As part of its continuing effort to stem the rate of foreclosure and preserve home retention, the U.S. Treasury Department recently announced enhancements to the Making Home Affordable Program. One of these enhancements, documented in Supplemental Directive 10-03, is the Home Affordable Modification Program – Modification of Loans Insured by the Federal Housing Administration (FHA), issued on March 26, 2010.
When Supplemental Directive 10-03 was released, I was hopeful that all of the requirements for FHA-HAMP would be consolidated in this single document, eliminating the need to patch together the program from a voluminous series of inconsistent and/or incremental Mortgagee Letters. That hope was short-lived. The Directive expressly incorporates five previously issued Mortgagee Letters: (1) ML 2009-23 – which sets forth the guidelines for FHA-HAMP; (2) ML 2009-35 – which updates the requirements for incentive payments; (3) ML 2009-39 – which provides updates to claim filing and default/delinquency reporting; (4) ML 2010-04 – which addresses loss mitigation requirements for imminent default; and (5) ML 2010-11 – which discusses the availability of Treasury success payments for FHA-HAMP modifications. Adding further complexity to the process of discerning FHA-HAMP requirements, ML 2009-23 references four other Mortgagee Letters, which must be navigated prior to offering FHA-HAMP. The bottom line: Supplemental Direct 10-03 did nothing to streamline the requirements, which means that FHA servicers are going to need to consider mortgagee letters upon mortgagee letters to create a compliant program and to remain in compliance.
How did FHA-HAMP evolve? You will recall that last April, when details of Treasury’s HAMP were explained in Supplemental Directive 09-01, FHA loans were excluded from the program. It was not until July 30, 2009, that HUD announced its stand-alone program for FHA loans in ML 2009-23. The program, which became effective on August 15, 2009, was referred to as “FHA-HAMP.” This name is somewhat misleading because the program bears little resemblance to Treasury’s HAMP. Although FHA-HAMP adopted the 31% DTI goal and the three month trial plan feature, it did not: follow the same waterfall for reducing a borrower’s monthly mortgage payment; have the same incentive payments for borrowers or servicers; and use the same documents (except the Hardship Affidavit) or documentation process.
Still, FHA-HAMP was, for servicers, a significant change over past practices because for the first time, a servicer could file for a partial claim (to bring the loan current and defer principal) and modify a loan, at the same time. However, offering FHA-HAMP is an avenue of last resort. Before FHA-HAMP can be used as loss mitigation tool, the servicer must first evaluate borrowers for other FHA loss mitigation options (FHA Special Forbearance, Loan Modification, and then Partial Claim) under existing guidelines found in ML 2008-21, ML2003-19, ML 2002-17, and ML 2000-05 (the mortgagee letters incorporated into MS 2009-23).
Under the initial guidelines, a servicer offering FHA-HAMP was directed to rely on existing loss mitigation documents applicable to stand-alone partial claims or loan modifications to paper the FHA-HAMP. However, the existing document packages were not suited to combining these options and were not going to work without changes -- including creation of new disclosures about the pros and cons of participating in FHA-HAMP.
So, if Supplemental Directive 10-03 does not streamline FHA-HAMP, what does it do? It adds a new component to the program that allows borrowers and servicers to receive incentive compensation if a borrower makes mortgage loan payments on time (which for FHA purposes means something akin to sort of or mostly on time). It also adds yet another layer of complexity to FHA-HAMP: agreements will need to be signed; systems must be established to account for the incentive payments; and documentation must be revised to disclose the new incentives.
The first order of business for servicers who want to participate is to sign a Servicer Participation Agreement (SPA). For those servicers who have already signed an SPA, they have the option to sign an amended and restated SPA or to submit an additional Service Schedule that includes Treasury FHA-HAMP. Participating servicers will then be eligible to receive pay for success compensation if they satisfy certain conditions.
Pay for Success Compensation: If a borrower’s monthly mortgage payment (including principal, interest, taxes, all related property insurance, HOA/condo fees and mortgage insurance) is reduced through FHA-HAMP by 6% or more, then the servicer is eligible to receive an annual pay-for-success fee for three years. The success fee will be $1,000 or ½ of the reduction in the borrower’s annualized monthly payment, whichever is less. The success fee accrues monthly, but is only paid annually, on the anniversary of the first trial payment due date.
Pay for Performance Compensation: Borrowers under FHA-HAMP can now earn the right to performance compensation, just like borrowers under HAMP. If the borrower’s monthly mortgage payment is reduced by 6% or more, then the borrower can receive up to the same payment that the servicer can receive under the pay for success compensation model. The borrower gets an added benefit because the borrower is eligible for the principal balance reduction for two additional years (for a total of five years). The performance compensation will be paid to the servicer to apply first toward reducing the borrower’s interest bearing unpaid principal balance and then to principal forbearance, if any.
One interesting thing about these incentive payments: the borrower doesn’t necessarily need to be current to receive the bonus. Instead, the incentive payments are payable as long as the borrower is in “good standing” at the time the payments are due. Good standing means that the borrower has not missed three consecutive monthly payments, determined as of the last day of the third month. Here is a quick example: If the borrower makes the first trial payment on May 1 and continues to make payments on the first of each month up to and including February 1 of the next year, the borrower will be eligible for principal reduction in an amount equal to the incentive paid for 10 (not 12) months on May 1 even though the borrower missed the March and April payments. The borrower receives the performance compensation regardless of whether the borrower ever brings the loan current and the incentive cannot be reversed when the borrower loses their good standing.
After a servicer is signed up for FHA-HAMP, the servicer needs to review program documentation, polices, procedures and processes. Servicers already participating in FHA-HAMP will build upon existing documents, policies and procedures to incorporate the new requirements and will need to come up to speed on the reporting requirements. Servicers not already participating in FHA-HAMP will need to patch together the requirements from the multiple mortgagee letters to implement the program and promptly perform a review of existing document packages to ensure that that the documents comply with FHA requirements and can be understood by the borrower.
One critical piece that cannot be overlooked by any servicer is quality assurance. It is critical that policies, procedures, processes and personnel are in place to measure compliance with program requirements, including updates, and to respond to Freddie Mac audits. In fact, you agreed to develop, implement, and periodically review a quality assurance program when you signed your SPA. A failure in a step of FHA-HAMP could mean, among other things, the loss of incentive payments.
Lisa DeLessio is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Lisa at 410-865-5437 or by email at ldelessio@hudco.com.