HIGHLIGHTS of the Home Affordable Modification Program
By N. Stephen Vokshori, Esq.
June 01, 2006
On February 18, 2009 President Obama introduced the Homeowner Affordability and Stability Plan. As part of this plan, the Treasury Department organized an implemented the Home Affordable Modification Program (“HAMP”), a nationwide modification program aimed at helping 3 to 4 million at-risk homeowners by reducing monthly payments to sustainable levels.
HAMP is available to one to four unit owner-occupied properties that are secured by the following types of mortgages:
- Loans owned by Fannie Mae or Freddie Mac;
- Loans guaranteed by Fannie Mae or Freddie Mac; OR
- Other loans not owned by Fannie Mae or Freddie Mac but when a servicer participation agreement between Fannie Mae and the servicer has been executed.
You can research whether or not a loan is owned by Fannie Mae by visiting: http://loanlookup.fanniemae.com/loanlookup/.
You can research whether or not a loan is owned by Freddie Mac by visiting: https://ww3.freddiemac.com/corporate/.
HAMP Eligibility
- The mortgage loan is a first lien originated on or before January 1, 2009.
- The mortgage loan is delinquent or default is reasonably foreseeable; loans in foreclosure are also eligible.
- The mortgage loan is secured by the borrower’s principal residence.
- The borrower can document a financial hardship.
- The borrower currently has a monthly mortgage payment ratio greater than 31 percent.
Determining Hardship
A borrower must be able to show a hardship in order to qualify for a modification. The following events constitute a presumption of hardship:
- A reduction in or loss of income (reduced job hours, reduced pay, decline in self-employed business earning, or unemployment).
- Change in household financial circumstances (death in family, serious or chronic illness, permanent or short-term disability, or increased family responsibilities).
- A recent or upcoming increase in the monthly mortgage payments.
- An increase in other expenses (medical/health-care costs, uninsured losses, or increased real property taxes)
- A lack of sufficient cash reserves to maintain payment on the mortgage loan and cover basic living expenses at the same time. Cash reserves include cash, savings, money market funds, stock and bonds. Cash reserves do not include retirement accounts or other assets reserved as emergency funds.
- Excessive monthly debt payments and overextension with creditors.
The loan modification candidate should be prepared to provide sufficient documentation that would evidence one of the above hardship scenarios.
Reasonably Foreseeable Default
Additionally, a borrower must either (a) be more than 30 days delinquent, or (b) default must be reasonably imminent. (The reasonably imminent default test requires that the debt coverage ratio be less than 1.20 AND cash reserves are less than three times the current monthly mortgage payment.)
Monthly Mortgage Payment Ratio
As mentioned above, a borrower is eligible for the HAMP if the verified income documentation confirms that the monthly mortgage payment ratio prior to the modification is greater than 31 percent.
Determining the Monthly Mortgage Payment
The “monthly mortgage payment” includes the payment of principal, interest, property taxes, hazard insurance, flood insurance, and association fees.
The monthly mortgage payment must not include mortgage insurance premium payments or payments due to holders of subordinate liens.
Determining Gross Monthly Income
The “monthly gross income” includes the borrower’s income before payroll deductions and includes wages, salaries, overtime, commissions, tips, bonuses, housing allowances, Social Security payments, annuity payments, insurance policies, retirement funds, pensions, disability benefits, unemployment benefits, rental income and other income.
When calculating monthly gross income the lender will include non-borrower household income so long as there is documentary evidence that the income has been, and can reasonably continue to be, relied upon to support the mortgage payment. All non-borrower household income must be documented and verified by the servicer using the same standards for verifying a borrower’s income.
Relief Granted Under HAMP
Servicers must apply the following modification steps in this order in order to get the borrower’s monthly mortgage payment ratio reduced as close as possible to 31 percent, without going below 31 percent (the “target monthly mortgage payment ratio”).
- Capitalize accrued interest and escrow advances. (Late fees must be waived).
- Reduce the interest rate in increments of .125 to get as close as possible to the target ratio. The interest rate floor in all cases is 2.0 percent.
- Extend the term and reamortize the mortgage loan by up to 480 months.
- Provide for principal forbearance in an amount according to the target ratio. The forbearance amount will result in a balloon payment fully due and payable upon the transfer of the property or maturity of the loan.
The debt coverage ratio is the borrower’s monthly disposable net income divided by the borrower’s current monthly principal and interest payment on the first lien mortgage loan (excluding tax and insurance payments). Note that monthly disposable net income constitutes a borrower’s monthly gross income less (1) payroll deductions, (2) escrow allocations of property taxes and insurance, (3) HOA fees, (4) other monthly debt service obligations, (5) reasonable living expenses, and (6) other monthly net negative amounts paid/incurred by borrower (i.e. negative rental income).
(This article is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. If you have any questions about this Article, please call or e-mail N. Stephen Vokshori, Esq. (213.785.5366/stephen@voklaw.com) or any other member of Vokshori Law Group.)
