Determining Eligibility for Making Home Affordable

On March 4, 2009 President Obama released guidelines for the Homeowner Affordability and Stability Plan. The guidelines are referred to as Making Home Affordable (MHA). These guidelines have been revised (Revised Guidelines) to include second mortgages and more clearly delineate the method of achieving a required loan modification, which may save eligible homeowners from a deed in lieu of foreclosure scenario. The Revised Guidelines require lenders to temporarily reduce payments for those borrowers eligible for modification and deemed to be in actual foreclosure or risk imminent default as defined by the guidelines. The Revised Guidelines also more clearly delineate the Net Present Value test ("NPV"), an initial hurdle toward modification. In this article I will talk about eligibility for the program and offering an immediate trial period of a modified mortgage to the borrower.

Thirteen Qualifying Rules

If a borrower wants to take advantage of the MHA program they must first qualify for the program. MHA lists thirteen rules necessary for qualification, as opposed to the original four qualifying rules. The thirteen qualifying factors ("Qualifying Factors") are:

  1. The mortgage loan has not been previously modified under the HMP.
  2. The mortgage loan is delinquent or default is reasonably foreseeable; loans currently in foreclosure are eligible;
  3. The mortgage loan is secured by a one- to four-unit property, one unit of which is the borrower's principal residence;
    1. Cooperative share mortgages and mortgage loans secured by condominium units are eligible for the HMP.
    2. Loans secured by manufactured housing units are eligible for the HMP.
  4. The property securing the mortgage loan must not be vacant or condemned.
  5. The borrower documents a financial hardship and represents that (s)he does not have sufficient liquid assets to make the monthly mortgage payments by completing a Home Affordable Modification Program Hardship Affidavit and provides the required income documentation.
  6. The documentation supporting income may not be more than 90 days old (as of the date the servicer is determining HMP eligibility).
  7. The borrower has a monthly mortgage payment ratio of greater than 31 percent [monthly mortgage payment to gross monthly income].
  8. A borrower in active litigation regarding the mortgage loan is eligible for the HMP.
  9. The servicer may not require a borrower to waive legal rights as a condition of the HMP.
  10. A borrower actively involved in a bankruptcy proceeding is eligible for the HMP at the servicer's discretion. Borrowers who have received a Chapter 7 bankruptcy discharge in a case involving the first lien mortgage who did not reaffirm the mortgage debt under applicable law are eligible, provided the Home Affordable Modification Trial Period Plan and Home Affordable Modification Agreement are revised as outlined in the Acceptable Revisions to HMP Documents section of this Supplemental Directive.
  11. The borrower agrees to set up an escrow account for taxes and hazard and flood insurance prior to the beginning of the trial period if one does not currently exist.
  12. Borrowers may be accepted into the program if a fully executed Home Affordable Modification Trial Period Plan is in the servicer's possession on December 31, 2012.
  13. The current unpaid principal balance (UPB) of the mortgage loan prior to capitalization must be no greater than:
    1. 1 Unit: $729,750
    2. 2 Units: $934,200
    3. 3 Units: $1,129,250
    4. 4 Units: $1,403,400

Upon receipt of the borrower's application for modification the servicer is given the option to either rely on the borrower's verbal representation of eligibility or demand written proof of eligibility. Please note that this election only applies to eligibility into the program, as opposed to qualifying for a modification.

Both the original and revised Guidelines require the borrower to undergo a trial period under a proposed modification. However, the Revised Guidelines allow the servicer to use the information provided in the eligibility phase to allow the trial period to begin almost immediately. Alternatively, the servicer may require full documentation of eligibility for entry into the program and meeting the requirements for modification prior to offering the trial period.

Upon first blush one might wonder why a servicer would ever proceed to offer the trial period of modification upon the verbal representation of the borrower. However, once one understands the intricacies of the program one does wonder why a servicer would not offer an immediate trial period for the borrower.

The Revised Guidelines state that the servicer "should not proceed with a foreclosure sale until the borrower has been evaluated for the program, and, if eligible, an offer to participate in the HMP has been made." Therefore, a servicer who offers an immediate trial period has two benefits:

  1. The servicer is able to require immediate payments from the borrower. This converts toxic paper into productive paper; and
  2. If the borrower fails to meet the terms of the trial period then regardless of whether the borrower meets the requirements for modification an otherwise qualified borrower will be rejected.

In other words, the tender of an offer of an immediate trial period generates immediate cash for the servicer and if the borrower fails during the trial period, speeds up the foreclosure process.

I will discuss the requirements that must be met for modification in a separate article.

Jerry Solomon


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