There was most likely an audible and collective sigh of resignation throughout the housing industry in May when Treasury secretary Jack Lew and HUD secretary Shaun Donovan announced that the Making Home Affordable program would remain in effect through 2015 rather than lapsing at the end of this year.
However, under the MHA programs, there can be a benefit for both the homeowner and the industry that many may have overlooked.
Hope Now, an alliance between mortgage industry participants to help homeowners stay in their homes, released in June its April 2013 loan modification data and since 2007 approximately 5.2 million homeowners received proprietary loan modifications and more than 1.1 million received HAMP modifications (since reporting began in 2009).
Further, for the month of April 2013, proprietary loan modifications with reduced monthly principal and interest payments accounted for 83% of the total of 70,000 modifications, and modifications with reduced principal and interest payments of more than 10% accounted for 76% of the total modifications.
As an industry, we have embraced modifications as a meaningful way to provide solutions to homeowners struggling to stay in their homes while increasing the value of the loans to investors.
Historically, the majority of modifications have been proprietary modifications. However, consider that HAMP modifications provide meaningful incentives to the borrower, servicer and investor for, among other things, payment reduction and principal reduction.
MHA has provided needed flexibility and streamlined underwriting and documentation over the years for HAMP. Servicers can receive $400 to $1,600 for a completed trial period plan transitioned to a permanent HAMP modification. Investors are able to receive a payment reduction cost share and home price decline protection incentive, but the most significant investor incentive can be the Principal Reduction Alternative incentive.
Principal reduction is often debated and is not currently recognized by the GSEs. Further, there may be contract limitations for those loans held in securities, not to mention the moral hazard debate.
However, research shows that borrowers with principal reductions are four times less likely to re-default on their mortgages.
For those investors able and willing to reduce the principal balance of the loan, why not use PRA under MHA? Below is an example of an investor incentive for a loan more than six months past due:
- $461,205 Unpaid Principal Balance
- 115% mark-to-market loan to value at $270,250
- $461,205-$270,250 = $190,955 principal forgiveness
- $190,955/$0.18 = $34,371.90 (investor incentive)
Or this example for a loan less than six months past due:
- $200,000 UPB before modification, property value is $100,000
- 105% mark-to-market loan to value at $105,000
- $200,000-$105,000 = $95,000 principal forgiveness
- $35,550 (investor incentive)
The MHA programs may seem more challenging to implement than a proprietary modification based on the volume numbers over time, but a servicer should be able to effectively and efficiently transition between MHA modification programs and propriety programs to serve the needs of the homeowner and the investor.
Loren Morris is the general counsel, chief compliance officer and executive vice president at Fay Servicing, a special servicer that manages distressed and at-risk loans for mortgage bankers and alternative real estate investors. For more information, please visit www.fayservicing.com