fannie mae
Home Affordability Modification Program: How does it work?
Everyone knows about President Obama’s program known as the Home Affordability Modification Program (“HAMP”). Many have wondered if the program can help them save their home, but how does it work? In brief, the HAMP was designed to save your home if you are struggling to pay your mortgage. It was also designed for consumers to be able to work through the process on their own without the need of an attorney or a consultant.
The HAMP process is not really that difficult. A consumer should review the mortgage company’s web site for all required documentation which is needed in order to be considered for the HAMP. Once all the required documents are submitted the company will put the consumer’s request for review under the HAMP into a pool of thousands of other like consumers.
It sounds simple right? Well, there are many problems hidden within this simply process. A consumer should keep in mind that the mortgage company in the HAMP is trying everything not to get the consumer into the review of the program. What I mean by this is that the mortgage company is likely to reject a consumer’s request for not having all documents requested even though you’ve submitted them. Also, the mortgage company is not going to stop foreclosure proceeding while the consumer’s request sits in the pool of thousands of request. The biggest issue with this process is time. The HAMP process is likely to take 3 to 12 months.
How to ensure that this process works for you? You really will need to either make a commitment to setting aside at least two hours a week to follow up with the mortgage company for updates and to ensure that the mortgage company continues to review your request. Alternatively, you could hire a professional like an attorney to ensure that the mortgage company continues to review your request and to ensure that the process is documented.
Overall HAMP is a simple process, but be prepared to dedicate the required time to prepare the documents and also for the long review process.
Home Affordable Mortgage Program Calculation
Many Consumer’s have heard of the Home Affordable Modification Program (“HAMP”). This is the Federal loan modification program. However, what most consumers do not realize is that the calculation of a new mortgage payment is very guideline specific. The following is a detailed explanation of how the program calculates the new or modified payment under HAMP.
The goal for borrowers, as they seek a HAMP Modification, is a Front-End Debt-to-Income of 31%. In plain English this ratio measures the percentage of monthly gross income that is consumed by debt and housing payments. This rate considers the value of consumer expenses compared to the borrower’s gross monthly income. This calculation begins with the reduction of mortgage payments by the investor to no more than 38%. The subsequent reductions by the lender, to get to the target of 31%, rest on the reduction of the borrower’s interest. If, however, the reduction reaches the floor of 2% without reaching 31%, the borrower may need to account for the difference with annual increases of the interest rate.
Once the lender reduces mortgage payments to no more than 38% Front-End Debt-to-Income ratio, the Federal Government will match further reductions in monthly payments down to 31% Front-End Debt-to-Income ratio for the borrower. At this point, lenders may capitalize arrearage.
The target Front-End Debt-to-Income (DTI) is 31%. The Standard Waterfall step that results in a Front-End DTI closest to 31% without going below 31% will satisfy the Front-End DTI Target. Front-End DTI is the ratio of PITIA to Monthly Gross Income.
- Gross Monthly Income—the amount before any payroll deductions.
- The total first mortgage debt and monthly payments (PITIA). This includes principal, interest, taxes, insurance, and homeowners association and/or condominium fees.
The calculation to reduce the interest rate to reach the Front-End DTI Target is subject to a floor of 2%. The interest rate reduction shall be made in increments of 0.125%, with the goal of bringing the monthly payment as close as possible to the Front-End DTI, without going below 31%.
If the modified interest rate is at or above the highest interest rate allowed by the original mortgage note, the modified interest rate will be the new note rate for the remaining loan term. If, however, the modified interest rate is below the maximum allowed rate in the note, the modified interest rate will be in effect for the first five years, followed by annual increases, until the interest rate reaches the interest rate cap, of up to 1% per year. The interest rate will be fixed once the interest rate reaches the interest rate cap. If the Front-End Debt to Income target has not been reached, the term of the loan shall be extended up to 40 years
It should be noted that there is no requirement to use principal reduction under HAMP, but servicers may forgive principal to achieve the Front-End Debt-to-Income target. Consumers should recall that the goal is to reduce Front-End DTI to 31%. By forgiving principal, monthly payments (as part of the PITIA calculation) are drastically reduced, thus reducing to overall ratio.
Short Sales
If your home is in jeopardy of foreclosure and a loan modification is not an option to save the home, a short sale may be the next option. A short sale is simply the sale of a home for less than the value of the mortgage owed on the property. It is no secret that most home values have declined below their original purchase value. Short Sales are a good option if the homeowner simply does not want to save their home and needs to get out from underneath the debt of the mortgage. The best part of a Short Sale for the homeowner is that if the home sells for less then the value owed to the bank, the homeowner is released from liability coupled with a release of tax liability pursuant to the 2007 mortgage forgiveness relief act.
More specifically, a short sale, also called a distress sale has significant benefit for the lender because the lender avoids the expenses and hassle of seizing a delinquent customer’s property. In addition, lenders realize that they could lose money if the borrower’s home is auctioned in a foreclosure proceeding.
To decide whether or not to accept a short sale, lenders look at various factors. Those factors are:
- Whether the seller truly has a hardship limiting his or her ability to pay the mortgage.
- Whether it would be cheaper to simply repossess and sell.
- How many other properties the lender has in default.
- Whether there are cosigners on the mortgage who can be held responsible for the balance covered on the mortgage.
