This past year has been transformational as far as the foreclosure crisis was concerned, although we weren’t sure what was being transformed much of the time, and we are only now going to start seeing the changes that have been underway but out of sight.
For one thing, while the DOJ settlement will mean something positive for some, it will also mean that foreclosures will increase across the board this year, and next… and the year after that. This next year isn’t gong to be “fair,” and it isn’t going to end with the Calvary coming to the rescue.
The fact is that we are going to lose more homes to foreclosure in the next three years than we lost in the last six. Unemployment will rise… Europe will most assuredly fall. And for America’s working and middle class… there is nothing ahead but a prolonged ride down.
It’s a sobering reality, I realize, but there isn’t any question now about what’s to come.
As of June 1st is the Making Home Affordable (“MHA”) program’s next generation “HAMP Tier 2,” which uses the new, more expansive NPV 5.0, will make HAMP loan modifications easier to qualify for, include eligibility for the modification of rental properties. It is also the beginning of the roll out of some new service standards for servicers that are designed to make banks more responsive to the needs of homeowners.
This newly renovated version of HAMP has been touted as being a major improvement to the HAMP program, and in many ways it is significantly better. Perhaps most amazing is that Treasury said it would be ready on June 1st… and it was, so that alone would have to be cause for some celebration. I guess there really is a first time for everything, and so on that point… I stand corrected.
In addition, HAMP’s deadline for eligibility has been extended a year to December 31, 2013, and my guess is that we’re going to be seeing such announcing of extensions annually. Barring some unforeseeable change in policy, I won’t be surprised to see HAMP being extended for one more year… a decade from now.
THE GOAL: To increase homeowner eligibility.
In the “big improvement” column would be found HAMP’s “Expanded Eligibility Criteria.” In fact, the new second level HAMP evaluation protocol is what the Supplemental Directive refers to as “HAMP Tier 2,” and it’s designed for pretty much anyone that failed to qualify for HAMP Tier 1… the original HAMP.
So, if the borrower’s loan wasn’t on an owner occupied property, or if the borrower’s pre-modification monthly payment was below 31 percent, or positive NPV couldn’t be achieved without excessive forbearance… or if it just came up negative NPV… then Tier 2 is here to potentially save the day.
There will be many loans that were evaluated for HAMP prior to June 1, 2012 that will be potentially eligible for re‐evaluation for under HAMP Tier 2. So that’s a good thing, I think.
In a nutshell, HAMP Tier 2 candidates may include:
- Those who did not meet the original HAMP guidelines
- Those who failed on a HAMP modification
- Those who own rental properties
With HAMP ‘Tier 2′, many of the initial qualification criteria are still in place:
- Must have been originated before January 1, 2009
- Must be able to document a financial hardship
- Only loans on properties with one-four units can be modified
- Maximum outstanding loan amount applies
Now borrowers may also be considered for ‘Tier 2′ when any of the following apply:
- They did not successfully complete a HAMP ‘Tier 1′ modification
- Their monthly payment is below the minimum 31 percent front end Debt-To-Income ratio
- And up to THREE SEPARATE mortgages MAY be modified if they secure rental properties
No loans may be modified more than once in each program, so a failed HAMP Tier 1, may be eligible for modification under HAMP Tier 2.
A Special Tribute to Ed DeMarco of the FHFA…
In the “no improvement whatsoever” category, none of this applies to GSE mortgages, or those insured or guaranteed by the Veterans Administration, and except as specifically noted in the Supplemental Directive, insured or guaranteed by the Department of Agriculture’s Rural Housing Service (RHS) or the Federal Housing Administration (FHA).
And just to make absolutely sure that the irony is not lost on anyone even for a moment…
Of course, the government loans won’t be participating in the government program.
Yes, the only loans that are NOT going to participate in the government’s program are the loans owned or guaranteed by the government. And if you’re okay with that sentence, then it’s just me and I better go lie down because I think I may have stepped into a Hunter S. Thompson or Kurt Vonnegut novel.
When I say sentences like that, and people respond by saying… “right, got it,” I become scared to leave my house because I’m afraid I might get killed by a flying banana, or discover that the concrete is quicksand.
Of course, the government loans won’t be participating in the government program.
Right, of course that’s the case. That’s what I would have guessed. Yep, got it. I understand.
Oh, do you? Do you “understand” that sentence? The government loans won’t be participating in the government program. But the banks should? And you “understand” that? That doesn’t require the president or even Secretary Geithner coming on television to say a little something?
