The Making Home Affordable Program (MHA), has been formally extended 1 year, through December 31, 2016, by Supplemental Directive 15-04. The program has been widely successful in providing affordable alternatives to foreclosure for millions of homeowners nationwide, and the extension through 2016 will provide relief to the millions more who will be in danger of falling behind on their mortgages in the next year.

This extension applies only to mortgages that are not owned or guaranteed by Fannie Mae or Freddie Mac and for applications that are submitted to the Lender on or before December 31, 2016. Though it is not necessary to have a decision on the application for a loan modification, short sale, or deed-in-lieu by the end of 2016 to be eligible under the MHA program, the transaction must close on or before September 30, 2017 if the borrower would like to receive incentive compensation, such as relocation assistance, payments for successfully completing a short sale or deed-in-lieu, or payments for making timely loan modification payments. Since the amount of relocation assistance that Lenders must offer has increased from $3,000 to $10,000 for all HAFA (short sales & deeds-in-lieu) transactions closing on or after February 1, 2015, borrowers must be mindful of the deadlines so that they may be eligible to receive this increased amount to assist them in moving costs.

This Directive also amends the MHA guidebook to allow servicers to establish a cap on the amount that they will pay to release the second mortgage liens, as long as the cap is not less than $12,000. It establishes a floor amount that borrowers may receive from their primary mortgage lenders to assist them in closing on their short sales or deeds-in-lieu.

These amendments ensure that borrowers will continue to have access to adequate relief through the MHA program.

If you are a struggling homeowner and have defaulted or are at risk of default on your mortgage loan, an application for the Home Affordable Modification Program (HAMP) may be your best chance of obtaining an affordable loan modification.

Previously set to expire in December 2015, the Home Affordable Modification Program has recently been extended by the Obama Administration through December 2016. This federal loan modification program has been successful in providing reductions in monthly mortgage payments for millions of homeowners nationwide. Unlike Lender-based modifications, this program has two tiers, one of which requires a debt-to-income of 31% in its modification terms and another which requires a 10% reduction in monthly mortgage payments. If a homeowner is not eligible for Tier 1, then he or she will be reviewed for Tier 2, thus giving homeowners two chances to obtain lower, affordable monthly mortgage payments in their application for HAMP.

Oftentimes, Lenders that have their own loan modifications will only add the arrears to the principal balance without changing any other terms of the loan, thus creating monthly mortgage payments that are, in fact, higher than the original payments. Struggling homeowners often cannot accept a modification with higher payments because their hardships are long term or even permanent.

HAMP, however, requires affordable mortgage payments as part of its program and now will continue through the remaining term of the Obama Administration.

Before you apply for a loan modification, it is wise to understand and have realistic expectations about the process. The Home Affordable Modification Program, now in its fifth year, is the federal modification program that has, to date, successfully provided for over 1.3 million permanent loan modifications nationwide. Many homeowners, however, do not know the steps in the HAMP modification process and feel frustrated or upset if they receive a modification with terms that are not what they expected. What homeowners must realize is that a HAMP Tier 1 loan modification requires a 31% debt-to-income ratio and must be reviewed in a ‘waterfall’ process, meaning that the Lender must modify the loan by specific means in a specific order.

The waterfall process is as follows:

1. Capitalization: When the Lender adds unpaid interest and unpaid tax and insurance payments to the principal balance. Late fees may not be capitalized for HAMP modifications.

2. Interest rate reduction: When the Lender reduces the original interest rate of the loan. Oftentimes, the Lender reduces the interest rate to 2% for the first five years and then gradually increases the interest rate on the loan every year until it reaches the current market value.

3. Term extension: When the Lender extends the life of the loan. The cap on a term extension for HAMP is 480 months or 40 years.

4. Principal forbearance: When the Lender forbears a portion of the principal balance. This portion of the principal balance becomes a “balloon payment,” which must be paid in full at the loan’s maturity or when there is a transfer of the property. It does not accrue interest.

If the debt-to-income ratio is not 31% after the Lender capitalizes the loan, then the Lender must then try to reduce the interest rate and so on until it achieves the desired ratio. If the ratio is still not 31% after the Lender has gone through the entire waterfall process, then the homeowner will be deemed ineligible for HAMP Tier 1 and then will be reviewed for other loan modifications, if available.

Updates to the Making Home Affordable Handbook for the federal Home Affordable Modification Program are available here and will be effective July 1, 2014!

Top things you need to know about HAMP:

1. The Home Affordable Modification Program (HAMP) is a federal program designed to help homeowners obtain affordable loan modifications.
2. HAMP Tier 1 only applies to loans of principal residences.
3. A HAMP Tier 1 mortgage payment must reflect 31% of the homeowner's gross monthly income.
4. HAMP Tier 2 may apply to loans of principal residences or to loans of rental properties.
5. A HAMP Tier 2 mortgage payment must be within the range of 25% to 42% of the homeowner's gross monthly income.
6. A HAMP Tier 2 mortgage payment must represent a reduction of at least 10% of the original mortgage payment amount. 

In Section 6.3.3 of Chapter II of the MHA Handbook, the post-modification principal and interest payment under HAMP Tier 2 must be at least ten percent less than the pre-modification principal and interest payment. To clarify, if the original monthly principal and interest mortgage payment is $3,000, then the modified monthly principal and interest mortgage payment under HAMP Tier 2 must be $2,700 or less according to the ten percent reduction rule. Under this Supplemental Directive, however, this required percentage is totally erased. Now, it is only required that the post-modification principal and interest payment be less than the pre-modification principal and interest payment, thus expanding the amount of homeowners eligible for HAMP Tier 2. In the past, many homeowners were ineligible because servicers could not reduce the principal and interest amount by the required percentage due to the default amount, monthly real estate taxes, property value, and other similar factors. Without a required percentage, servicers will have a much easier time reducing the post-modification principal and interest payment for more homeowners across the country.

However, it should be noted that servicers may require a minimum reduction as long as that reduction is not greater than ten percent. Servicers must include this minimum reduction in their written policy if they choose to do so.

Another important clarification is the modification of loans prior to the loss of good standing. If a homeowner would like to modify an already HAMP-Tier 1-modified loan and is not in default on that loan, he or she may be eligible for HAMP Tier 2 if it has been more than five years since the HAMP Tier 1 modification. Once a homeowner accepts a HAMP Tier 1 loan modification, he or she cannot obtain another one in the future if that loan goes into default again. HAMP Tier 2, however, would still be available to this homeowner as a loan modification option (even if the property is a primary residence) as long as it has been more than five years since the original HAMP Tier 1 modification date. Since the Home Affordable Modification Program is the federal program to help homeowners cure their default, it always has priority over Lender in-house modifications.

Also included in this Supplemental Directive are updated guidelines regarding post-modification counseling, assistance for homeowners with limited English proficiency, and notice of interest rate step-ups. Although these guidelines are important as well, it is crucial that real estate agents focus on the new HAMP Tier 2 guidelines, especially if their clients own rental properties that are in risk of default or are currently in default. The more knowledgeable you are able these guidelines, the more your clients will trust you in other aspects of real estate.

Again, these updated guidelines will be effective July 1, 2014, and it is important that you understand and prepare for these changes.