Monday, June 28, 2010

FANNIE MAE: Attacking Strategic Defaults


On June 23, 2010, Fannie Mae announced a change to its "waiting period" policy for prior foreclosures. Heretofore, the waiting period that must elapse after a borrower experiences a foreclosure is seven years. However, Fannie Mae allowed a shorter time period - five years - if certain additional requirements were met (i.e., minimum down payment, credit score, and occupancy requirements).

These requirements have now been modified to remove the five year option. Unless the foreclosure was the result of documented extenuating circumstances, which only requires a three-year waiting period (with additional requirements), all borrowers will now be required to meet a seven-year waiting period after a prior foreclosure to be eligible for a new mortgage loan eligible for sale to Fannie Mae. Fannie Mae's policies for extenuating circumstances remain unchanged (see: Selling Guide, 133-5.3-08, Extenuating Circumstances for Derogatory Credit).

The policy change, effective October 1, 2010, reflects Fannie's commitment to reduce the growing epidemic of strategic defaults.

The policy change was announced at the same time that Fannie put forth a News Release entitled Seven-Year Lockout Policy for Strategic Defaulters. In the announcement, Fannie stated that the changes are designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure, and specifically stating that defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.

Borrowers with extenuating circumstances who work out one of the foreclosure alternatives with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances. However, Fannie will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments.

Strategic Default Epidemic

A strategic default is the decision by a borrower to stop making payments (i.e., defaulting) on a debt despite having the financial ability to make the payments. This is particularly associated with residential and commercial mortgages. Strategic defaults usually occur after a substantial drop in the house's price such that the debt owed is greater than the value of the property (a negative equity condition called "underwater") and is expected to remain so for the foreseeable future.

Borrowers that stop making mortgage payments despite having the ability to pay have traditionally been called "walkaways" - the new term being "strategic defaulters."

Strategic defaults account for almost one-third of all defaults (31% in March 2010), according to research conducted by the University of Chicago Booth School of Business and the Kellogg School of Management. Experian places this statistic at nearly one in five mortgage defaults through the first half of 2009.

More and more defaults are considered "strategic" - where borrowers choose to "walk away" from underwater mortgage obligations regardless of their ability to pay - although to what extent is still up for debate as the two studies cited above demonstrate.

Waiting Period After A Foreclosure

Fannie-Chart (Foreclosure)

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Walking Away

There are two lines of thinking about strategic defaults. One position argues that the borrower has a duty to make payments on debt if the ability to pay is intact. The other position argues that there is no such duty, a loan being a contract between consenting adults, and further noting that financial investors (especially commercial mortgagors) routinely default on non-recourse loans that have negative equity without retaliation from the mortgagee.

In fact, there is an extreme view that argues there is a moral duty to strategically default based on the fact that one should make such decisions based on one's financial interest "unclouded by unnecessary guilt or shame", as lenders who do not modify mortgages do the same, "seek[ing] to maximize profits or minimize losses irrespective of concerns of morality or social responsibility," or to put it more bluntly, stating that "the economy is fundamentally amoral."

Further, obligations to honor a contract are balanced by obligations to oneself and one's family, the latter speaking in favor of strategic default, some arguing "You need to put yourself and your family's finances first," while one also has obligations to a community, which may be damaged by default.

Economist Paul Krugman has noted that strategic defaults will happen after a housing bubble bursts. Many other economists take a similar view. This is consistent with studies and anecdotal information which conclude that most defaults are driven by house equity falling to below the value of the mortgage, combined with a major downward shock to income (i.e., loss of wages).

Of course, foreclosure of the borrower's house will result in a negative credit rating, possibly making obtaining loans in the future more difficult or more expensive for the borrower. With otherwise good credit a new mortgage from US government agencies will be denied until 3 (FHA), and, with the new Fannie announcement, to 7 years (FNMA) have passed since the actual date of foreclosure if extenuating circumstances cannot be proven.

Fannie is updating the additional requirements that apply to borrowers with documented extenuating circumstances to reflect a maximum LTV ratio of the lesser of 90% or the LTV ratio per the Eligibility Matrix for all transactions.

