Saturday, March 21, 2009

More Loan Modification Info.

The Los Angeles Times has a starter guide for mortgage modifications that is a good high level overview and also links to counseling services. But I think it is important to understand what loan modifications give and don't give the borrower. Borrowers expecting principal reduction under the plan will be disappointed. The plan is designed to maximize cash flow for the investor but keep the borrower in the home. It does this by amortizing the loan over 40 years and reducing the interest rate. This ensures the borrower pays the investor the maximum amount possible and does nothing to address borrowers being underwater. Under the plan it will be a long time before the borrowers build equity and will unable to move anytime soon.

Here is the
"standard waterfall" formula for modification under the plan:

Step 1a: Request Monthly Gross Income.
Step 1b: Validate total first lien debt and monthly payments (PITIA). For purposes of making a provisional modification offer during the trial modification period, the borrower’s unverified income and debt payments can be used. Provisional information and modification terms will be verified in a timely manner.
Step 2: Capitalize arrearage (ED Note: This is just a fancy way of saying put back what you owe and haven't paid back on your principal balance). Servicers may capitalize accrued interest, past due real estate taxes and insurance premiums, delinquency charges paid to third parties in the ordinary course of servicing and not retained by the servicer, any required escrow advances already paid by the servicer and any required escrow advances by the servicer that are currently due and will be paid by the servicer during the Trial Period. Late fees are not capitalized.
Step 3: Target a Front-End DTI of 31%. The lender/investor shall follow steps 4, 5, and 6 to reduce the borrower’s payment to the level corresponding to the Front-End DTI Target.
Step 4: Reduce the interest rate to reach the Front-End DTI Target (subject to a floor of 2%). The note rate should be reduced in increments of 0.125 %, and should bring the monthly payment as close as possible to the Front-End DTI Target without going below 31%. If the resulting modified interest rate is at or above the Interest Rate Cap, this modified interest rate will be the new note rate for the remaining loan term. If the resulting modified interest rate is below the Interest Rate Cap, this modified interest rate will be in effect for the first five years, followed by annual increases of 1% (100 basis points) per year or such lesser amount as may be needed until the interest rate reaches the Interest Rate Cap, at which time it will be fixed for the remaining loan term.
Step 5: If the Front-End DTI Target has not been reached, extend the term of the loan up to 40 years. If term extension is not permitted extend amortization. The 40-year term begins at the start of the modification (after the borrower successfully completes the Trial Period). Note that the servicer should only extend to a term that is necessary to reach the Front-End DTI Target; there is no requirement to extend to a 40-year term.
Step 6: If the Front-End DTI Target has not been reached, forbear principal. If there is a principal forbearance amount, a balloon payment of that forbearance amount is due on the maturity date, upon sale of the property, or upon payoff of the interest bearing balance. If the modification does not pass the NPV Test and the servicer chooses to modify the loan, the modified balance must be no lower than the current property value.

1 comment:

Anonymous said...

Hmmm...well at least you need more than a heartbeat to get it. Good start.