Obama's Home Affordability Loan Modification Program Part 3

In my two previous posts, I discussed the concept that wraps the Obama "Making Home Affordable Loan Modification Program" along with details of "Making Home Affordable" as well as "Eligibility and Verification". Today, I will discuss the 3rd and 4th aspects of the plan..."Loan Modification Terms and Procedures" as well as "Transparency and Accountability".

3.] Loan Modification Terms and Procedures

A.] Participating servicers are required to service all eligible loans under the rules of the program unless explicitly prohibited by contract; servicers are required to use reasonable efforts to obtain waiver of limits on participation.
B.] Participating loan servicers will be required to use a net present value (NPV) test on each loan that is at risk of imminent default or at least 60 days delinquent. The NPV test will compare the net present value of cash flows with modification and without modification. If the test is positive..i.e. meaning that the net present value of expected cash flow is greater in the modification scenario...the servicer must modify, absent of fraud or a contract prohibition.
C.] Parameters of the NPV test are spelled out in the guidelines, including acceptable discount rates, property valuation methodologies, home price appreciation, assumptions, foreclosure costs, time-lines, and borrower cure and re-default rate assumptions.
D.] Servicers will follow a specified sequence of steps in order to reduce the monthly payment to no more than 31% of gross monthly income (DTI).
E.] The modification sequence requires first reducing the interest rate (subject to a rate floor of 2%), then if necessary extending the term of amortization of the loan up to a maximum of 40 years. If necessary "Forbearance" fo the principal can be effected. Principal Forgiveness or a Hope for Homeowners refinancing are acceptable alternatives.
F.] The monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner's association and/or condominium fees. Monthly income includes wages, salary, overtime, fees, commissions, tips, social security, pensions, and all other income.
G.] Servicers must enter into the program agreements with Treasury's financial agent on or before December 31, 2009.
H.] Payments to servicers, lenders, and responsible borrowers.
I.] The program will share with the lender/investor the cost of reductions in monthly payments from 38% to 31% DTI.
J.] Servicers that modify loans according to the guidelines will receive an up-front fee of $1000.00 for each modification, plus "pay for success" fees on still-performing loans of $1000/year.
K.] Homeowners who make their payments on time are eligible for up to $1000 of principal reduction payments each year for up to 5 years.
L.] The program will provide one-time bonus incentive payments of $1500 to lender/investors and $500 to servicers for modification made while a borrower is still current on mortgage payments.
M.] The program will include incentives for extinguishing second liens on loans modified under this program.
N.] No payments will be made under the program to the lender/investor, servicer, or borrower unless and until the servicer has first entered into the program agreements with Treasury's financial agent.
O.] Similar incentives will be paid for Hope for Homeowner refinances.

4.] Transparency and Accountability

A.] Measures to prevent and detect fraud, such as documentation and audit requirements, will be central to the program.
B.] Servicers will be required to collect, maintain and transmit records for verification and compliance review, including borrower eligibility, underwriting, incentive payments, property verification, and other documentation.
C.] Freddie Mac will audit compliance.

The guidelines are detailed. They are set to protect all parties. Homeowners can effect the transactions themselves, however it is advisable to retain the services of a qualified loan modification professional who will have the expertise to expedite the process and avoid any pitfalls that the individual homeowner is likely to stumble upon. The goal here is to ensure that each homeowner gets the best chance possible to stay in their homes. Other than the personal benefit of being "Empowered", by being able to remain in their homes...each home loan that is successfully modified will help to insure that our economy begins to stabilize and grow. This will "Empower" each of us...