Jurisdictional Variances

Effects vary by jurisdiction: different states in the United States treat default on mortgage debt differently, often depending on whether the mortgage debt is recourse debt or non-recourse debt (i.e., meaning whether the mortgage lender can pursue claims against the defaulted debtor).

Furthermore, mortgage refinancing may be treated differently from a purchase money mortgage, and mortgages on second homes may be treated differently from mortgages on primary residences.

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Underwriting Borrowers with a Prior Foreclosure
Fannie Mae: SEL-2010-08
June 23, 2010

Friday, June 25, 2010



The National Association of Realtors asked the Department of Housing and Urban Development (HUD) for clarification on an unofficial staff interpretation HUD had issued on February 21, 2008. In that interpretation, HUD's Office of General Counsel opined that services performed by real estate brokers and agents on behalf of a home warranty company (HWC) are compensable as additional settlement services if the services are actual, necessary and distinct from the primary services provided by the real estate broker or agent [See 24 CFR 3500.14(g)(3)], and allowed that the real estate broker or agent may accept a portion of the charge for the homeowner warranty only if the broker or agent provides services that are not nominal and for which there is not a duplicative charge. [See 24 CFR 3500.14(c)]

In today's Federal Register, HUD's Office of General Counsel has published an Interpretive Rule which interprets Section 8 of the Real Estate Settlement Procedures Act (RESPA) and HUD's regulations as they apply to the compensation provided by home warranty companies to real estate brokers and agents. An interpretive rules is exempt from public comment under the Administrative Procedure Act; however, HUD is providing a public comment period, commencing today and continuing to July 26, 2010.

HUD's Interpretive Rule holds that an HWC's compensation of a real estate broker or agent for marketing services that are directed to particular homebuyers or sellers would be a payment that violates Section 8 of RESPA as an illegal kickback for a referral of settlement service business. This obviously upholds HUD's historic view that a referral is not a compensable service for which a broker or agent may receive compensation.

However, on a case-by-case basis, compensation may be permissible when the services provided are actual, necessary, and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and for which there is a duplicative charge.

The amount of the compensation from an HWC that is permitted under Section 8 for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business, pursuant to the guidelines offered in HUD's Statement of Policy 1999-1. HUD provides several examples that would not constitute an illegal kickback.


Interpretive Rule

(1) A payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback for a referral under Section 8 of RESPA.

(2) Depending upon the facts of a particular case, an HWC may compensate a real estate broker or agent for services when those services are actual, necessary and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and are not services for which there is a duplicative charge.

(3) The amount of compensation from the HWC that is permitted under section 8 for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business.

Examples of Permissible Compensation

To evaluate whether a payment from an HWC is an unlawful kickback for a referral, HUD may look in the first instance to whether, among other things:

  • The compensation for the HWC services provided by the real estate broker or agent is contingent on an arrangement that prohibits the real estate broker or agent from performing services for other HWC companies (i.e., if a real estate broker or agent is compensated for performing HWC services for only one company, this is evidence that the compensation may be contingent on such an arrangements).
  • Payments to real estate brokers or agents by the HWC are based on, or adjusted in future agreements according to, the number of transactions referred. If it is subsequently determined, however, that the payment at issue is for only compensable services, the existence of such arrangements and agreements would not be an indicator of an unlawful referral arrangement, and would be permissible.

Pricing the Compensation

In analyzing whether a particular payment or fee bears a "reasonable relationship to the value of the goods or facilities actually furnished or services actually performed," payments must be commensurate with that amount normally charged for similar services, goods or facilities.

If the payment or a portion thereof bears no reasonable relationship to the market value of the goods, facilities or services provided, the excess over the market rate may be used as evidence of a compensated referral or an unearned fee in violation of Section 8(a) or (b) of RESPA. [See 24 CFR 3500.14(g)(2)]

The market price used to determine whether a particular payment meets the reasonableness test may not include a referral fee or unearned fee, because such fees are prohibited by RESPA.

