2nd UPDATE:US Administration Unveils Guidelines For Mtge Modifications
05 March 2009 - 3:12AM
Dow Jones News
The Obama administration Wednesday unveiled key guidelines for
its housing market rescue plan that should enable loan servicers to
immediately start modifying eligible mortgages.
Under the new guidelines, modified loans would have to complete
a 90 day trial period before any government payments to servicers,
borrowers and mortgage holders kick in.
Only mortgages originated on or before Jan. 1, 2009 will qualify
for the program, which will accept new borrowers through the end of
2012.
"Two weeks ago, the president laid out a clear path forward to
helping up to 9 million families restructure or refinance their
mortgages to a payment that is affordable now and into the future,"
Treasury Secretary Timothy Geithner said Wednesday in a statement.
"Today, we are providing servicers with the details they need to
begin helping eligible borrowers."
Treasury unveiled the basic outlines of its strategy to right
the housing market last month, including a loan modification
program it said would help 3-4 million homeowners avoid
foreclosure.
On Wednesday, the Treasury confirmed many key features of the
program and released technical documents detailing how the loan
modifications would work. Meanwhile, the Federal Reserve and other
regulatory agencies urged all federally-regulated financial firms
that service or hold residential mortgage loans to participate in
the loan modification program. They noted, in a joint statement,
that financial firms that receive government funds in the future
under the administration's bank rescue program will be required to
implement loan modification programs that follow the guidelines
Treasury announced Wednesday.
The program should promote "sustainable alternatives to
foreclosures on owner-occupied residential properties," said the
group of agencies, which includes the Federal Deposit Insurance
Corp., the National Credit Union Administration, the Office of the
Comptroller of the Currency and the Office of Thrift Supervision in
addition to the Fed.
"These incentives should help make affordable loan modifications
more attractive than foreclosure," they said. "The program also
provides incentives for homeowners whose mortgages are modified to
remain current on their mortgages after modification."
Under the new guidelines, the government will pay lenders and
borrowers generous incentives to participate in the program.
Eligible borrowers must be screened for financial hardship and
lenders will have to document current income, assets and expenses
to verify that borrowers are struggling to meet their mortgage
payments.
For borrowers deemed at risk of imminent default, lenders will
apply a net present value test to determine whether the loan is
worth modifying under the program.
Under the program, lenders will have to reduce monthly payments
on mortgages to no greater than 38% of a borrower's income. The
government will then match further reductions in monthly payments
dollar-for dollar from 38% down to 31% debt-to-income ratio for the
borrower.
After five years, "the interest rate can be gradually stepped-up
by 1% per year to the conforming loan survey rate in place at the
time of the modification," Treasury said in a document released
Wednesday.
Treasury said that in order to reach that 31% debt-to-income
ratio level, interest payments will first be reduced down to as low
as 2%.
In cases where loans fail the net present value test, mortgage
insurers have agreed to pay partial claims in order to help the
borrower avoid foreclosure, Treasury said.
Under the program, servicers will receive an upfront fee of
$1,000 for each eligible modification meeting guidelines
established under this initiative. Servicers will also receive "pay
for success" fees, as long as the borrower is successful at staying
in the program, of $1,000 each year for three years, said
Treasury.
In addition, Treasury said the plan will include an incentive
payment of $1,500 to mortgage holders and $500 for servicers for
modifications made while a borrower at risk of imminent default is
still current on their payments. As long as the borrower stays
current on his or her payments, he or she can get up to $1,000 each
year for five years, the department said.
Treasury added that Freddie Mac will audit compliance for the
housing program.
-By Maya Jackson Randall and Jessica Holzer, Dow Jones
Newswires; 202-862-9255; maya.jackson-randall@dowjones.com