General Rule Which Applies to All Modifications
Most lenders and servicers have in house modification programs. These programs have resulted in far more modifications than done under the government’s HAMP program. Although these in house programs differ, it is beyond dispute that no investor will modify a loan unless it is in its financial self interest to do so. Therefore, it is necessary to analyze whether the value of the loan as modified is greater than the value of the property if foreclosed by the investor or sold in a short sale. This is exactly the purpose of the REST Report: to provide such an NPV analysis.
HAMP stands for: Home Affordable Modification Program, a component of the government’s Making Home Affordable initiative, which is a part of the Economic Affordability & Stability Act of 2008.
Homeowners who may qualify for a HAMP loan modification are required to enter a “trial modification period”, during which they must make all monthly trial payments on time and as agreed.
HAMP guidelines state that the trial period is 3 months, however, it is not at all uncommon for trial periods to last much longer. Some borrowers have reported having to make trial payment for close to a year before learning whether or not they qualify for a permanent HAMP loan modification, or modification under a lender’s or servicer’s in-house program.
If you qualify for a HAMP loan modification, the federal government compensates participating lender’s and mortgage servicers as an inducement for modifying the terms of your loan.
Who is eligible to get a HAMP loan modification?
HAMP applies to all mortgages originated before January 1, 2009. No loans originated after that date are eligible. New borrowers will be accepted until December 31, 2012. Program payments will be made for up to five years after the date of entry into the HAMP.
The goal of a HAMP loan modification is to modify the loan so that the full housing cost [principal, interest, taxes, insurance, homeowners insurance and hazard and flood insurance] [referred to as PITIA] does not exceed 31% of the borrower’s monthly gross income.
Mortgage insurance premiums (PMI Insurance) are excluded from the PITIA calculation.
The standard analysis (called the “Standard Waterfall”) states that to reach the 31% goal, the lender must first reduce the loan’s interest rate, and then extend the term of the loan. But there are limits: the interest rate cannot be lowered below 2%. And the loan term cannot be extended beyond 480 months.
How HAMP Works
First, the lender takes the borrower’s monthly gross income, and multiplies by 31%. This results in a target amount ("TA"), which is the amount to be made available for all monthly mortgage related expenses.
Next the lender subtracts monthly property taxes, insurance and homeowner’s association or condominium dues. The result is the target monthly mortgage payment.
The next step is to identify a qualifying rate, term and payment using the Standard Waterfall approach.
First the lender capitalizes any accrued arrearages, interest or escrow advances, and adds those amounts to the loan balance to obtain a new starting loan balance.
Next the lender is required to reduce the current interest rate in .125 increments to reach the target 31% monthly mortgage payment. The interest rate may not be reduced to less than 2%.
If the interest rate reduction does not result in a 31% monthly mortgage payment, the loan’s term may be extended up to 480 months (40 years). If neither an interest rate reduction or term extension meets the Target Amount, the borrower does not qualify for a HAMP modification.
Lenders are not currently required to reduce a borrower’s principal loan balance under HAMP, and as a practical matter, to-date most servicers have chosen not to reduce principal balances in conjunction with HAMP loan modifications.
Principal Reductions
However, HAMP guidelines do state that servicers may forgive principal to achieve the 31% target payment. Principal forgiveness can be used on a standalone basis or before any step in the Standard Waterfall.
However, if principal forgiveness is used, subsequent steps in the Standard Waterfall may not be skipped. If principal is forgiven and the rate is not reduced, the rate will be frozen at its existing level and treated as a modified rate for the purposes of the program’s Interest Rate Cap (see below).
Interest Rate Cap ( IRC)
The modified interest rate must remain in place for 5 years, after which time the interest rate will increase by 1% per year, or such lesser amount as may be needed, until it reaches the IRC.
The IRC for a modified loan is the lesser of the fully indexed and fully amortizing original contract rate, OR the Freddie Mac Primary Mortgage Market Survey rate for 30-year fixed rate conforming mortgage loans, rounded to the nearest 0.125%, as of the date that the modification document is prepared.
If the modified rate exceeds the Freddie Mac Primary Mortgage Market Survey rate in effect on the date the modification document is prepared, the modified rate will be the new note rate for the remaining loan term.
Principal Forebearance
Lenders are not currently required to forebear principal under the HAMP guidelines. However, should a lender agree to forebear principal, no interest will accrue on the amount of the forbearance, and the servicer shall forbear on collection the deferred portion of the Capitalized Balance until the earlier of the maturity of the modified loan, the sale of the property, or the pay-off or refinancing of the loan.