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Home Warranty Companies’
Payments to Real Estate Brokers and Agents - Interpretive Rule

RESPA: 24 CFR Part 3500 FR: Vol. 75, No. 122, 36271-36273 (06/25/10)

Thursday, June 24, 2010



On June 23, 2010, the Office of the Controller of the Currency (OCC) and the Office of Thrift Supervision (OTS) jointly issued their Mortgage Metric Report (Report) for the first quarter 2010. The Report provides performance data on first-lien residential mortgages serviced by national banks and federally regulated thrifts. These mortgages comprise more than 64% of all mortgages outstanding in the United States.

Among the disclosed statistics, the Report showed that approximately 41% of loan modifications made in second quarter of 2009 were 60 days or more delinquent nine (9) months after the modification, and the failure rate within nine (9) months was almost 52% in the fourth quarter of 2008.

The Report further discloses that nearly 25% of loan modifications made in the fourth quarter of 2009 were 30 days or more delinquent after three (3) months and Home Affordable Modification Program (HAMP) recidivism rate was 17% in the same period.

Although the Report's Key Findings, Mortgage Performance, Home Retention Actions: Loan Modifications, Trial Period Plans, and Payment Plans, Modified Loan Performance, and Foreclosures and Other Home Forfeiture Actions give varying results, both positive and negative -- as the saying goes, the "devil is in the details!"

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  • Delinquency rates dropped in the first quarter of 2010, with improvement in all categories of mortgages-prime, Alt-A, and subprime.
  • The number of foreclosures increased substantially, including new foreclosures, foreclosures in process, and completed foreclosures.
  • The number of loan modifications and other home retention actions also increased.
  • Re-default rates for modified mortgages remain high.
  • Recent "vintages" (i.e., 2009 loan modifications) performed better.

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Chart-1 Mortgage Metrics-3.10

Serious delinquencies declined across all risk categories during the first quarter of 2010. Subprime mortgages recorded the most significant improvement, while prime loans had the least improvement. Overall, there were 2,210,495 seriously delinquent mortgages at the end of the first quarter, 7.5 percent less than the prior quarter but 36 percent more than a year ago.

Chart-2 Mortgage Metric 3.10

Early stage delinquencies-mortgages 30-59 days delinquent-significantly declined across all risk categories during the first quarter. Overall, early-stage delinquencies, at 2.8 percent, were 17.7 percent less than the prior quarter and 3.6 percent less than a year ago.

Chart-3 Mortgage Metric 3.10

During the first quarter of 2010, servicers implemented 629,678 new home retention actions: loan modifications, trial period plans, and payment plans. This 5.4 percent increase in home retention actions from the prior quarter was driven by the 79,301 increase in HAMP modifications and 25,732 increase in other modifications, which more than offset the 74,091 decrease in new trial period plans. In total, servicers initiated 2,731,408 home retention actions over the last five quarters.

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Mortgage Metrics Report
Disclosure of National Bank and Federal Thrift Mortgage Loan Data
First Quarter 2010
Issued 06/23/10

Wednesday, June 23, 2010



The government program established to assist homeowners in distress continues to lose steam. The Home Affordable Modification Program, known as Making Home Affordable Program, continues to lose steam. The monthly report for May 2010 provides sobering statistics.

  • Number of permanent loan modifications: 346,816.
  • Number of trial modifications canceled: 429,696.
  • Number of "active trials": 467,672.
  • Number of trial modifications started over the last eight months: 690,616. (As of May, there were 1,244,184 trials started, and as of last September there were 553,568. That gives 690,616 trials started over the last 8 months.)

The trial portion of the loan modification process is taking far longer than the three-month period it is designed to last. It appears that, more often than not, borrowers aren't surviving the trial modification stage.

In effect, the May Report shows the number of failed loan modifications trials is significantly greater than the number of successful ones.

Furthermore, a month-over-month comparative analysis indicates that the number of "All Trials Started" is decreasing steadily, along with the number of "All Permanent Modifications Started." For example, trials started in April over March were 47,160, and trials started in May over April were 30,099 - which is the slowest pace since the commencement of the HAMP program.

