Chapter 13 and "HAMP" Mortgage Modification

Chapter 13 bankruptcy may present a platform to obtain modification of first mortgages under the U.S. Treasury Department's "Home Affordable Modification Program" (HAMP).

As most people are aware, Congress did not yet pass the "cram-down" provision for principal residential mortgages. Despite this, the legal landscape does seem to indicate that the HAMP program will be of substantial assistance to homeowners - perhaps in many instances - more than the much sought after "cram-down".

The chapter 13 plan may be a good platform to obtain relief under HAMP. As part of the chapter 13 plan, modification of the first mortgage may be sought under HAMP. Usually the mortgage company retains an attorney to represent their interests and this lawyer will serve as a contact person to insure review for HAMP relief. A substantial portion of first mortgage are eligible for HAMP relief either as Fannie Mae or Freddie Mac related mortgages (GSE Loans) or as the mortgage servicer has agreed to participate in HAMP (non-GSE Loans).

Some homeowners have trouble communicating with their mortgage company to obtain HAMP relief. But as most mortgage company usually retain an attorney to represent their interests, this mortgage company attorney will serve as a contact person to insure review for HAMP relief.

Upon filing of the chapter 13 case, most foreclosure actions are stayed until further order of the court. This automatic stay allows for pursuance of approval of the chapter 13 plan, HAMP modification of the first mortgage, avoidance of wholly underwater junior mortgages, and substantial discharge of unsecured debt.

Fannie Mae Guidance for Lenders and Appraisers

Efanniemae.com sets forth "Guidance for Lenders and Appraisers" dated April, 2009.

"HAMP" Mortgage Modification

The Home Affordable Modification Program (HAMP) was established by the U.S. Department of the Treasury pursuant to section 101 and 109 of the Emergency Economic Stabilization Act of 2008 (EESA)(section 109 of the EESA has been amended by section 7002 of the American Recovery and Reinvestment Act of 2009). HAMP includes loan modification and other foreclosure prevention measures.


Application of HAMP as to GSE Loans, Fannie Mae Announcment 09-05R

All Fannie Mae and Freddie Mac approved servicers are being directed through their servicing guides and bulletins to implement HAMP with respect to "mortgage loans owned, securitized, or guaranteed by Fannie Mae or Freddie Mac (the “GSE Loans”).

Fannie Mae provides Announcement. 09-05R (posted May 15, 2009) "Introduction of the Home Affordable Modification Program, HomeSaver Forbearance™ and Frequently Asked Questions thereunder, and New Workout Hierarchy."


Application of HAMP to Non-GSE Loans

Fannie Mae and Freddie Mac approved servicers as well as all other servicers may agree to participate in HAMP by agreement as to non-GSE Loans.


Role of Fannie Mae and Freddie Mac

Fannie Mae was designated by the Treasury as financial agent of the United States in connection with the implementation of HAMP to fulfill the roles of administrator, record keeper, paying agent, creation of certain standardized mortgage modification and foreclosure prevention practice consistent with EESA and in accordance with the directives of and guidance of Treasury. Freddie Mac was also designated as a financial agent to fulfill a compliance role for the program.


Key Information and Documents under HAMP

Fannie Mae as administrator of HAMP makes available on Hmpadmin.com key information and documents, including, a sample servicer participation agreement, supplemental directive 09-01 guidelines, the supplemental directive 09-02 dated April 21, 2009, the Servicer Reporting Requirements, data dictionary, net present value model overview, and borrower solicitation material. A self-guided training presentation is also provided.

Another Fannie Mae self-guided presentation is provided as to "Bankruptcy Filings on Loan Servicing", "Loss Mitigation in Today's Market", and "The New 2009 MBS Trust Agreement: An Introduction."


Net Present Value Model

Fannie Mae provides a "standardized guidance and a base net present value (NPV) model" for HAMP participating servicers. Such a servicer "must modify any loan "if the modification test for NPV is positive as "it is in the best interest of the lenders, servicers, investors, and borrowers." If the NPV is negative, modification is in the discretion of the servicer.

NPV refers to the "value today of a cash-generating investment." In the context of a distressed mortgage borrower, the choice is between modifying the mortgage or leaving as-is with each choice to generate expected cash flows with different net present values. If the NPV of the modified loan is higher than the NPV of the mortgage as-is, a modification is said to be "NPV positive." The Program is structured to "produce modifications that are more likely to test NPV positive... by lowering the probability that borrowers will default by making borrower payments more affordable and, second, by providing incentive payments that are added to cash flows received by lenders (or investors)."


