HAMP Waiver Eliminates Trial Period Restart Rule
I missed this HAMP update yesterday. Although the changes are not all that relevant to most loan originators, struggling homeowners should take note.
From the release:
Critical Home Affordable Modification Program Waiver Granted to Participating Servicers
Effective today, a new critical Home Affordable Modification Program (HAMP) Waiver is granted to participating servicers, as detailed below.
Permanent HAMP Waiver for Elimination of the 25% Trial Period Restart Rule #20091203 Supplemental Directive 09-01 (issued April 6, 2009) required borrowers to be reevaluated for a HAMP trial period if their verified income (as evidenced by the borrower's documentation) exceeded the initial income information used by the servicer to place the borrower in the trial period by more than 25%. The borrower would be reevaluated based on the program eligibility and underwriting requirements and, if eligible, would have to restart the trial period.
With the issuance of this waiver, borrowers are no longer required to restart the trial period. The trial period payments would not be adjusted, but the permanent modification terms would be based on the borrower's higher verified income.
Note from John Kohler of 12th Street Capital:
A small bit of good news came out of the Treasury Department today for those who are understating their incomes in order to qualify for a HAMP loan modification.
To be eligible for a HAMP modification, a borrower's pre-modification front-end DTI must be greater than 31%. Since a borrower's current mortgage payment is known by the servicer, the initial screening to get into a trial modification turns on what the borrower states as his current income. During the trial period, the servicer collects the borrower's financial information and verifies what the borrower has provided.
Prior to yesterday's rule change, if the borrower understated his income by more than 25%, the servicer was required to re-qualify the borrower for a HAMP modification taking that higher income into account and, if the borrower was still HAMP-eligible, the 3 month trial period was restarted. An understatement by 25% or less would not require a re-start of the trial period.
The new rule will no longer require that the trial period be restarted if the borrower understates income, regardless of amount. If the other conditions of HAMP are satisfied, the borrower can proceed to permanent status. The monthly payments under the permanent modification will be adjusted to reflect the higher verified income, but the borrower does not have to make up for any “shortfall” in respect of the lower trial period payments that were made. I can confirm that the borrower's HAMP eligibility (31% DTI) will still be tested based on the higher verified income. I already tried that one.
The bad news about yesterday's announcement is that income “discrepancies” in HAMP are at a level where the Treasury characterizes this change as a “critical” waiver. I'm not surprised that borrowers seeking loan modifications understate their income. See above. But I was slightly surprised that this change was labeled as “critical.”
What will they call it when they finally see what's in the financial information of the 70%+ of borrowers on trial modifications who have not yet submitted their paperwork?
(Originally posted on www.fixedincomecolor.com)
Here are the rest of the details from the Treasury:
- Original Trial Periods: Effective immediately for all original trial periods existing on/after today.
- Restarted Trial Periods: Effective immediately,you can apply this waiver retroactively to all borrowers whose trial periods have been restarted based on the original guidance provided in 09-01. Therefore, a borrower who is currently in a restarted trial period can be immediately converted to a permanent modification if they have made at least three (or four, if required) trial period payments under their combined original and restarted trial periods and is otherwise eligible for a HAMP modification. (Remember, permanent modification terms must be based on the higher verified income.)
HAMP Reporting System (Treasury system of record)
Servicers are required to follow these reporting requirements when applying the waiver to original and restarted trial periods:
- Trial periods that have restarted but have not yet been resubmitted to the HAMP Reporting System — send an official loan setup record with new loan terms (based upon the revised income) and a trial period length based upon the Official (modification) Effective Date minus the First Trial Payment Due Date. For example, if the effective date of the modification is January 1 and the borrower's original First Trial Payment Due Date was July 1, then the length of trial period would be 6 months.
- Trial periods that have restarted and been resubmitted to the HAMP Reporting System (retroactive application of the waiver) require a two step process to reflect the number of months between the modification effective date and the First Trial Payment Due Date.
- First, you must send a trial loan setup record to change the First Trial Payment Due Date back to its original date and a trial period length based upon the Official (modification) Effective Date minus the Original First Trial Payment Due Date.
- You must then send an official loan setup record to change the trial modification to official. The official loan setup record should reflect the same First Trial Payment Due Date, Trial Period Length, Official (modification) Effective Date, and new loan terms based upon the revised income.
Note: Both situations will result in incentive accruals for all trial period months. The borrower and servicer success payments would be disbursed on the anniversary of the First Trial Payment Due Date.
Questions? Contact the HAMP Support Center at email@example.com or 1 (866) 939-4469.
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