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Mortgage Servicing and Loan Modifications: 7.3.1.5.1 The basic Flex Modification waterfall

A basic Flex Modification evaluation waterfall applies to all applications submitted after ninety days of delinquency and in all instances when a servicer reviews a borrower for a Flex Modification without considering information supplied by a borrower as part of an application. The basic waterfall consists of five steps. None of the basic steps consider income or other information provided by a borrower.

Mortgage Servicing and Loan Modifications: 7.3.1.5.2 The Flex Modification waterfall for borrowers who submit a complete borrower response package before they become ninety days delinquent

The Flex Modification guidelines add a sixth step for borrowers who apply for a modification before they are ninety days past due. This variation permits certain borrowers to be considered for further payment reduction correlated to their income. This reduction based on income could lower the payment below the 20% payment reduction target under the basic Flex Modification waterfall, described above. However, there are two significant limitations on this option. First, it is available only to a borrower who submits a complete borrower response package to the servicer.

Mortgage Servicing and Loan Modifications: 7.3.1.6 The Role of an Application in the Flex Modification Program

The Flex Modification program is designed to facilitate modifications without input from borrowers. Servicers conduct evaluations based on information contained in their own records and from the property valuations they obtain. The unilateral Flex Modification evaluations are mandatory during the 90-to-105-day delinquency period and discretionary up until a set time before a foreclosure sale (thirty days before a nonjudicial sale and sixty days before a court-ordered sale). Streamlined procedures have their advantages.

Mortgage Servicing and Loan Modifications: 7.3.1.7 The Interaction of the CFPB Mortgage Servicing Rules with the Flex Modification

The GSE guidelines require that servicers evaluate borrowers for a Flex Modification when a loan is between 90 and 105 days delinquent.124 A great deal rides on the assumption that servicers will conduct these reviews in all cases in a timely fashion and perform the reviews accurately. The absence of transparency at this stage can lead to a number of problems. The borrower who did not receive a Flex Modification offer at the 90-to-105 days of delinquency stage may not be aware that a review took place.

Mortgage Servicing and Loan Modifications: 7.3.4.1 GSE HAMP

Both Fannie Mae and Freddie Mac offered a version of the Home Affordable Modification Program (HAMP) through the end of 2016.145 Like the Treasury Department’s HAMP, servicers used a uniform loan modification process to provide eligible borrowers with a monthly payment targeted to thirty-one percent of their monthly gross income. All GSE servicers were required to evaluate borrowers for GSE-HAMP if they applied by December 30, 2016. The structure, requirements, and timeline of the GSEs’ programs paralleled HAMP Tier 1.

Mortgage Servicing and Loan Modifications: 7.3.4.2 Standard Modification

The Standard Modification was an option for Fannie Mae and Freddie Mac loans until the mandatory implementation of the Flex Modification. The Standard Modification had one variation for borrowers whose pre-modification loan-to-value ratio was greater than 80%, and a different set of rules when this ratio was less than 80%. The loan-to-value determination was made based on appraisal and unpaid principal balance data in the servicer’s possession.

Mortgage Servicing and Loan Modifications: 7.3.4.3 Streamlined Modification

Fannie Mae and Freddie Mac created a Streamlined Modification, which was later extended to the Treasury HAMP program, in which the servicer was required to send unsolicited offers to the borrower to receive a modification simply by complying with a trial payment plan. This program expired as of 2017, when the Flex Modification superseded all GSE loan modification programs. Under the former Streamlined Modification, a borrower did not have to submit an application or even ask for a Streamlined Modification.

Mortgage Servicing and Loan Modifications: 7.3.4.4 2MP for Second Mortgages

Fannie Mae’s Second Lien Modification Program (2MP) allowed servicers to modify a borrower’s second lien mortgage after the first lien mortgage was modified under HAMP.184 The program also was phased out with the HAMP sunset, and 2MP trial modifications were required to be converted to permanent modifications with an effective date of no later than December 1, 2017.185 As with Treasury’s second lien program, this program was structured to be a part of the Fannie Mae HAMP program; only second lie

Mortgage Servicing and Loan Modifications: 7.3.4.5 MyCity Modifications for Detroit and Cook County

Fannie Mae and Freddie Mac’s MyCity Modification was a temporary program available for borrowers in Detroit, Michigan and Cook County, Illinois.192 This program provided for automatic solicitation of borrowers with loans at least ninety days in default. Servicers solicited borrowers who were ninety days delinquent for a modification that reduced the principal and interest payment by up to sixty percent.

Mortgage Servicing and Loan Modifications: 7.4.1 General

The Fannie Mae Single-Family Servicing Guide outlines the full range of workout options for loans held by Fannie Mae.195 Workout options are divided into two classes: (1) measures for borrowers experiencing a temporary hardship and (2) measures for borrowers experiencing a permanent hardship.196 Servicers must evaluate borrowers according to Fannie Mae’s loan workout hierarchy.