HAMP Activity

Slide 1

Debt to Income

HAMP-DTI Chart-2010.05_Page_03

The median front-end DTI before modification is 44.8% (which has remained in this range for several months), and the back-end DTI before modification is 79.8% (which has been in the range of 77.5% to 80.2% for several months). The back-end DTI discloses an inescapable fact: nearly 80% of the borrower’s income is going to servicing debt – and nearly 64% of income even after loan modification.

It’s no wonder that many borrowers never make it out of trial modification into permanent modification. Indeed, these are “median” characteristics – so many borrowers have even higher risk profiles!

On what basis can success be claimed for this program?

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Making Home Affordable Program

Servicer Report - May 2010


Tuesday, June 15, 2010

OTS: Fraud and Insider Abuse


The Office of Thrift Supervision (OTS) issued a revised Examination Handbook on Fraud and Insider Abuse on June 14, 2010. Substantive changes include:

  • adding a discussion on Suspicious Activity Reports (SARs) reporting requirements and the applicability of the "Safe Harbor" provisions for SAR filers;
  • adding a discussion on the FDIC's white paper entitled, "Impact of New Activities and Structures on Bank Failures" and highlighted factors that contributed to the four costliest institution failures from 1997 through 2002;
  • providing updated statistics and red flags on mortgage fraud, identity theft, check fraud and payment card fraud;
  • adding a discussion on fraud risk management and detection methods based on AICPA guidance; and,
  • streamlining the internal controls section.

In 2009, the President elevated the fight against mortgage fraud to a cabinet-level priority and expanded the task force to include OTS, OCC, the Federal Reserve, The Federal Housing Finance Agency, HUD, and the Special Inspector General for the Troubled Asset Relief Program.

The President's task force joined the work that the Federal Trade Commission had already begun with their "Operation Stolen Hope" program to crack down on mortgage foreclosure rescue and loan modification scams.

Given more recent concerns like mortgage fraud, consumer loan fraud and identity theft, SARs data is more important than ever. Law enforcement agencies use the information reported on the SARs to initiate investigations and the agencies use the information in their examination and oversight of supervised institutions. The usefulness of the SAR database depends on the completeness and accuracy of the reported information.

Accordingly, we advise you to be sure that your institution is accurately and fully completing SARs.


Appraisal Abuse Red Flags

  • No appraisal or property evaluation in file.
  • Mortgage broker or borrowers that always use the same appraiser.
  • Appraiser bills association for more than one appraisal when there is only one in the file.
  • Unusual appraisal fees (high or low).
  • No history of property or prior sales records.
  • Market data located away from subject property.
  • Unsupported or unrealistic assumptions relating to capitalization rates, zoning change, utility availability, absorption, or rent level.
  • Valued for highest and best use, which is different from current use.
  • Appraisal method using retail value of one unit in condo complex multiplied by the number of units equals collateral value.
  • Use of superlatives in appraisals.
  • Appraisal made for borrower.
  • Appraisals performed or dated after loan.
  • Close relationship between builder, broker, appraiser, lender and/or borrower.
  • Overvalued (inflated) or high property value.

Mortgage Fraud Red Flags

Straw Borrower Schemes

  • Borrowers purchasing property described as a primary residence, but outside of their home states, or located an unreasonable commuting distance from their stated employers.
  • A quit claim deed is used either right before, or soon after, loan closing.
  • Investment property is represented as owner-occupied.
  • Someone signed on the borrower's behalf.
  • Names were added to the purchase contract.
  • Sales involve a relative or related party.
  • No sales agent involved.
  • Indication of default by the property seller.
  • High FICO score.
  • Power of attorney for borrowers.
  • Good assets, but gift used as down payment.
  • Repository alerts on credit report.

Flipping Schemes

  • Fraudulent appraisal.
  • Inflated buyer income.
  • Ownership changes two or more times in a brief period of time.
  • Two or more closings occur almost simultaneously.
  • The property has been owned for a short time by the seller.
  • The property seller is not on the title.
  • There is a reference to double escrow or other HUD-1 form.

