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American Bar Association Young Lawyers Division - Vol 14, Issue 11, September 2010, Traversing the HAMP Maze – Home Loan Modification Program
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By Lionel E. Bashore and Kevin S. Green
Notwithstanding criticism that the Home Affordable Modification Program (HAMP), established by the Obama administration in March 2009, has been largely ineffectual, the program is starting to gain traction. According to the U.S. Department of the Treasury, as of May 2010, more than 25% of 1.2 million applicants received permanent home loan modifications, up from just 8% of applicants as of the end of 2009. While the fall-out rate is still disappointing, recent trends suggest that homeowners are receiving a more meaningful opportunity at a home loan modification. It is essential for attorneys to have a firm grasp of the complex details of the HAMP program and the process by which loan servicers evaluate their clients’ eligibility for a home loan modification.
HAMP is a component of the broader Making Home Affordable Program (MHAP). Other component programs under MHAP exist; however, the majority of homeowners seek relief through HAMP. The program is intended as a lifeline for borrowers with a financial hardship that places them at risk of losing their home.
Under HAMP, lenders receive financial incentives to modify home loans that make monthly payments more affordable and sustainable for financially distressed borrowers. Homeowners who apply to the program may be offered trial modifications consistent with detailed guidelines, and upon successful completion of program requirements homeowners may be granted a permanent loan modification.
Servicer participation is mandatory for all loans owned or guaranteed by Fannie Mae or Freddie Mac, which are Government Sponsored Enterprises (GSEs). Participation in the modification program is voluntary for servicers and investors of non-GSE loans; however, substantial incentives are available to servicers that complete loan modifications under HAMP.
To ensure that a borrower currently at risk of foreclosure has the opportunity to apply for a modification under HAMP, participating servicers may not proceed with a foreclosure sale on an eligible loan until the borrower has been evaluated for HAMP and, if eligible, a trial modification offer has been made.
Notably, borrowers in bankruptcy are not automatically eliminated from consideration for a modification. Further, borrowers in active litigation over the mortgage loan can qualify for a modification without waiving their legal rights.
New borrowers will be accepted into the program until December 31, 2012.
Steps to obtaining a home loan modification
Loan servicers evaluate applicants in accordance with strict guidelines as outlined under HAMP. The objective is to modify the loan such that the resulting monthly payment for first lien principal, interest, taxes, insurance, and association dues (PITIA) is 31% of monthly gross income (referred to as the DTI target).
The servicer must first reduce the interest rate in increments of 0.125% (subject to a floor of 2%), bringing the resulting payment as close to the DTI target as possible, without going below 31%. If this fails to reduce the payment to the target level, the servicer must then extend the loan term or amortization period up to a maximum of forty years. If the resulting payment still does not reach the DTI target, the servicer must forbear principal in an amount necessary to achieve the targeted payment. Any forbearance of principal is due via a balloon payment on the loan maturity date, upon sale of the property, or upon payoff of the interest-bearing balance.
Finally, the servicer must perform a Net Present Value calculation in accordance with a complex formula prescribed by the Treasury Department. This calculation is used to determine if the proposed loan modification provides the lender with a better financial result than if no modification were given. If the NPV analysis provides a positive result, the servicer must modify the loan. If the result is negative, the servicer has the option to modify the borrower’s loan, but there is no requirement to do so.
A strong understanding of the screening process, the underwriting standards, and documentation requirements for a home loan modification under HAMP enhances the probability of securing a permanent modification for your clients.