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"Understanding Treasury's Loan Modification Guidelines" - Anton J Moch
Overview: Anton J Moch discusses the U.S. Department of the Treasury's guidelines for its new loan-modification program, the “Making Home Affordable Program.”  The article appears in Mar. 23, 2009, edition of the E-newsletter, Community Banker Report, a publication of Palladium Capital Partners, LLC.
Tony Moch is a member of the firm's Community Banking practice and counsels clients on the Treasury's Financial Stability Plan and other matters.

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Up to nine million homeowners with a history of timely payments, but who are unable to refinance due to a decrease in market value, and have loan-to-value ratios above 80%, may be eligible for the “Making Home Affordable Program”—a new program introduced by the U.S. Treasury.
New guidance indicates financial institutions that received funds from the Treasury under the Financial Stability Plan, including the Capital Purchase Program, may be required to participate in the program.
Participating institutions must enter into the required program agreements with Treasury's financial agent on or before December 31, 2009. The program only applies to certain mortgage loans by Fanny Mae or Freddie Mac. Qualifying mortgage loans must have been originated on or before January 1, 2009, have a first-priority lien on owner-occupied properties and have an unpaid principal balance of $729,750, or less. Qualifying mortgage loans may be modified at any time prior to December 31, 2012, although mortgage loans may be modified only once under the program.
Participating institutions that service mortgage loans are required to service all eligible mortgage loans under the rules of the program, unless explicitly prohibited by contract. In determining whether a mortgage loan qualifies for modification, the loan servicer is required to use a net present value test that compares the net present value of expected cash flows of the unmodified mortgage loan with the net present value of expected cash flows of the same mortgage loan as modified. If the net present value of expected cash flows is greater under the modification scenario, the servicer must modify the mortgage, absent fraud or contract prohibition. The program also provides a specified sequence of modification steps to reduce the homeowner's monthly payment to no more than 31% of gross monthly income: first, reducing the interest rate, next, extending the term or amortization up to a maximum of 40 years, and then if necessary, forbearing principal.
The program will share with the lender/investor the cost of reductions of monthly payments from 38% to 31% of gross monthly income. Further, servicers that modify mortgage loans according to the guidelines will receive an up front fee of $1,000 for each mortgage loan that is modified plus “pay for success fees” of $1,000 per year for each modified mortgage loan that is performing. Additionally, homeowners who pay on time will be eligible for up to $1,000 of principal reduction each year for up to five years. Finally, the program will provide one-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers for modifications made while a borrower is still current on mortgage payments. However, no payments will be made under the program to the lender/investor, servicer or borrower unless the servicer has first entered into the program agreements with Treasury's financial agent.
If your customers are asking about this program, and/or your bank received TARP funds, please keep apprised of the guidelines and be ready to answer lots of questions about the program. Being knowledgeable is one more way to help your customers.
[Reprinted with permission from Palladium Capital Partners, LLC.]

Article Citation:
Moch, Anton J. "Understanding Treasury's Loan Modification Guidelines." Community Banking Report (23 Mar. 2009).
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"Understanding Treasury's Loan Modification Guidelines" - Anton J Moch
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