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Mortgage Servicing and Loan Modifications: 6.7.2.5 The HAMP “Waterfall”

If the borrower was eligible, the mortgage servicer was required to calculate hypothetical new mortgage terms based on the borrower’s monthly gross income, using a series of steps called the HAMP “waterfall.” Under the Tier 1 waterfall, the goal was to follow a series of steps until the borrower’s monthly payment was reduced to 31% of the borrower’s gross monthly income. Under the Tier 2 waterfall, the terms were fixed, but the monthly payment was required to fall within a certain debt-to-income ratio range based on the borrower’s gross monthly income.

Mortgage Servicing and Loan Modifications: 6.7.2.6.1 Generally

The core measure used to determine whether the borrower would receive a modification under HAMP was the net present value (NPV) test. The NPV test compared the net present value of the money the mortgage loan owner would receive if the loan were modified with what would be received if no modification were made.

Mortgage Servicing and Loan Modifications: 6.7.2.7 Initiating the Application Process

As described above, while participation in HAMP was voluntary, most servicers were participating.211 Participating servicers were required to consider all eligible mortgage loans for modification unless prohibited under investor guidelines. If contractual agreements, such as pooling and servicing agreements, restricted participation in the program, servicers were required to use reasonable efforts to obtain waivers or approvals from the parties.212

Mortgage Servicing and Loan Modifications: 6.7.2.8 Servicer’s Review of the Application

Once the initial package was submitted, servicers were required to acknowledge receipt in writing within five business days and inform the borrower whether their application was complete or incomplete.234 This notice also was required to include a description of the servicer’s evaluation process and timeline.235 The servicer was required to review and evaluate the borrower within thirty calendar days from the date a complete loss mitigation application is received.

Mortgage Servicing and Loan Modifications: 6.7.2.9.2 Denial based on investor not participating in the HAMP program

HAMP required servicers, not investors, to participate in the program. Nonetheless, in certain limited situations existing contracts between servicers and the trusts that own the mortgages may limit servicers’ authority to modify loans. These terms in pooling and servicing agreements are the exception rather than the rule. Large investors like Fannie Mae and Freddie Mac require that their mortgages be modified under their HAMP guidelines, as do insurers like the FHA and VA under their respective HAMP programs.

Mortgage Servicing and Loan Modifications: 6.7.2.10 The Trial Period Plan

Prior to obtaining a permanent loan modification, the homeowner was required to participate in a trial period plan, by making monthly payments based on the proposed new loan terms for an initial three-month period (or longer if necessary to comply with investor guidelines).260 The homeowner was then sent a notice that outlined the terms of the trial modification and payment due dates.

Mortgage Servicing and Loan Modifications: 6.7.2.11 The Permanent Modification

To receive a permanent loan modification, the borrower had to be current at the end of the trial period. Current means that the borrower had made each trial period payment by the last day of the month in which it was due.263 Borrowers who were not current were considered to have failed the trial period, and were not eligible to receive the HAMP modification for which they had applied.

Mortgage Servicing and Loan Modifications: 6.7.2.12 Principal Reduction Alternative (PRA)

The principal reduction alternative (PRA) used an alternative modification waterfall analysis to determine whether reducing principal on a mortgage loan with a loan-to-value ratio (LTV) ratio greater than 115% will produce a positive NPV result for non-GSE loans.267 Mortgage loans with an LTV ratio greater than 115% had to be evaluated using both the standard modification waterfall as well as an alternative modification waterfall process.

Mortgage Servicing and Loan Modifications: 6.7.2.13 Borrowers in Bankruptcy

Borrowers with active chapter 7 or chapter 13 bankruptcy cases had to be considered for HAMP if the borrower, borrower’s counsel, or the bankruptcy trustee (with the borrower’s permission) submitted a request to the servicer.272 Though servicers were not required to solicit these borrowers for HAMP, they had to work with the borrower or the borrower’s counsel to obtain the approval of the court or trustee in keeping with local court rules and procedures.

