Fannie: Introduces Second Lien Modifications

On August 13, 2009, the US Department of Treasury (Treasury) published Supplemental Directive 09-05, introducing the Second Lien Modification Program designed to work in tandem with the Home Affordable Modification Program (HAMP). The Supplemental Directive 09-05 was revised on March 26, 2010.

HAMP and the Second Lien Modification Program (which is named "2MP") are meant to create a "comprehensive solution to help borrowers achieve greater affordability by lowering payments on both first-lien and second-lien mortgage loans."

On September 21, 2010, Fannie issued Announcement SVC-2010-14, which introduces its Second Lien Modification Program and provides guidelines to Fannie servicers.

All Fannie Mae-approved servicers must participate in the program for all eligible Fannie Mae second-lien mortgage loans and must implement the 2MP program no later than January 1, 2011.

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Highlights

Modification Eligibility

• Borrowers in Bankruptcy

• Coordination with Other Making Home Affordable Programs

Modification Process

• Matching Second Liens to HAMP First Liens

• Reliance on First-Lien Data

• Standard Modification Steps

• Compliance with Applicable Laws

• Borrower Communication

• Trial Period Requirements

• Borrower Response

• Effective Date of 2MP Modification

• Reclassification or Removal of MBS Mortgage Loans Prior to Effective Date of Modification

• Borrower Notice

• 2MP Modification Documents

• Assignment to MERS

Use of Suspense Accounts and Application of Payments

• Monthly Statements

Reporting Requirements

• Reporting to Fannie Mae Through HSSN

• Reporting to Treasury

• Reporting to Credit Bureaus

Mortgage Insurers

• Mortgage Insurer Approval

• Reporting to Mortgage Insurers

Fees and Costs

• Servicing Fees

• Late Fees

• Administrative Costs

Incentive Compensation

• Servicer Incentive Compensation

• Borrower Incentive Compensation

• Re-default and Loss of Good Standing

Compliance

Record Retention

Transfers of Servicing

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Fannie: Home Affordable Modification Program:
Introduction of Second Lien Modification Program
SVC-2010-14
September 21, 2010

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LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

FHA Launches “Underwater” Refinances

On August 6, 2010, the Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2010-23, which announced the FHA Short Refinance program.

Available on September 7, 2010, the loan product will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth – or “underwater.” The FHA Short Refinance will continue to be available until December 31, 2012.

The Federal Housing Administration (FHA) will offer certain non-FHA borrowers, who are current on their existing mortgage and whose lenders agree to write off at least ten (10%) percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.

To be eligible for a new loan, homeowners must owe more on their mortgage than their home is worth and be current on their existing mortgage. Homeowners must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner's primary residence.

The borrower's existing first lien holder must agree to write off at least 10% of the unpaid principal balance, bringing the borrower's combined loan-to-value ratio to no greater than 115%. The existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75%.

U.S. Department of Treasury will provide incentives to existing second lien holders who agree to full or partial extinguishing of the liens. To be eligible, servicers must execute a Servicer Participation Agreement (SPA) with Fannie Mae, in its capacity as financial agent for the United States, on or before October 3, 2010.

HUD estimates that between 500,000 and 1,500,000 borrowers will refinance using these enhancements and the net economic benefits will be between $11.774 and $35.322 billion.

Highlights

Eligibility

Participation is voluntary and requires the consent of lien holders. In order for a loan to be eligible, the following conditions must be met:

1. The homeowner must be in a negative equity position;

2. The homeowner must be current on the existing mortgage to be refinanced;

3. The homeowner must occupy the subject property (1-4 units) as their primary residence;

4. The homeowner must qualify for the new loan under standard FHA underwriting requirements and possess a "FICO based" decision credit score greater than or equal to 500;

5. The existing loan to be refinanced must not be a FHA-insured loan;

6. The existing first lien holder must write off at least 10 percent of the unpaid principal balance;

7. The refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent;

8. Non-extinguished existing subordinate mortgages must be re-subordinated and the new loan may not have a combined loan-to-value ratio greater than 115 percent;

9. For loans that receive a "refer" risk classification from TOTAL Mortgage Scorecard (TOTAL) and/or are manually underwritten, the homeowner's total monthly mortgage payment, including the first and any subordinate mortgage(s), cannot be greater than 31 percent of gross monthly income and total debt, including all recurring debts, cannot be greater than 50 percent of gross monthly income;

10. FHA mortgagees are not permitted to use premium pricing to pay off existing debt obligations to qualify the borrower for the new loan;

11. FHA mortgagees are not permitted to make mortgage payments on behalf of the borrowers or otherwise bring the existing loan current to make it eligible for FHA insurance; and

12. The existing loan to be refinanced may not have been brought current by the existing first lien holder, except through an acceptable permanent loan modification as described below.

Salient Features of Program

• Principal Write Off
• Calculating Mortgage
• Underwriting Requirements
• Current Mortgage
• Acceptable Credit History
• Combined Loan-to-Value Ratio
• Permissible Secondary Financing
• Borrower Certification
• Mortgage Type and ADP Codes
• Second Lien Extinguishment and Servicer Incentive

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FHA Refinance of Borrowers in Negative Equity Positions
Mortgagee Letter 2010-23
August 6, 2010

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

HAMP: “Continues to Struggle”

Yesterday, we provided an outline of the continuing downward trend of the Home Affordable Modification Program (HAMP) program, as reported in the most recent June Report, issued on July 20, 2010.

