Flex Modification: An outline of HAMP's replacement

The Home Affordable Modification Program (HAMP) came to a close on December 31, 2016.

The standardized program for modifying mortgages to be more affordable was key in stabilizing housing markets in the aftermath of the housing market crash and the Great Recession. The original program may have ended but the issue of homeowners finding themselves in financial difficulty returns periodically, so it's useful to have a working set of guidelines for lenders and servicers to follow when things aren't working out for a mortgage holder.

Although HAMP is gone, it has been replaced by program called "Flex Modification". Flex Modification combines features of three programs: HAMP, Fannie/Freddie's "Standard Modification" and "Streamlined Modification" programs. Like HAMP, it is only available for loans owned or backed by Fannie Mae or Freddie Mac, but lenders could certainly follow the published guidelines for non-Fannie or Freddie mortgages, too.

As with HAMP, homeowners having trouble making mortgage payments are encouraged to engage their servicer as soon as they can. Flex Mod allows a homeowner to start a modification process before the loan is even as much as 90 days late by requesting and completing a Borrower Response Package (BRP). Homeowners must request these from their mortgage servicer; typically, the servicer's contact information can be found on the homeowner's mortgage statement. This begins the process.

If the borrower is already more than 90 days behind on payments, he or she does not need to complete a Borrower Response Package in order to get the process underway, but they will need to contact their servicer, of course.

As did HAMP, Flex Mod sets targets for lowering payments to make them more affordable. In the case where a borrower starts the process and has not yet had a "90 day late", the target of the modification is to reduce the mortgage payment by 20 percent, and to get the homeowner's Housing Expense To Income (HTI) down to a ratio of not more than 40 percent.

For borrowers in greater difficulty, who have already registered a 90 day late on their mortgage payments, the program simply strives to achieve a 20 percent reduction in payment and does not use a HTI ratio as a part of the calculation.

Modifications are usually requested as a result of a hardship encountered by the homeowner. Typical hardships include unemployment, reduction in income, increase in housing expenses, divorce or legal separation, death of a borrower or wage earner in the home, disability or serious illness of borrower or dependent family member and other reasons. These are outlined on the Mortgage Assistance Application, which is part of the BRP. Other components of the BRP include the provision of income documentation as required and authorization to pull your tax returns from the IRS (form 4506-T).

Eligibility for a Flex Modification

To be eligible for a Flex Modification, your mortgage must be:

• A conventional first lien mortgage, and at least 12 months old.
• For a mortgage secured by your principal residence, your payments must be at least 60 days delinquent or, if payments are current, you must be facing imminent default;
• For a mortgage secured by a second home or investment property, the payments must be at least 60 days delinquent.
• The existing mortgage can not currently be in an existing modification agreement from any other program;
• The borrower can not have failed out of an existing Flex Mod Trial Period plan within the last 12 months, and
• if already in a Flex Modification program, the borrower cannot have become more than 60 days late in the first 12 months or the modification.
• The existing mortgage cannot have had three or more modifications already done to it.

Even if these criteria aren't met, but the servicer thinks a loan modification will work for both parties, the servicer can still request that Fannie/Freddie review the loan for modification.

• Your property must have an appraisal, or have a Broker Price Opinion (BPO) conducted or be run through an Automated Valuation Model (AVM) to determine its current market value.

Flex Mod's "Waterfall"

Like HAMP, there's a "waterfall" of steps used to get your payment down to the target level.

Step 1: Figuring out the amount to be modified

• The servicer will first "capitalize" any arrearages. These include any unpaid interest that is due, and items such as advances made by the servicer to any third parties. If state law does not allow these monies to be added to the outstanding loan amount, the servicer will collect these funds over a period not longer than 60 months (or the borrower can pay them "up front" if they wish).
• If these costs they can be added to the loan amount, they will be. Then, the servicer will conduct a "Mark-To-Market-Loan-To-Value" (MTMLTV) evaluation -- essentially, the total unpaid balance measured against the current value of the home.

Step 2: Figure out the MTMLTV and interest rate for the Flex Mod loan

The math looks like this:

$100K loan with $5K arrearages = $105,000 amount to be modified; Appraisal says home is valued at $110,000

$105,000 (loan amount) divided into $110,000 value produces a factor of .95454 - the borrower's loan will have a MTMLTV of 95.4 percent (stated another way, the homeowner has a 4.6 percent equity stake).

The MTMLTV ratio dictates what interest rate is used for the modified loan.