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Fraud and Insider Abuse
Regulatory Bulletin, RB 37-54 (May 18, 2010)
Revised: June 14, 2010

Monday, June 14, 2010

FINANCIAL REFORM: Restricts Loan Officer Compensation


On May 20, 2010, by a vote of 59-39 the Senate passed the so-called "Finance Reform Bill," otherwise known as Restoring American Financial Stability Act of 2010 - Amendment (S 3217) (Act). Nearly sixteen hundred pages long, it passed as an Amendment to the House's own version of over sixteen hundred pages (HR 4173), the Restoring American Financial Stability Act of 2010 (HR 4173).

On June 10, 2010, the Senate and House began reconciling their respective financial regulatory reform bills. Thus began the process of "reconciliation" between Senate and House versions to produce a final version that is supposed “to end 'too big to fail,' to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”

In a Summary published by the the House Financial Services Committee, a brief outline was provided which, among other things, confirms the adoption of restrictions on a mortgage originator's compensation through Yield Spread Premiums (YSP).

The reconciled version:

●Clarifies that mortgage compensation can only be financed if all originator compensation is paid by the borrower (not third parties) and the borrower pays the entire fee by financing it; and,

●Permits compensation through rate for all mortgages as long as they satisfy the "borrower pays fee" financing provision (previously the House bill only required this for "Qualified Mortgages").

Under the rubric of "anti-steering regulations," the YSP  would now be  restricted as compensation to the mortgage originator.

The restrictions on loan officer compensation are meant to reconcile the Senate and House versions of the Act and will presumably be in the final version to be signed by the President.


Section 1073 (Page 1444 - HR 4173)


(1) IN GENERAL: For any consumer credit transaction secured by real property or a dwelling, no loan originator shall receive from any person and no person shall pay to a loan originator, directly or in-directly, compensation that varies based on the terms of the loan (other than the amount of the principal).


  (A) IN GENERAL: For any consumer credit transaction secured by real property or a dwelling, a loan originator may not arrange for a consumer to finance through the rate any origination fee or cost except bona fide third party settlement charges not retained by the creditor or loan originator.

  (B) EXCEPTION: Notwithstanding sub-paragraph (A), a loan originator may arrange for a consumer to finance through the rate an origination fee or cost if:

    (i) the loan originator does not receive any other compensation, directly or indirectly, from the consumer except the compensation that is financed through the rate;

    (ii) no person who knows or has reason to know of the consumer-paid compensation to the loan originator, other than consumer, pays any compensation to the loan originator, directly or indirectly, in connection with the transaction; and

    (iii) the consumer does not make an upfront payment of discount points, origination points, or fees, however denominated (other than bona fide third party settlement charges).

(3) RULES OF CONSTRUCTION: No provision of this subsection shall be construed as:

  (A) limiting or affecting the amount of compensation received by a creditor upon the sale of a consummated loan to a subsequent purchaser;

  (B) restricting a consumer's ability to finance, at the option of the consumer, including through principal or rate, any origination fees or costs permitted under this subsection, or the loan originator's right to receive such fees or costs (including compensation) from any person, subject to paragraph (2)(B), so long as such fees or costs do not vary based on the terms of the loan (other than the amount of the principal) or the consumer's decision about whether to finance such fees or costs; or

  (C) prohibiting incentive payments to a loan originator based on the number of loans originated within a specified period of time.

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●Restoring American Financial Stability Act of 2010 (HR 4183)
●Restoring American Financial Stability Act of 2010 - Amendment (S 3217)
●HR 4183: Section 1073 - Prohibited Payments to Mortgage Originators

Thursday, June 10, 2010

Fannie Mae: Credit Reports Prior To Closing


Under Fannie Mae’s new Loan Quality Initiative guidelines, there is an affirmation that the lender is responsible for implementing "practices to identify undisclosed liabilities in a transaction."