Even when borrowers engage in a legitimate short sale, there is no guarantee of success. It’s difficult to have an agreement where the interests of all parties are satisfied. One has to take into account the interests of the lender, homeowner, agent, buyer and investor who held the mortgage. Also, if the husband and wife were divorcing, then both would have to agree to have a short sale. With regard to managing a short sale, it’s important that sellers review loan documents with an attorney to make an informed decision. Also, is recommended to that you hire a law firm specializing in loss mitigation to help get you through the process.
How the HAMP loan modifications affect your credit score
For many consumers, their existing home mortgage obligation has outpaced their ability to pay it back. Many homeowners have suffered some form of a hardship, be it from the loss of a job, an illness, a divorce, or other similar type of situation. For those in such a situation, many have turned to President Obama’s loan modification program called the HAMP program. This is a great program because it allows a reduction in mortgage payments for 5 years. However, what many Consumers need to understand is how this program may or may not affect their credit score.
Many mortgage companies are reporting the modified mortgages to the credit bureaus as a “rolling 30-day late” while the modification are in its 90-day trial period. Homeowners are deemed “delinquent” during the trial period because the modified payment amount is less than the original mortgage payment amount, but the homeowner is not yet officially in the modification program.
THIS IS NOT HOW A LOAN MODIFICATION SHOULD BE REPORTED
Homeowners who are current on their mortgage when they enter into the trial modification period should not be reported as late, according to servicer guidelines for Fannie Mae, Freddie Mac, as well as other loans (”non-GSE loans”) being modified by HAMP-participating servicers.
Homeowners who were delinquent when they entered the modification trial period, however, will continue to be reported as delinquent during the trial period. See below for more detail.
If your loan is owned or guaranteed by Fannie Mae, see page 12 of Fannie Mae Servicing Guide Announcement 09-05R for information about credit reporting for HAMP-modified Fannie Mae loans. It says:
“If a borrower is current when they enter the Trial Period, the servicer should report the borrower current but on a modified payment if the borrower makes timely payments by the last business day of each Trial Period month at the modified amount during the Trial Period. If a borrower is delinquent when they enter the Trial Period, the servicer should continue to report in such a manner that accurately reflects the borrower’s delinquency and workout status following usual and customary reporting standards. In both cases the servicer should report the modification when it becomes final.”
“Borrowers, who are current when they enter into the Trial Period and make payments by the 30th day of each month, report as current, but on a modified payment. Borrowers, who are delinquent when they enter into the Trial Period or do not make payments by the 30th of each month, report according to borrower’s delinquency and workout status. Notify when borrowers have completed the modification.”
If your loan is NOT owned or guaranteed by Fannie Mae or Freddie Mac, see page 22 of “HAMP Servicer Supplemental Directive 09-01? for information about credit reporting guidelines for modified non-GSE loans. It specifies the following:
“The servicer should continue to report a “full-file” status report to the four major credit repositories for each loan under the HAMP … on the basis of the following: (i) for borrowers who are current when they enter the trial period, the servicer should report the borrower current but on a modified payment if the borrower makes timely payments by the 30th day of each trial period month at the modified amount during the trial period, as well as report the modification when completed, and (ii) for borrowers who are delinquent when they enter the trial period, the servicer should continue to report in such a manner that accurately reflects the borrower’s delinquency and workout status following usual and customary reporting standards, as well as report the modification when completed. More detailed guidance on these reporting requirements will be published by the CDIA.”
Deed for Lease Program
Even if you don’t qualify for a loan modification through the HAMP or some other loan workout program, you may be able to qualify for the Deed for Lease Program by Fannie Mae (“D4L”). This is a new option for qualified borrowers or tenants of borrowers, who have Fannie Mae loans, who are facing foreclosure. According to Fannie Mae, the program will allow the homeowner or tenant to remain in their home by surrendering the deed to their home to Fannie Mae and in return be allowed to sign a lease through a deed-in-lieu of foreclosure transaction. Fannie Mae executives were quoted in an MSNBC report stating, “the rental program is designed to help delinquent homeowners who don’t qualify for a loan modification, but still want to stay in their homes”
The program is intended to keep families in their homes even after a possible foreclosure or transfer of ownership of their property back to the bank by executing a lease of up to 12 months. Investment properties that are tenant-occupied may also be considered as long as the borrower is cooperative in providing information from the tenant to facilitate the transfer of ownership.
A CNN report quoted Jay Ryan, a Fannie Mae vice president, “The program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities”.
As stated in the November 5, 2009 announcement by Fannie Mae, In order to qualify for the Deed for Lease Program, the occupant of the property must have the ability to pay rent at the value the market bears, which can not be more then 31% of his or her monthly gross income. The home must also be the primary residence of either the homeowner or the tenant who will continue to occupy the property. The homeowner must not be more then 12 months behind on their mortgage payments and most importantly, the person responsible for paying the rent, will have verifiable income. In addition, Fannie Mae will inspect the property to confirm that the occupants have been keeping the property in good condition. The occupants will need to agree to be responsible for regular maintenance, to keep the property in good condition, and to permit marketing of the property for sale. Finally, the occupants signing the lease must agree to a credit review and all occupants over the age of 18 must have an acceptable background check.
At the conclusion of the 12 month lease term, there is the potential for a month-to-month extensions of the lease. There is also the potential to buy back the property from Fannie Mae at the end of the lease period if the homeowner can obtain the proper funding. The obvious benefit here is that the buy back price would be at current market value and not at the original mortgage value. If the value of the home has decreased too much, it is also possible the Lender will want to continue to rent the property to the occupant in order to continue to generate cash flow.
To find out if your loan is with Fannie Mae go to:
http://loanlookup.fanniemae.com/loanlookup/