Mortgage Servicing and Loan Modifications: 6.7.2.17 HAMP Incentives to Servicers, Holders, and Homeowners

HAMP had an extensive incentive compensation program for servicers, investors, and homeowners, but no real penalty for servicer noncompliance.295 If the borrower entered into a permanent modification the servicer would receive an incentive payment between $1200 and $2000 for each loan modification.296 If the borrower’s monthly mortgage payment was reduced by at least six percent, the servicer would receive an additional “pay for success” incentive of up to $1000 per year up to a maximum of three

Mortgage Servicing and Loan Modifications: 6.7.3.1 2MP Described

After implementing HAMP, Treasury announced a separate program to deal with second liens in August 2009. The Second Lien Modification Program (referred to as 2MP) is intended to complement HAMP Tier 1 and Tier 2 by providing borrowers with sustainable monthly payments or complete extinguishment of second lien mortgage loans.

Mortgage Servicing and Loan Modifications: 6.7.3.2 The 2MP Trial Period Plan

A three-month trial period was required under the program if the borrower was two or more payments delinquent on a second lien mortgage when offered the modification.315 A trial plan was not required if the borrower was current on the mortgage and the amount of the borrower’s monthly payment was equal to or greater than the amount that would be due after modification.316 The plan may not run concurrently or overlap the HAMP or Standard Modification trial period, unless the servicer is the same f

Mortgage Servicing and Loan Modifications: 6.7.3.3 2MP Modification/Extinguishment Steps

The program provided two alternatives for servicers of second lien mortgages: modify the loan, or receive a payment in exchange for releasing the lien (extinguishment).321 Servicers could partially extinguish or forgive a portion of the principal and then modify the loan.322 However, the converse was not allowed; if the second lien mortgage was modified under 2MP, the loan was not eligible later for a full or partial extinguishment of the loan.

Mortgage Servicing and Loan Modifications: 6.7.3.4 2MP and Borrowers in Bankruptcy

The guidelines regarding borrowers in bankruptcy in 2MP paralleled those of the first lien modification program. Borrowers with active chapter 7 or chapter 13 bankruptcy cases were eligible for 2MP if the borrower, borrower’s counsel or the bankruptcy trustee (with the borrower’s permission) submitted a request to the servicer.

Mortgage Servicing and Loan Modifications: 6.7.3.5 2MP Incentives

Servicers of second liens modified or extinguished under the program received a $500 fee.339 If the amount of the borrower’s monthly payment on the second lien was reduced by six percent or more, the servicer also received a fee of $250 for up to three years as long as both the HAMP modification and second lien modification remain in good standing and the loan has not been paid in full.340 This was in addition to any incentive compensation the servicer may have received for modifying the first l

Mortgage Servicing and Loan Modifications: 6.7.4 Home Affordable Unemployment Program (UP)

The Department of the Treasury on May 11, 2010, announced the Home Affordable Unemployment Program (UP), effective July 1, 2010.342 For up to twelve months, participants were able have their monthly mortgage payment reduced to less than or equal to thirty-one percent of their gross monthly household income, or their payments could be suspended in full.343 Servicers were given discretion to extend the period beyond twelve months, according to their investor/regulatory guidelines.

Mortgage Servicing and Loan Modifications: 6.7.5 Home Affordable Foreclosure Alternatives (HAFA)

HAFA Assistance was potentially available to borrowers who did not qualify for HAMP, who were offered a modification but declined it, who defaulted on a HAMP modification, or who did not successfully complete the terms of a trial period plan.357 Under the Home Affordable Foreclosure Alternatives (HAFA) portion of the Making Home Affordable program, borrowers were offered a short sale or a deed in lieu of foreclosure as a means of avoiding foreclosure.

Mortgage Servicing and Loan Modifications: 6.7.7 Treasury/FHA Second Lien Program (FHA2LP)

Under the Treasury/FHA Second Lien Program (referred to as FHA2LP), the Treasury provided incentives to servicers and investors of second lien mortgages to fully or partially extinguish these second loans as part of the refinance process.365 FHA2LP became effective on September 27, 2010 and expired on December 31, 2013.366 This program was designed to complement the FHA Short Refinance program, which allows borrowers who are current on their mortgage to refinance into an FHA-insured loan, provid