Alrighty then… it’s obviously me. Never mind. It’s fine. The government loans won’t be participating in the government program. Fair enough. Don’t worry about me, I’ll adjust eventually. I’m good with it… living in Loopy-Doopy Land. Not a problem.
Thanks Ed! Is there anything less you can do?
Okay, here’s HAMP’s New Deal… HAMP Tiers 1&2
What follows is my summary of what’s most important about the new Tier 1&2 and the NPV 5.0 model. But, please remember, I AM NOT AN UNDERWRITER, and this is not all there is to it. At the end of this section, you’ll find a link to the new Supplemental Directive that will offer additional guidance.
I’m providing this overview so those that would struggle to get through a more technical explanation can at least get an A to Z look at what’s new and why the changes are important to borrowers.
The new NPV 5.0, when combined with HAMP Tier 1&2 can seem complicated, and that’s only because it is more complicated than when we were only talking about HAMP alone. This may make some people afraid to even apply… and when I say some people, I mean… like me.
Well, don’t worry… I’m setting up a way to help people get their applications completed correctly, and even a help desk/live chat type of set up to answer questions. Because while it is more complicated, it’s also more inclusive, meaning more people will find themselves approved than ever before.
RENT – 525,600 Modifications…
The big news about HAMP Tier 2, of course, is that now rental properties can be modified under certain circumstances.
Under Tier 2, a “rental property” is defined as one used by the borrower for rental purposes only and not one that is occupied by the borrower as a principal residence, second home, vacation home or otherwise. Under HAMP Tier 2, such properties may be eligible for modification if:
- You’re behind by at least two payments – That’s right, two or more mortgage payments must be due and unpaid. Rentals are NOT eligible for imminent default consideration.
- You certify that you don’t own more than five single-family properties.
- The rental property is currently the principal residence of a tenant… or is vacant.
- But, if the tenant is a legal dependent, parent or grandparent of the borrower and doesn’t pay rent, that’s okay, the property may still be considered a rental under HAMP Tier 2.
Also, the borrower must certify in writing that he or she intends to rent the property to a tenant or tenants for at least five years following the effective date of any permanent modification and that he or she will make reasonable efforts to rent the property on a year-round basis in the event it becomes vacant.
During that five year period, however, the borrower may sell the property, occupy it as a principal residence, or permit any dependent, parent or grandparent to occupy the property as such party’s principal residence with no rent charged or collected.
How to Calculate Monthly Net Income/Loss on Rental Properties
You calculate monthly net income or loss on a rental property as PITIA (Principal, Interest, Taxes, Insurance, Association Dues) as follows:
- 75 percent of the monthly gross rental income…
- Reduced by the monthly principal and interest payment…
- Plus 1/12th of annual property taxes, insurance premiums & association’s dues.
Also, HAMP Tier 2 doesn’t consider delinquency alone as a hardship, so if the monthly net income of a rental property is equal to or greater than the pre-modification PITIA of that property, the servicer is required to verify and document the cause of the borrower’s hardship.
Sorry, vacation homes don’t count…
If the home is offered for rent on a seasonal basis and it’s available for use by the borrower when it isn’t rented… then it’s considered a vacation home and is NOT eligible for a HAMP Tier 2 modification. Borrowers must certify that they don’t intend to use the property as a secondary residence for at least five years following the effective date of any permanent modification.
All of these certifications that need to be signed by the borrower are referred to in the Supplemental Directive as the borrower’s “rental property certifications,” and I’ve provided a link at the end of this post.
You can have one Tier 1 and one Tier 2… and That’s all Folks!
You can only receive one modification under Tier 1. If you fail or lose “good standing,” you can apply for another modification under Tier 2. But, if you fail at that modification, you’re done as far as HAMP is concerned.
NPV 5.0 is in the HOUSE!
Starting next week, all loans that meet HAMP eligibility criteria for HAMP Tier 1 or Tier 2 must be evaluated using this new version of the software, which automatically evaluates for both HAMP Tier 1 and Tier 2, and will reflect the NPV results of modification under each Tier.
Loans previously evaluated under an NPV model and that are being re-evaluated for HAMP Tier 2 should use the first evaluation date that the loan is evaluated under NPV 5.0 as the “NPV Date”. And, all subsequent re-running of the loan through the NPV model must include such date, as the “NPV Date”.