Thus, it is the lender's responsibility to develop and implement its own business processes to support compliance with Fannie Mae's requirements  through the closing of a transaction.

Fannie Mae has not changed the policy as it relates to credit reports. Credit documents, including the credit report, are valid for 90 days from the date of the report and may not be older than 90 days at time of closing (i.e., the date that the Note is signed by the borrowers).

However, the lender is responsible for confirming and factoring in the undisclosed liabilities that were not present in the loan processing reviews conducted prior to and through to the date of closing.

Therefore, if the lender pulls a new credit report the day before closing and no differences are found compared with the original credit report, the lender is not relieved of representations and warranties for undisclosed liabilities.

Although pulling a new credit report may reduce the lender's risk exposure related to its representations and warranties on undisclosed liabilities, lenders remain responsible for any and all borrower debt up to and concurrent with closing.



●Retrieving a refreshed credit report just prior to the closing date and reviewing it for additional credit lines.

●New vendor services are becoming available to provide borrower credit report monitoring services between the time of loan application and closing - Equifax's Undisclosed Debt Monitoring™ is one example.

●Direct verification with a creditor that is listed on the credit report under recent inquiries to determine whether a prospective borrower did in fact enter into a financial arrangement with the creditor, which may not be listed on the loan application.

●Running a Mortgage Electronic Registration System (MERS®) report to determine if the borrower has undisclosed liens or another mortgage is being established simultaneously.

New P-T-C Credit Report Finds Undisclosed Liabilities

If additional liabilities are discovered prior to closing, the lender must consider any such additional debts of the borrower in the qualification:

●If the lender is using Desktop Underwriter® (DU®) and identifies differences between the new and/or refreshed credit report and the credit report used when underwriting the loan case file through DU, the lender must take appropriate action when information that was not considered by DU might result in a recommendation other than that returned by DU.

Examples of situations in which loan case files should be resubmitted to DU:

     o If additional debt has been incurred and the inclusion of the additional debt would increase the total expense ratio to a level outside the tolerance specified in section B3-2-10, Accuracy of DU Data, DU Tolerances, and Errors in the Credit Report, of the Fannie Mae Selling Guide.

     o If new derogatory information is detected and/or the credit score has materially changed.

Example of a situation in which the lender should not have to resubmit the loan case file to DU would be if credit balances have changed slightly but the change in the total expense ratio remains within the DU Tolerances policy.


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Fannie Mae: Loan Quality Initiative (LQI) Program
FAQs - Update


Friday, June 4, 2010

Fannie Mae: Alternative Modification™ Extended


On June 3, 2010, Fannie Mae issued Lender Letter LL-2010-07, the purpose of which is to extend the eligibility timeline provided in LL-2010-04 and clarify certain requirements for participation in the Alt Mod™ program. 

The Alternative Modification™ program (Alt Mod™), introduced on March 18, 2010 in LL-2010-04, is an alternative to the Home Affordable Modification Program (HAMP) for those borrowers who were eligible for and accepted into a HAMP trial period plan and completed all trial period payments, but who were subsequently not offered a HAMP permanent modification because of eligibility restrictions.


Revised Eligibility Timeline

Eligible borrowers who failed to qualify for a permanent HAMP modification but successfully completed ALL of the trial period plan payments before LL-2010-04 was issued on March 18, 2010, must be sent an Alt Mod™ offer no later than June 18, 2010. Borrowers who are unable to submit ALL non-capitalized post-trial period payments will not be eligible for the Alt Mod™.

Timing of Borrower Solicitation and Follow Up

Borrowers who complete their trial period plan payments and who are determined to be ineligible for a permanent HAMP modification, but eligible for Alt Mod™, must be sent offers within 10 days of their completion of the HAMP trial period plan or within 10 days of the expiration of the 30-day HAMP Borrower Notice (Notice of Non-Approval).

Once the HAMP trial period has been completed, the service may send an Alt Mod™ Offer to an eligibility borrower subject to receipt of specified documentation, such as: first payment for the Alternative Modification; Hardship Affidavit (or similar document); any remaining documentation required to verify borrowers income; and, executed Loan Modification Agreement.