Mortgage Servicing and Loan Modifications: 7.4.4.1 Overview

Fannie Mae’s loss mitigation options for borrowers facing long-term hardship include both home retention and home surrender options. The home retention options include loan modification programs (as of October 1, 2017, the Flex Modification) and workout mortgage assumptions. The surrender options include short sales and deeds in lieu of foreclosure (called “mortgage release”) that follow specific Fannie Mae guidelines.

Mortgage Servicing and Loan Modifications: 7.4.4.2 Mortgage Assumption

Mortgage assumption permits a qualified individual to assume both the title to the property and the mortgage obligation from a borrower who is currently delinquent in the mortgage payments.211 This is a loss mitigation option for the original borrower and should not be confused with loss mitigation options that may be offered solely to a successor in interest when the original borrower has died or moved out through a divorce.212

Mortgage Servicing and Loan Modifications: 7.4.4.3 Short Sale

Short Sale. With a short sale, Fannie Mae agrees to accept the proceeds from the sale of a property to satisfy the amount owed on a mortgage loan when the proceeds are less than the amount owed.216 Subordinate lien holders must agree to the short sale, though they can be paid up to $6000 in aggregate to release their liens on the property.

Mortgage Servicing and Loan Modifications: 7.5.1 In General

Freddie Mac divides its workout options into three broad categories: reinstatements, relief options, and workout options. Relief options provide a borrower with temporary relief or an opportunity to cure a delinquency over a defined period of time. The workout options lead to a long-term cure of the delinquency or transfer of property other than through a foreclosure sale. Servicers must evaluate borrowers according to Freddie Mac’s loan workout hierarchy.

Mortgage Servicing and Loan Modifications: 7.5.2 The Hardship Requirement

In general, to be considered for a workout, a borrower must be delinquent in their mortgage payments, or be in imminent danger of default.248 Borrowers must submit a standard application Uniform Borrower Assistance form (Form 710) in order to be considered for the full range of loss mitigation options.249 This form includes a list of circumstances that meet Freddie Mac’s hardship standard.

Mortgage Servicing and Loan Modifications: 7.5.3 Reinstatement

Servicers are required to pursue reinstatement as the first option for resolving a delinquency.255 A reinstatement occurs when a borrower pays all delinquent mortgage payments and past-due amounts, making the mortgage current.256 A borrower may reinstate a delinquent mortgage at any time, even after foreclosure proceedings begin or while a relief or workout plan is in progress. In general, the servicer need not seek Freddie Mac’s approval to process a reinstatement.

Mortgage Servicing and Loan Modifications: 7.5.5.1 In General

Freddie Mac offers workout options that enable borrowers to address long-term or permanent reductions in income which may make homeownership unsustainable or complete a transfer of the home short of foreclosure. These home retention options include several programs to modify the terms of the mortgage. Foreclosure alternatives include short sales and deeds in lieu of foreclosure that meet Freddie Mac’s guidelines. Borrowers also have the option of transferring the home to a third party through a mortgage assumption.

Mortgage Servicing and Loan Modifications: 7.5.5.2 Workout Mortgage Assumption

A workout mortgage assumption permits a qualified individual to assume both the title to the property and the mortgage obligation from a borrower who is currently delinquent in the mortgage payments.271 This is a loss mitigation option for the original borrower and should not be confused with loss mitigation options that may be offered solely to a successor in interest when the original borrower has died or moved out through a divorce.272

Mortgage Servicing and Loan Modifications: 7.5.5.3 Short Sale

Short sale. The Freddie Mac standard short sale is a sale of the property for less than the amount owed on a mortgage.277 As with other options, the borrower must have experienced a hardship and all other workout options must be considered prior to the use of a short sale procedure.278 In addition, subordinate lien holders must agree to the short sale, although they can be paid up to $6000 in aggregate to release their liens on the property.279

Mortgage Servicing and Loan Modifications: 7.5.5.4 Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is a workout option in which a borrower conveys clear and marketable property title to Freddie Mac in exchange for a discharge of the debt.296 Freddie Mac revised the requirements for its deed in lieu of foreclosure process in keeping with the servicing alignment initiative and the CFPB’s mortgage servicing rules.297

Mortgage Servicing and Loan Modifications: 7.5.5.5 Charge-Offs

Freddie Mac will consider a charge-off of a mortgage loan that has an unpaid principal balance of $5000 or less and is 120 days or more delinquent.310 The property must be owner-occupied and maintenance of the property must be up to neighborhood standards and in compliance with municipal requirements.311 Generally, a charge-off ends collection efforts on the mortgage but does not necessarily cancel the note or release the lien on the property.