Business Puerto Rico Magazine - Business in Puerto Rico.

Fighting Off Foreclosure
Understanding Obama’s

MAKING HOME AFFORDABLE MODIFICATION

The Homeowner Affordability and Stability Plan includes $75 billion in incentives that will continue until December 31, 2012 in order that banks modify the loans of home owner who are struggling to remain in their homes. These incentives are under the program Making Home Affordable Modification. It includes modification of secondary loans within the Making Home Affordable (MHA) program in the United Stated and Puerto Rico.

Making Home Affordable Modification

The program Making Home Affordable Modification is not obligatory for all investors (loan owners) and the administrators/banks of the loan; however, this will serve homeowners as an incentive for the banks to make loan modifications. Nevertheless, financial institutions that in the future accept money from the Treasury Department will be obligated to participate in the MHA program.

A list of the participating banks will be available on the FinancialStability.gov after they have signed a contract with the Treasury Department. The banks have to agree to review the possible eligible cases of all homeowners who call or write asking to be considered for the program. The banks will have to first reduce the monthly payments so that the mortgagee’s payments do not surpass 38% of his income. This percentage is known as the DTI (debt-to-income ratio). Furthermore, the program will provide subsidy for an additional reduction in the monthly payments that will reduce it from 38% to 31% of the DTI. However, loan modifications will not be made if fraud is involved, or if modification is prohibited under the original contract that outlines the servicing of the loan between the administrator and investor.

Eligibility

The government has an auto-evaluation tool provided at MakingHomeAffordable.gov where homeowners can see whether they can benefit from the modification or refinancing programs. In addition, the Q & A Session for Homeowners has questions and answers for homeowners that describe the MHA Modification Program and the MHA Refinancing Program.
An analysis of the net present value (NPV), developed by the Treasury Department, will be used in the eligibility qualification process to determine whether modification (including incentives) provides a better financial result (cash flow) for the investor than a foreclosure.
In order to be eligible for a modification, the borrower should comply with the following minimum eligibility requirements:

The property must be occupied as the principal residence (a house consisting of up to four units, condominium or cooperative are properties considered residences under the law).
The house must not be abandoned.
The loan should have been obtained before January 1, 2009.
There is no minimum or maximum of lost added value which will be taken into account for the purpose of eligibility.
The current balance of the loan should be equal to or less than $729,750 (1 unit), $934,200 (2 units), $1,129,250 (3 units), and $1,403,400 (4 units).
The monthly mortgage payments should currently be more than 31 percent (front-end DTI) of the borrower’s gross income (before taxes).
The borrower should have suffered a significant change in income or expenses up to the point where mortgage payments can no longer be made.
The borrowers do not have to be late with their payments. In fact, borrowers who are behind in their payments are advised to get help from a HUD approved housing counselor.
Borrowers who are in bankruptcy are not automatically eliminated from being considered for a modification.
Borrowers who are currently in litigation concerning their mortgage loans can qualify for a modification without giving up their legal rights.
Modification will be permitted only one time under the MHA program.

The calculation of front-end DTI includes payment of principle, interest, property taxes, insurance and homeowner’s association (HOA) fees. The payments on second mortgages are not included.

As one of the modification conditions, borrowers who have a back-end DTI that exceeds 55% of their gross income should certify that they will seek counseling from a HUD approved counselor or the National Foreclosure Mitigation Counseling Program (NFMC) in order to create a sustainable financial plan.

The calculation of the back-end DTI includes: the payment of principal, interest, property taxes, insurance, HOA fees, mortgage insurance (MIP), payments for second mortgage loans, mortgage loans for a second home (vacation, not investment), payments to other debts, total negative income from rental derived from all investment property.

Requirements

Borrowers have to provide documentation in order to qualify for the MHA Modification Program. Some of the required documents are:

Documentation of gross income (before taxes) of the person whose salary appears on the mortgage loan note. This should include the most recent check stubs that cover at least one month and/or documentation of other sources of income.
The most recent tax declaration. In addition, the borrower’s income will be verified if IRS Form 4506-T is required.
Information on other assets.
Information on second mortgage loans (i.e. the most recent statements) on the property.
The current balances on all credit cards and the minimum payments required (i.e. credit card statements).
Current balances on all other debts (i.e. student loans, car loans, etc.).
Debts will be verified using a borrower’s credit report. The bank, however, will cover the cost of obtaining this credit report.
An affidavit of financial difficulty (i.e. hardship letter) describing the circumstances that caused the income reduction or increase in expenses (i.e. job loss, divorce, illness, etc.).

When contacting the lending bank, borrowers should ask to be considered for a loan modification under the Making Home Affordable program.

The Modification

After calculating the DTI, the borrowers could receive lower interests than those currently on the market, not to go below 2%. The interest would be fixed for a minimum of five years. After 5 years, the interest can rise, but not to more than 1% each year until the interest on the note reaches the interest noted in the Freddie Mac Primary Mortgage Market Survey on the day the modification was made.

In some cases, however, the calculation of interest could go below 2%, but that would cause the DTI to go below the required 31%. In these cases, the bank should defer the principal of the debt. The amount deferred should be paid when the loan is paid off, refinanced, or when the house is sold. Meanwhile, this amount would not accumulate interest.

Reduction of the Principal

Loan administrators are not required to reduce the principal of the loan under the Making Home Affordable program. However, the administrator could forgive part of the unpaid principal in order to obtain the required front-end DTI. If the principal is forgiven, the rest of the modification process will follow its course according to program regulations.

All this is the option of the bank to help borrowers who are below the requirement of 31% DTI. However, upon helping borrowers to qualify, the program will reimburse the mortgage/bank administration with a portion of the costs of a principal reduction.

The Incentives

In order to help those who pay their taxes year after year, the MHA program focuses on modifications that make sense by providing a 90 trial period. At the end of the trial period, the administrators issue an agreement of modification that includes deposits for taxes and insurance (escrow accounts). Consequently, the modification will take effect the first month after having successfully completed the 90 trial period. The successful completion of this trial period is defined by the borrower’s on-time payments on the modified loan.

Just as tax payers are protected, borrowers, investors and administrators will be eligible to receive financial incentives only after having successfully completed the 90 trial period for the modification. The incentives under the Making Home Affordable Modification program include:

Borrowers who make their payments on time under the modified loan will receive a reduction on the principal of the loan which could be as much as $1,000 each year for a maximum of 5 years. The payments will be made directly to the loan administrator and will be applied directly to reduce the principal balance of the loan. The total incentive could amount to$5,000 within 5 years, and the borrower will receive monthly information on the accumulation of these payments.
Administrators will receive only one payment of $1,000 for each delinquent modification, and $1,500 for each loan modification that is up-to-date. An additional incentive of $1,000 could be earned each year if the borrower maintains his payments up-to-date (to not be late for more than 30 days) for three years. In addition, they will receive compensation when they contact the owner of the second mortgages and cancel those loans.
Investors will receive a subsidy for a portion of the cost of reducing the interest for the modification and a payment of $1,500 as an incentive for each loan modification that is current. In addition, they will be eligible to receive compensation payments for the increase in risk exposure if the values of the properties with loan modifications decrease within a period of 5 years after modification.

Similar incentives will be paid on refinancing under the Hope of Homeowners program.

Incentives for Short Sales and Voluntary Delivery (Deed-in-Lieu)

Loan administrators and borrowers will be compensated for facilitating short sales and voluntary delivery (deed-in-lieu of foreclosure) in the event that the borrower does not qualify under the NPV analysis, or defaults with his payments under the Making Home Affordable Modification program.