According to the Supplemental Directive, whether or not a loan modification is pursued, the servicer MUST maintain detailed documentation of the NPV model used, all of the NPV inputs and assumptions used, and the NPV results.
If the borrower’s monthly mortgage payment ratio is greater than 31 percent, and the servicer can achieve the target mortgage payment without excessive forbearance, the servicer is to input the HAMP Tier 1 waterfall criteria into NPV 5.0 and the model will return NPV results for both HAMP Tier 1 and HAMP Tier 2.
The following is subject to whatever investor-specific guidance may apply. That means that it’s impossible to tell for sure what the outcome will be, and in the past that’s been a source of great frustration for many homeowners, I understand. And. the way servicers often explain it would have to be considered… poorly, so that doesn’t help either.
Although it doesn’t happen all that frequently, some investors place certain restrictions on servicers related to the modification of loans. In the most extreme examples, a loan may be “non-delegated,” meaning the servicer must submit proposals for approval. That can mean that you think your loan is Bank of America, the decision to modify has to be made by Wells Fargo.
There are ways to find out if the restriction is correct, but it isn’t simple or easy. Have patience and nowadays you should be able to get your servicer to explain things to you… if not, you’ll need to escalate your case to a higher authority.
Absent any investor limitations, the following guidelines apply:
- If NPV POSITIVE for HAMP Tier 1 under the standard modification waterfall, a HAMP Tier 1 trial period plan MUST be offered to the borrower, regardless of HAMP Tier 2 NPV result. So, that means, if you qualify for HAMP Tier 1, then that’s what you’re going to get.
- If NPV NEGATIVE for HAMP Tier 1 under the standard modification waterfall and the investor authorizes a different threshold, servicer MAY offer the borrower a HAMP Tier 1 trial period plan.
- If NPV POSITIVE under HAMP Tier 2 standard modification waterfall, the borrower must be offered a HAMP Tier 2 trial period plan.
- If NPV NEGATIVE under HAMP Tier 2 standard modification waterfall, the servicer may, based on investor guidance, offer a HAMP Tier 2 trial period plan or must consider the borrower for other available loss mitigation options including HAFA/short sale.
Underwriting Guidelines for HAMP Tier 2
HAMP Tier 2 Standard Modification Waterfall – Borrowers that do not qualify for Tier 1 will be evaluated for Tier 2 as follows:
Step 1 – Capitalization
The servicer capitalizes accrued interest, out-of-pocket escrow advances to third parties, and any escrow advances that will be paid to third parties by the servicer during the trial period plan as well those servicing advances that are made for costs and expenses incurred in performing servicing obligations.
Step 2 – Interest Rate Adjustment
NPV 5.0 adjusts the interest rate to what’s referred to as the “Current Tier 2 Rate,” which is a fixed-rate based on the weekly Freddie Mac Primary Mortgage Market Survey (PMMS) Rate for 30-year fixed rate conforming loans, rounded up to the nearest 0.125 percent… plus a risk adjustment in basis points. On the Effective Date the risk adjustment will be 50 basis points, but servicers will be notified of any changes to the risk adjustment.
Step 3 – Term Extension
NPV 5.0 extends the term and re-amortizes the mortgage to 480 months from the “as of” date of the loan information provided by the servicer (e.g. UPB, term).
Step 4 – Principal Forbearance
This gets a little complicated, but if a given loan’s pre-modification mark-to-market loan-to-value (LTV) ratio is greater than 115 percent, then NPV 5.0 calculates principal forbearance in an amount equal to the lesser of:
- An amount that would create a post-modification mark-to-market LTV ratio of 115 percent using the interest bearing principal balance, OR…
- An amount equal to 30 percent of the post-modified UPB of the mortgage loan… inclusive of capitalized arrearages.
- Unlike HAMP Tier 1 there’s NO EXCESSIVE FORBEARANCE LIMIT in HAMP Tier 2.
Using data inputs provided by the servicer, NPV 5.0 uses the HAMP Tier 2 standard modification waterfall to calculate the post-modification monthly mortgage payment and the borrower’s post-modification DTI.
Additionally, NPV 5.0 determines if the proposed modification meets two affordability requirements needed for a HAMP Tier 2 approval:
- The borrower’s post-modification DTI must fall within the Acceptable DTI Range meaning it’s not less than 25 percent or greater than 42 percent… AND…
- The modified monthly P&I payment must represent a reduction of at least 10 percent compared to the pre-modification monthly P&I payment in effect at the time of consideration for HAMP Tier 2.