Preliminary Qualification Terms:
The borrower’s total monthly housing cost (PITIA) must exceed 31% of his or her gross monthly income.
The home must be owner-occupied, single family 1-4 unit property (including condominium, cooperative, and manufactured home affixed to a foundation and treated as real property under current State law).
The home must be the primary residence (verified by tax return, credit report, and other documentation such as utility bills). The home may not be investor-owned.
The home may not be vacant or condemned.
Borrowers in a current bankruptcy case are not automatically eliminated from consideration for HAMP.
Borrowers in active litigation regarding the mortgage loan can qualify for a modification without waiving any legal rights.
First lien loans must have an unpaid principal balance (prior to capitalization of the arrears) equal to less than:
1) Unit – $729,750
2) Units -$934,200
3) Units – $1,129,250
4) Units – 1,403,400
Lenders and servicers require a verifiable hardship before you can be eligible for a loan modification. Acceptable hardships include: job loss, reduction in pay, medical issues, death of family member, divorce, or interest rate reset. The important point is that you must be able to demonstrate to the lender how your hardship has impacted your ability to make your loan payments.
A Net Present Value Test ("NPV") is REQUIRED for each loan submitted for a HAMP loan modification, and the REST Report will show you whether you have passed the NPV test.
The NPV Test compares the Net Present Value of the cash flows expected from a modification to the net present value of cash flows expected in the absence of a modification.
If the NPV of the modified scenario is greater, the NPV result is deemed positive. In other words, the government will not require lenders to modify loans if doing so will cause the owner of the loan to be financially worse off than were the loan not to be modified.
The NPV Test applies to the outstanding loan balance and does not presume any principal forgiveness. However, the servicer may choose to forgive principal if the servicer determines that principal forgiveness improves the likelihood of loan performance and the value of the modification.
If the NPV Test generates a positive result, the servicer is required to offer a HAMP modification to the borrower. If the NPV Test generates a negative result, modification is optional, unless prohibited by the servicer contracts, known as Pooling & Servicing Agreements (PSAs).
The monthly payment reduction incentive is available for any HAMP loan modification, whether or not the NPV of the modification is positive, that meets the eligibility requirements and is performed according to HAMP’s standard "waterfall" testing.
If the NPV Test result is negative and a HAMP loan modification is not pursued, the lender/investor must seek other foreclosure prevention alternatives, including alternative modification programs, deed-in-lieu and short sale programs.
The Deminimis Test
The modified mortgage payment proposed must be at least 6% less than the borrower’s existing monthly mortgage payment.
Are there Modification Fees?
NO Modification fees or charges are to be charged to the borrower. The investor may not require the borrower to contribute cash for eligibility or execution of a Trial or Permanent modification.
What happens to unpaid late fees?
When the HAMP modification is completed, normally the unpaid late fees will be waived for the borrower. These include late fees prior to the start of the Trial Period and accrued during the Trial Period.
Is a HAMP modified loan assumable?
No. Even if assumable before the modification, the HAMP modification cancels this feature.
What happens if I don’t qualify for a HAMP loan modification?
Just because you don’t qualify for HAMP, it doesn’t mean you can’t get your loan modified. You should ask your lender or servicer if you can be considered for a standard or in-house modification program. If such a program is not available, the government is providing compensation servicers in order to facilitate short sales or deeds-in-lieu in those cases in which borrowers either fail the net present value (NPV) test (described above) or fail to qualify for, or default under, the modification program.
What Happens If I Re-default?
A loan will be considered to have re-defaulted when the borrower reaches a 90-day delinquency status.
Re-defaulting Loans will be terminated from the program, and no further payments of any kind will be made to the lenders, investors, servicers, or borrower. Re-defaulting Loans should be considered for other loss mitigation programs prior to being referred to foreclosure.
Does My State Offer a Mediation Program Prior to Foreclosure?
Some States require a mediated session between the borrower and the bank prior to foreclosure.
Providing the State Appointed Mediator with the REST Report, even if it does not show you qualify for HAMP, will give the mediator more to go on, when suggesting alternatives to foreclosure, as the Report provides other work out options that may make sense and be available to you.
Mediation in some form or other takes three forms:
Mandated by State Legislature:
- Indiana
- Maine
- Michigan
- Nevada
- New York
- Oregon
- Maryland
- New Hampshire
- State Court mandated
- New Jersey
- Ohio
- Delaware
- Wisconsin
- Indiana

Mandated Locally by Court/Local Governing Body:

- Pennsylvania
- Florida
- Kentucky
- Rhode Island
- Illinois