Servicer follow-ups, by mail and phone, are required for borrowers who do not respond to the Alt Mod™ offer in accordance with specified follow-up timelines.

Mortgage Insurer Approval

Until Fannie Mae obtains a delegated authority agreement from a mortgage insurer on behalf of all servicers, the servicer must obtain approval through either their delegations from each mortgage insurer or, if not available, on a case-by-case basis.

Borrowers Ineligible for Alt Mod™

Borrowers who are not eligible for Alt Mod™ may not be considered for any other permanent modification without the prior written consent of Fannie Mae. Instead, the servicer must attempt to structure a repayment plan to bring the mortgage loan current within 12 months or proceed with foreclosure prevention alternatives or, if necessary, foreclosure.

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Extension to Fannie Mae's Alternative Modification™ to the Home Affordable Modification Program

LL-2010-07, June 3, 2010

Thursday, June 3, 2010

HUD Announces RESPA "Required Use" Prohibition - Rulemaking


HUD published notification today of an Advance Notice of Proposed Rulemaking (ANPR), which commences the process of initiating rulemaking.

The purpose of the ANPR is to "strengthen and clarify" the prohibition against the ''required use'' of affiliated settlement service providers in residential mortgage transactions under Section 8 of RESPA.

According to HUD, the ANPR is necessary because HUD has received complaints that some home buyers are committing to use a builder's affiliated mortgage lender in exchange for construction discounts or discounted upgrades, without sufficient time to research their contracts or to comparison shop.

Therefore, this ANPR will solicit information that can be used to inform any future revision or clarification of the regulatory definition of the ''required use'' of affiliated settlement service providers in residential mortgage transactions.

By means of issuing the ANPR,  HUD seeks comments from sources that are experienced in affiliated business arrangements in residential mortgage transactions.

Interested persons are invited to submit comments regarding this ANPR to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street, SW., Room 10276, Washington, DC 20410-0500.

Comment Due Date: September 1, 2010



In order to address concerns about the operation and effect of incentivized affiliate referrals, HUD issued a revised definition of ''required use'' in its Final Rule on November 17, 2008, which was to take effect on January 16, 2009. The revised definition of ''required use'' in the November 17, 2008 Final Rule would have provided as follows:

"Required use means a situation in which a person's access to some distinct service, property, discount, rebate, or other economic incentive, or the person's ability to avoid an economic disincentive or penalty, is contingent upon the person using or failing to use a referred provider of settlement services. In order to qualify for the affiliated business exemption under § 3500.15, a settlement service provider may offer a combination of bona fide settlement services at a total price (net of the value of the associated discount, rebate, or other economic incentive) lower than the sum of the market prices of the individual settlement services and will not be found to have required the use of the settlement service providers as long as: (1) The use of any such combination is optional to the purchaser; and (2) the lower price for the combination is not made up by higher costs elsewhere in the settlement process." (See 73 FR 68239-68240)

As a result of litigation challenging the revised definition, HUD deferred the effective date for the revised definition, and subsequently withdrew the revision by a Final Rule published on May 15, 2009 (74 FR 22822). When HUD withdrew the revised definition, it left in place the existing definition of ''required use,'' pending new rulemaking on the subject.

HUD's Final Rule withdrawing the revised definition of ''required use'' noted that public comments received in response to the proposed withdrawal had highlighted the potential complexity of existing affiliated business arrangement practices and the need for further clarity on the application of ''required use'' to such practices. The comments also underscored the need for HUD to continue to pursue reform in this area in order to protect consumers from harmful steering and referral practices.

In withdrawing the definition, HUD stated its intention to pursue new rulemaking on the subject of ''required use.'' In the May 15, 2009, Final Rule, HUD also reiterated its commitment to the goals of RESPA reform and to addressing referral practices that result in required use. This ANPR is in furtherance of that goal.

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‘‘Required Use’’ Prohibition: Advance Notice of Proposed Rulemaking

FR: Vol. 75, No. 106, 31334-31338 (06/03/10)