- For adjustable rate mortgage (ARM) loans, which include both pay option ARM loans and interest only ARM loans, the pre-modification monthly P&I payment used for the comparison should be determined in accordance with the current guidance, which you can find in Section 220.127.116.11 Chapter II of the Handbook.
Additionally, if the loan previously failed a HAMP Tier 1 trial period plan, the servicer must verify that the HAMP Tier 2 post-modification P&I payment is at least 10 percent less than the monthly P&I payment that was payable under the HAMP Tier 1 trial period plan.
If the modified P&I payment fails to meet that minimum 10 percent payment reduction from the pre-modification P&I payment in effect at the time of consideration for HAMP Tier 2… (or the 10 percent payment reduction from the post-modification P&I payment under the failed HAMP Tier 1 trial period plan) or the modified monthly mortgage payment-to-income ratio falls outside of Acceptable DTI Range… the borrower is NOT eligible for a HAMP Tier 2 modification.
When any of these instances apply, the servicer is now required to send the borrower a “Non-Approval Notice” citing updated reasons for non-approval… and then must consider the borrower for alternative loss mitigation options including HAFA/short sale.
The post-modification monthly mortgage payment ratio is based on the amount of the trial period payment and there is no requirement that the servicer re-calculate the ratio at the end of the trial period plan.
If an investor is not participating in HAMP or has restrictions such as a total prohibition on modification of rental properties or a prohibition on converting the loan to a fixed interest rate, the servicer is supposed to identify this prior to conducting the NPV analysis.
How will underwriters calculate…
Monthly Gross Income and Total Housing Expense for Rental Property Borrowers
Believe it or not, calculating income is always a little tricky, but here it’s even trickier.
Before evaluating a borrower for HAMP Tier 2, servicers must determine borrower’s gross monthly income and total housing expense. The NPV 5.0 model uses these amounts to determine whether the proposed HAMP Tier 2 modification falls within the Acceptable DTI Range.
When working with a loan that is secured by a rental property, the servicer will add net income from the subject rental property to the borrower’s gross income from all other sources (including rental income from other rental properties), as follows:
- If the rental property has a net rental loss, the servicer will add the loss to the monthly PITIA of the borrower’s principal residence to determine the borrower’s total housing expense.
- If there is no rental income from the subject property, the servicer will add the monthly post- modification PITIA of the subject rental property to the monthly PITIA of the borrower’s principal residence to determine the total housing expense.
- If there are multiple borrowers obligated on the rental property mortgage, the income from all borrowers must be included in the gross monthly income calculation and the monthly PITIA of the principal residences of all borrowers must be included in the total housing expense calculation.
Investor Prohibitions on Waterfall Steps
If investor guidelines or applicable law restricts or prohibits a step in either the HAMP Tier 1 or Tier 2 standard modification waterfall and the servicer partially performs it or skips it, the modification may still qualify for HAMP, because the rule has been amended to state that if an investor or applicable law has such lesser restrictions (i.e. limits on capitalization, interest rate or term extension) then the servicer should attempt to complete the waterfall steps subject to such restrictions.
Here’s an example…
If capitalization is not permitted by the investor or applicable law, the servicer should, if allowable, forgive the amount that would otherwise be capitalized or establish a non-interest bearing balloon payment (i.e. forbearance) due at maturity equal to the amount that would have been capitalized.
However, negative amortization after the modification effective date is prohibited.
If investor or applicable law does not permit the note rate of the mortgage to be modified below a certain value, the servicer should:
- If HAMP Tier 1: Adjust rate to the greater of the restriction rate or the rate required to achieve the target monthly mortgage payment.
- If HAMP Tier 2: Adjust rate to the greater of the restriction rate or HAMP Tier 2 rate.
If investor or applicable law does not permit the note rate of the mortgage to be permanently modified, the servicer should:
- If HAMP Tier 1: Adjust rate to the one required to achieve the target monthly mortgage payment for the maximum period allowed by the investor or under applicable law and then, as allowed by the investor or applicable law, step up to the note rate.
- If HAMP Tier 2: Convert the note interest rate to a fixed rate if permitted and move to the next waterfall step.
And there are a few hard and fast rules to consider…
- If investor or applicable law does not permit an adjustable rate to be converted to a fixed rate, the loan is not eligible for HAMP modification in either HAMP Tier 1 or Tier 2.