For an existing fixed-rate mortgage:

• If the MTMLTV is currently less than 80 percent, the interest rate on the modified mortgage will remain current loan's mortgage rate; (in our example above, it is above 80 percent).
• if the MTMLTV is greater than 80 percent, the interest rate for the modified mortgage will be the lesser of Fannie Mae's Standard Modification Interest Rate or the current loan's mortgage rate.

You can see Fannie Mae's Standard Modification Interest Rates or see Freddie Mac's Standard Modification Interest Rates to find out what your rate might be if you are above the 80 percent MTMLTV threshold.

If you have an existing adjustable-rate mortgage, or one in a step-rate modification already, the new interest rate will be the lesser of the SMIR or the final rate step for the loan or the lifetime cap for the ARM (if applicable).

Step 3: Give the Flex Modification a new loan term

• The loan will be given a new term of 40 years.

Step 4: Conduct principal forbearance to lower the payment, as needed:

If the MTMLTV is greater than 100 percent, the lender will forbear (not forgive!) the lesser of 30 percent of the unpaid principal balance or the amount needed to get the loan to 100 percent MTMLTV.

Note: The amount of forbearance does NOT go away; it is NOT forgiven debt. Although it cannot accrue any interest charges, it is payable when the loan matures, if the property is sold or the loan is refinanced.

Then... some math has to be done.

If the loan was less than 90 days late when the modification was started, the servicer can...

• Increase principal forbearance until a 20 percent principal and interest payment reduction and 40 percent Housing Expense to Income (HTI) ratio is achieved; however, the servicer cannot cut interest-bearing principal to a MTMLTV of less than 80 percent, or an amount that is more than 30% of the loan's unpaid principal balance.
• If the loan was more than 90 days late when the modification was started, there is no 40 percent HTI standard -- the forbearance is done as above until a 20 percent reduction in payment is reached.

Step 5: Determining the Housing Expense To Income (HTI) ratio

For a primary residence...

The lender will use typical measurements of borrower monthly gross, pretax income -- wages, SSI, regular annuity or pension payouts, etc. and divide this by the sum of the monthly amounts of:

• the mortgage principal and interest payment
• homeowner's property insurance premium
• flood insurance premium (if any)
• real estate taxes
• ground rent (if the land the home is on is leased)
• any special property assessments
• HOA fees / co-op corporation fees
• any escrow shortage payment

Note: if any, mortgage insurance premiums are excluded from this calculation.

So, if the borrower has a gross income of $3,000 per month, and the total of the above is $1,750 per month, the ratio is .583,-- in other words, the ratio of monthly housing expense to monthly gross income is more than 58 percent. If the borrower has filed for a modification before the loan is more than 90 days overdue, the modification's goal is get this ratio down to not more than 40 percent.

To do this, the lender will continue to forbear the principal amount subject to payment (lower the outstanding balance of the loan). These actions are limited to a MTMLTV not less than 80 percent or not more than forbearance on 30 percent of the unpaid principal balance. Once the combination of 40 percent HTI and a 20 percent payment reduction are found, this will become the loan's new monthly payment.

If the borrower requested help with a loan that is already more than 90 days late, the servicer needs only to run this calculation until a 20 percent payment reduction is achieved, as the HTI factor is not considered.

If a second home...

the monthly housing expenses for the second home are added to the housing expenses of the borrower's primary residence, then this amount is divided by the amount of the borrower's monthly gross income.

If an investment property...

The calculations get pretty complicated, as it depends on whether the property is currently rented, or if it is being rented at a loss. If you have an investment property that needs a loan modification, your servicer will need to help you get your documentation put together.

Flex Modification Trial periods

If the borrower is accepted into the trial modification, the trial mod remains in place for four months if the modification was requested and the loan was less than 31 days late when the mod was started, or three months if it was more than 31 days in arrears at the start of the process. If all obligations at the end of the trial have been met, the modification terms become permanent. During the trial period, any payment not made by the last business day of a month in which it is due is grounds for cancellation of the modification.

The lender is allowed to reach out to you, too. If you are more than 90 days late on a payment, the lender is allowed to solicit you (by mail) with an offer to put you in the Flex Modification program.

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Making Home Affordable's Home Affordable Modification Program may officially have been over at the end of 2016, but its spirit certainly lives on.

If nothing else, HAMP set standards for the mortgage industry to follow. This is continued in the Flex Modification program, and even as complicated as these arrangements can be, it's a good bet that mortgage servicers are glad to have clear guidelines to deal with issues in the future.