On July 21, 2010, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), stated in its Quarterly Report to Congress (Report), that HAMP "continues to struggle to achieve its original stated objective to help millions of homeowners avoid foreclosure 'by reducing monthly payments to sustainable levels.'"

It would be helpful to refer to our compliance update, "HAMP: Continues Downward Trend," issued on July 22, 2010, for comparative analysis.

The Report states that the number of homeowners being helped through permanent modifications "remains anemic," with fewer than 400,000 ongoing permanent modifications and HAMP has not put an "appreciable dent" in foreclosure filings. Furthermore, according to the Report and as we also indicated in yesterday's compliance update, the number of trial and permanent modifications that have been canceled substantially "exceeds the number of homeowners helped through permanent modifications."

In a telling statement of fact, the Report unequivocally finds that the Treasury "clings to its prior statements that it plans to offer trial modifications to three to four million homeowners, a measure that the SIGTARP has previously shown to be essentially meaningless," and that its refusal to provide meaningful goals is a "fundamental failure of transparency and accountability."

Finally, the SIGTARP takes the position that the "American people are essentially being asked to shoulder an additional $50 billion of national debt without being told, more than 16 months after the program's announcement, how many people Treasury hopes to actually help stay in their homes as a result of these expenditures, how many people are intended to be helped through other subprograms, and how the program is performing against those expectations and goals."

Without clearly defined standards, opines the SIGTARP, positive comments about HAMP's success are "simply not credible," and leads to a growing "public suspicion" that HAMP is an "outright failure."

It should be noted that of the anticipated $75 billion dollar cost of the Making Home Affordable (MHA) program that commenced on February 18, 2009, $50 billion will be funded through TARP. HAMP is one of the MHA programs.

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director or call 516-442-3456 x 100.

Highlights

As of June 30, 2010, a total of 753,275 mortgages are currently being modified, either permanently or on a trial basis. Of those, 389,198 were active permanent modifications and 364,077 were active trial modifications.

SIGTARP uses statements from the June reviews provided by HUD and Treasury to explain why the number of cancellations of mortgage modifications has increased, as decisions on aged trials are being reached, such as:

• Many borrowers who received temporary modifications were not able to meet eligibility requirements such as verifying their income and successfully making trial payments.

• Borrowers had mortgage payments already less than 31% of their income or did not occupy the property as their primary residence.

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Office of the Special Inspector General
of the Troubled Asset Relief Program
Quarterly Report to Congress
July 21, 2010

July 1st: Home Affordable Unemployment Program

Overview

Under the Home Affordable Modification Program (HAMP), servicers apply a uniform loan modification process to provide eligible borrowers with sustainable monthly housing payments. On May 11, 2010, a Supplemental Directive was issued that gave servicers flexibility to provide assistance to borrowers whose hardship is related to unemployment.

When a borrower is unemployed, a HAMP trial period plan or permanent HAMP modification may not be appropriate, and in some cases, the borrower may not have the ability to make the required payments.

So, the Supplemental Directive requires servicers to consider eligible borrowers for the Home Affordable Unemployment Program (HAUP), which grants borrowers a forbearance plan during which regular monthly mortgage payments are reduced or suspended.

Borrowers will be evaluated for HAMP at the earlier of re-employment or 30 days prior to the expiration of the UP forbearance plan.
The Supplemental Directive pertains to first lien mortgage loans that are not owned or guaranteed by Fannie Mae or Freddie Mac (Non-GSE Mortgages) or insured or guaranteed by a federal agency, such as the Federal Housing Administration (FHA).

Effective for all participating servicers on July 1, 2010.

Highlights

Eligibility

Servicers are required to offer an HAUP forbearance plan to a borrower who meets the following HAMP minimum eligibility criteria:

• The mortgage loan is secured by a one- to four-unit property, one unit of which is the borrower's principal residence.
• The mortgage loan is a first lien mortgage loan originated on or before January 1, 2009.
• The current unpaid principal balance of the mortgage loan is equal to or less than $729,750.1
• The mortgage loan is delinquent or default is reasonably foreseeable.
• The mortgage loan has not been previously modified under HAMP and the borrower has not previously received an UP forbearance period.

Additional HAUP forbearance plan eligibility requirements include that the borrower:

• Makes a request before the first mortgage lien is seriously delinquent (before three monthly payments are due and unpaid). A request for UP may be made by phone, mail or email. Servicers must document the date of the UP request in the servicing file and, within 10 business days, confirm the receipt of the request with the borrower via mail or return email.
• Is unemployed at the date of the request for UP and is able to document that he or she will receive unemployment benefits in the month of the Forbearance Period Effective Date (defined below) even if his or her unemployment benefit eligibility is scheduled to expire before the end of the UP forbearance period.

Terms

• Term must be three months or upon reemployment (whichever is less). Servicers may extend this period according to their investor/regulatory guidelines.

• Monthly mortgage payment must be reduced to less than or equal to 31% of the borrower's gross monthly household income and may be suspended in full.

Transition to HAMP

Borrowers in an HAUP forbearance plan will be evaluated for HAMP at either reemployment or 30 days prior to the UP forbearance period expiring (whichever happens first).

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Home Affordable Unemployment Program
Home Affordable Modification Program Supplemental Directive
May 11, 2010

OCC-OTS: MORTGAGE REPORT SHOWS MIXED REVIEWS

Overview

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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Highlights
Findings

• 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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Charts

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.

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.

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

MAKING HOME AFFORDABLE: PROGRAM LOSING STEAM

Overview

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

Debt to Income

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

(06/21/10)