- If a term extension is limited or not permitted by the investor or applicable law, the servicer should extend the term as far as allowable and/or re-amortize the mortgage loan based upon the remaining term.
- If the current remaining term of the loan is greater than 480 months, the servicer should skip the term extension step.
BUT… Servicers MUST maintain evidence in the loan file documenting the nature of any deviation from the HAMP Tier 1 or Tier 2 standard modification waterfall steps and the fact that investor guidelines or applicable law restricted or prohibited the servicer from fully performing the modification step.
Plus… the servicer’s documentation must show that a “reasonable effort to seek a waiver from the investor” and whether that waiver was approved or denied.
HAMP Tier 2 Alternative Modification Waterfall
HAMP Tier 2 alternative modification waterfall is the one that incorporates principal reductions, however, just like it was in HAMP Tier 1… principal forgiveness in HAMP Tier 2 is optional.
Under HAMP Tier 2, the NPV 5.0 model will evaluate any mortgage loan with a pre-modification mark-to-market LTV ratio greater than 115 percent using both the HAMP Tier 2 standard modification waterfall and the HAMP Tier 2 alternative modification waterfall that includes principal reduction down to the lesser of:
- An amount that would create a post modification mark-to-market LTV ratio of 115 percent using the interest bearing principal balance… OR…
- 30 percent of the post-modified UPB (inclusive of arrearages), essentially replacing the required forbearance with principal forgiveness in the model.
A borrower who was evaluated, but determined to be ineligible for HAMP Tier 2, must be sent a non-approval notice under certain circumstances. However, HAMP Tier 2 amends the current guidelines as follows:
The offer of either a HAMP Tier 1 or HAMP Tier 2 trial period plan is considered a HAMP offer. Therefore, if an owner occupant borrower is evaluated, but determined to be ineligible for HAMP Tier 1, and is offered a HAMP Tier 2 trial period plan, the servicer will NOT send a Non-Approval Notice and is NOT required to send NPV inputs to a borrower.
ONLY when a borrower files an “Escalated Case” and requests NPV inputs, MUST the servicer provide them.
If a loan is evaluated for both HAMP Tier 1 and HAMP Tier 2 but not approved for either Tier, the servicer will send a Non-Approval Notice that refers to the HAMP Tier 2 denial reason.
- “Insufficient Monthly Payment Reduction” is one reason for denial if loan evaluated for HAMP Tier 2 does not meet the applicable minimum 10 percent payment reduction requirement.
- “Post-Modification DTI Outside Acceptable Range” is another reason for denial if loan evaluated for HAMP Tier 2 has a modified monthly mortgage payment-to-income ratio outside the Acceptable DTI Range.
- “NPV Negative Result” is the third reason for denial if borrower evaluated for HAMP is NPV negative for both Tiers, the servicer must send a Non-Approval Notice citing as the reason for the denial and include NPV inputs with the non-approval notice.
If a servicer has performed an NPV evaluation on any loan, including loans being evaluated for HAMP Tier 2, and the borrower is not offered a trial period plan or a permanent modification, the non-approval notice must include all NPV Data Input Fields, even if a negative NPV result was not the reason for denial.
There’s lots more information and you can find it here:
WHERE ATTORNEYS HOMEOWNERS CAN TURN FOR HELP…
Among other products designed for the financial services industry, REST 5.0 delivers analytics for loan disposition analysis related to:
- Home Affordable Modification Program (HAMP Tier 1 and Tier 2)
- Home Affordable Unemployment Program (UP)
- Home Affordable Foreclosure Alternatives (HAFA)
- Second Lien Modification Program (2MP)
Servicers ARE without question NPV driven when making their loan modification and short sale decisions, and anyone who tells you otherwise just doesn’t know from whence they speak.
Contact firstname.lastname@example.org for more information on how you can make the most of HAMP Tier 1&2 using NPV 5.0. I’m going to make this a lot easier for homeowners this year, and that’s a promise.
For lawyers too… I’m looking for the best of the best in pragmatic solution providers. This is the year I’m going to make it much harder for anyone selling something that doesn’t work. The bar is going higher and higher still. Only the best will be here on Mandelman Matters.
AND REMEMBER: Bank of America and Ocwen customers, if you’re feeling stuck, I’m here to help you get the answers you need and get things moving again. Contact: email@example.com.