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Patti Lyles' Blog

By Patti Lyles | Agent in Santa Cruz, CA

The HAMP Waterfall - Qualifying for a Loan Modification


Most borrowers asking about loan modifications are asking if they qualify for the “Obama Plan” formally known as the Home Affordable Modification Program or HAMP.  I’ve outlined the details of the program in another post, however I’ve included below the process your lender will use to determine if you qualify for a HAMP modification and how the modification will be achieved.  This is commonly referred to as the HAMP waterfall.


To qualify for a HAMP loan modification:


·    you must have a loan balance below the conforming loan limits

·    you must have an owner occupied loan.  Yes you must live in the property it cannot be vacant or condemned

·    you must be in or be facing imminent default (soon to miss a mortgage payment due to some hardship)

·    you must have a property that is 1-4 units

·    you must NOT be in bankruptcy

·    really 5b. you must determine if your loan is owned by Freddie Mac or Fannie Mae, commonly known as the GSE’s.  You may find out if your loan investor is either by checking here.  More later on why this is important.

·    To achieve the HAMP modified payment, your lender will attempt to lower your monthly payments to less than or equal to 31 percent of your current gross monthly income; To reach this debt to income ratio (DTI) they will follow the steps below (the HAMP waterfall) in the order presented:


Your lender will calculate the total outstanding interest and principal, escrow advances, and out of pocket servicing expenses incurred during the time your loan has been in default (this will not include late fees).


Your lender will first attempt to lower the monthly payment by reducing your interest rate in increments of .125 percent (1/8 percent) until your monthly payment is 31 percent of your gross income or until a minimum interest rate of 2 percent is reached.  There are literally thousands of mortgage calculators on the Internet for you to use such as this simple one from mortagecalculator.org. If your monthly payment still exceeds 31 percent of your gross income, the lender moves on to the next step…


Next you lender will begin extending the amortization period of your loan, in one year increments, until either your mortgage payment reaches an amount less than or equal to 31 percent of your gross income or a maximum amortization period of 40 years is reached.  If your payments are still more than 31 percent of your gross income, the lender will move on to the next step of the waterfall…


This is where it becomes interesting.  Although there are no lender requirements to forgive any portion of your debt or give a principal reduction under the HAMP program, the next step of the HAMP waterfall does require the lender to consider deferring a portion of the principal balance of your loan interest free until the loan is either paid off or refinanced.  The amount deferred under HAMP will not exceed a loan to value (LTV) of 100% of the current fair market value of your home, nor will any lender be required to defer more than 30 percent of the outstanding principal balance of your loan.  This is also where knowing if your loan is owned by one of the GSE’s is important.

GSE vs. Non-GSE Loans - The Net Present Value (NPV) Test


As mentioned earlier, it is important to know if the investor on your loan is a private investor or one of the GSE’s (Fannie Mae or Freddie Mac).  The reason, HAMP has two different sets of rules to determine if a servicer should recommended you for the next step in the loan modification process.


As you may know, the banks are not required to modify your loan, regardless of who the investor may be.  Therefore once you’ve completed the waterfall analysis above the servicer is required to run an analysis for the bank to determine if they will recover more money by modifying your loan or by moving forward with a short sale, deed in lieu, or foreclosure sale.  The name of this test is the Net Present Value or NPV Test.  Unfortunately even if you “pass” the guidelines above the bank still may not grant you a loan modification if they would recover more money by forcing a sale.


The factors considered in this analysis are intended to forecast the probability you may re-default on a loan, which direction market values are moving in your market, and how likely you are to walk away via strategic default.  Some of these factors used in the calculation include:


re-default rates in your demographic

the discount rate for the remainder of the amortization period

the likelihood you will pay off your mortgage before the end of the amortization period (sell or refinance before paid off)

cost of foreclosure vs. cost of loan modification

value of the home in relation to the amount of debt owed on the property

the likelihood of foreclosure (are you currently late on payments or in default)

The results of the NPV test are returned to the servicer with a Positive (yes, the bank makes more money by completing the loan modification) or Negative (no, the bank loses more money by granting a loan modification).  If you’re interested in details you may review the servicer’s instructions for interpreting NPV test results in this pdf.


To summarize, a positive result would require both GSE and non-GSE loans to be approved under HAMP.  The difference, GSE loans must seek Fannie or Freddie approval when #4 in the waterfall exceeds 100 percent LTV or more than 30 percent of the loan balance is deferred.  Non-GSE loans may be approved at the investor’s discretion.  If the NPV Test is negative a non-GSE loan can be denied under HAMP at the banks discretion.  However, a negative NPV test on a GSE loan must still be considered for HAMP approval unless #4 in the waterfall above requires the bank defer principal beyond 100 percent LTV or defer more than 30 percent of the current loan balance to meet the 31 percent DTI on gross income.  This result will also require “expressed written consent from Freddie Mac or Fannie Mae.


If this last part seems confusing, you’re not alone.  So far the HAMP program has produced dismal results falling short of the expected 3 million modifications promised by the Obama Administration.  To date less than 250,000 permanent modifications have been completed using the program.   In a July 20 report from the Treasury Department officials noted that participants are dropping out of the HAMP program at twice the pace of those getting permanent loan modifications.  To make matters worse, House lawmakers are now investigating allegations that Fannie Mae executives have pushed borrowers into temporary modifications in order to collect incentive payments from the federal government.


The bottom line for borrowers is to be proactive and do your homework beforehand.  The unfortunate reality is that HAMP is not the magic program that can keep you in your home if you cannot make the payments.  Further, it’s important to remember the bank is collecting on a debt; although this seems obvious to most, it’s often forgotten that all information gathered during the modification process can and will be used to collect on that debt regardless of the outcome of your modification.  If you later attempt to complete a short sale the bank will likely attempt to obtain any liquid assets divulged during the process.  Some industry experts may also suggest that the Fannie Mae allegations mentioned earlier only support the notion that banks willingly grant temporary modifications in order to continue collecting payments and to seek other hidden assets on an already hopeless loan.


Finally, do your homework, seek help from knowledgeable advisers, and never pay up front for a loan modification.  Best of luck to everyone.

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