. Reduce the contract interest rate to reach the Front-End DTI Target (subject to an interest floor of no less than 2%). The note rate should be reduced in increments of 0.125%, and should begin 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 term of the mortgage loan. 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 a fixed mortgage rate for the remaining loan term.
• 6. If the Front-End DTI Target has not been reached, extend the loan term of the loan up to 40 years. If term extension is not permitted, then extend amortization. The 40-year term begins at the start of the modification (after the borrower 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.
• 7. 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 payment 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.

Principal Reduction Option:

There is no requirement to use principal reduction under HAMP: 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 Standards 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 Repayment 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 IRF 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 by 1% (100 basis points) per year or such lesser amount as may be needed until it reaches the IRC.  The IRC for a modified loan is the lesser of the fully indexed and fully amortizing original contract rate or 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.

Principal Forbearance:  No interest will accrue on the forbearance amount.  If the option to forbear principal is selected, the servicer shall forbear on collection the deferred portion of the Capitalized Balance until the earlier of the maturity of the modified loan, the sale of the property, or the 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 MBAS 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.

Trial Period Required.  Successful completion of the Trial Modification Period and entry into program agreements between the Servicer and the Treasury’s financial agent are prerequisites for any payments to the lender/investor, servicer or borrower.

Modification is effective on 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, servicer or borrower will be made during the Trial Period.  No payments under the program to these parties will be made if the Trial Period is not completed successfully.  NO payments under the program to these parties will be made unless and until the servicer has entered into the program agreements with the Treasury’s financial agent.

Length of Trial Period:  The Trial Period will last for 90 days (three payments at modified terms) or longer if necessary to comply with investor contractual obligations in the Pooling and Servicing Agreements.  The borrower must be current at the end of the Trial Period to obtain the HAMP 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.  The 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 solidified loan was assumable prior to modification, a HAMP modification cancels this feature.

Modification Fees:  There are NO Modification fees or charges born by the borrower.

Reimbursable Fees and Charges:  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:  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 Trial Period.

Credit Report:  The servicer will cover the cost of the credit report.

Servicer Compensation:  Upon modification following a successful 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 HAMP guidelines.  Servicers will also receive Pay for Success fees payable each 12 months for three years at $1,000 per year.  Servicers will not receive Pay for Success fees for Redefaulting Loans.  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 (portfolio) loans are eligible for these incentives.  The term servicer means the party that is responsible for performing the modification activities.  Similar incentives will be paid under the HARP Program.

Borrower Cash Contributions:  The investor may not require the borrower to contribute cash for eligibility or execution of a Trial or Permanent modification.

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). 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 Incentive Payment, the Payment Reduction Cost Share, or the Home Price Depreciation Reserve Payment.

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.

Home Price Depreciation Payments. To encourage lenders/investors to modify more mortgages, compensation will be provided to partially offset probable losses from home price declines. This will be structured as a simple cash payment on each modified loan while the loan remains active in the program.

Payments for Short Sales and Deeds-in-Lieu:  Compensation will be provided to servicers and borrowers in order to facilitate short sales or deeds-in-lieu in those cases in which borrowers either fail the net present value (NPV) test (described above) or fail to qualify for, or default under, the modification program.

Second Line Elimination Payments:  To reduce the borrower’s overall indebtedness and improve loan performance, additional incentives will be provided to extinguish junior liens on homes with first-lien loans that are modified under the program.

HARP:

The] Home Affordable Modification Program 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 13 participating servicers (including affiliates) cover over 50% of the servicing market for prime, Alt-A and subprime, so there’s a good chance you’ll have coverage even if no other servicers participate, although it sounds as if others are in the process of signing up so this coverage should only increase.  Whether they can get consistent application to their loans in the private-label deals is uncertain at this point.