NPV Assuming Non-Modification

The NPV calculation is to determine the net present value of the mortgage assuming it is not modified based on a. the probability that the mortgage defaults, b. the projection of the future cash flows of the mortgage if it defaults and the present value of these cash flows, c. the projection of the future expected cash flows of the mortgage if it does not default and the present value of these cash flows, and d. the probability weighed average of the two present values.

NPV Assuming Modification

The NPV calculation is to determine the net present value of the mortgage assuming it is modified based on the same manner with the incorporation of the effects on cash flows and performance of the modification terms and subsidies under the Program.

HAMP Modification

"The Making Home Affordable Program is structured to produce modifications that are more likely to test NPV positive, increasing the number of modifications that will be done and keeping more Americans in their homes." If eligibility criteria for HAMP are met, the servicer will adjust the terms of the mortgage to reduce the borrower's payment to HAMP's target front-end debt-to-income (DTI) ratio of 31 percent. Servicers are required to "reduce payment in the precise manner specified" by HAMP (the "Standard Waterfall") starting with reducing the interest rate on the mortgage. Once the modified loan terms are known, the NPV model calculation is run.


Principal Factors in the NPV Model

The NPV model was especially designed by an expert group for HAMP and takes into account the principal factors that can influence cash flows including the following:

1. Value of the home relative to the size of the mortgage.

2. Likelihood that the loan will be foreclosed on.

3. Trends in home prices.

4. Cost of foreclosure including:
a. legal expenses,
b. lost interest during the time required to complete the foreclosure action,
c. property maintenance costs, and
d. expenses involved in reselling the property.

5. Cost of conducting a modification including:
a. a lower monthly payment from the borrower,
b. likelihood a borrower will default even after the loan is modified,
c. financial incentives provided by the government, and
d. likelihood that a loan will be paid off before its term expires (prepayment probability).

Fannie Mae states that due to customization allowed within certain constraints and guidelines, servicer NPV results and resulting modification decisions may vary.

Discount Rate

In the base NPV model servicers are permitted "limited discretion to adjust the discount rate by up to 250 basis points because different investors may place different values on future payments versus payments received today." The discount rate may be as low as Freddie Mac's Primary Mortgage Market Survey rate ("PMMS") for 30-year fixed-rate conforming loans and as high as the PMMS rate plus 250 basis points. The PMMS are available on Freddie Mac's website. A rule is provided as to loans not owned or guaranteed by Fannie Mae or Freddie Mac. The servicer must apply the rate specified in Fannie Mae and Freddie Mac guidelines as to loans owned or guaranteed by Fannie Mae and Freddie Mac.

Default Rates

The probability of default if the loan is modified and if not modified depends on a number of variables particular to the loan and in general is assumed to vary based on the credit quality of the borrower, his debt burden, and the loan-to-value (LTV) of the home, and "whether the loan is modified early or later in the delinquency cycle."

The default rates are "generated by a model based on the performance of GSE and non-GSE loans" and the base model is to be updated as performance data under the Program becomes available to reflect actual program experience. Large servicers with a book exceeding $40 billion are allowed to customize the model to reflect their own portfolio experience, which customization must be empirically validated, commercially reasonable, and subject to review and oversight.

Home Prices

"Future increases or decreases in home prices impact a borrower’s willingness to stay in a house and potential financial loss in the event of foreclosure. A servicer must use the home price projection provided in the base NPV model. A servicer does not have discretion to substitute a different projection. The home price projection for the program has been made available by FHFA exclusively for this program, is based on data from a broad cross section of mortgage transactions, and will be updated quarterly. The projection is not based on the FHFA House Price Index and does not represent an official forecast of FHFA or any other government agency."

REO "Stigma"

"The REO stigma values used in the base NPV model are based on an analysis of sale prices of foreclosed homes sold by Fannie Mae and Freddie Mac. REO stigma values vary by state and home price. Servicers are not permitted to change the REO assumptions in the base NPV model."

Mortgage Servicers Participating under President Obama's Home Affordable Modification Program

Makinghomeaffordable.gov lists that the following mortgage servicers have contracted with the government under the "Home Affordable Modification Program" as of May 22, 2009:

• Aurora Loan Services LLC
• Bank of America, NA
• Carrington Mortgage Services, LLC
  
• Chase Home Finance
• CitiMortgage, Inc.
• Countrywide
  
• GMAC Mortgage LLC
• Green Tree Servicing LLC
  
• Home Loan Services, Inc.
• Ocwen - see press release
  
• Saxon Mortgage Services, Inc.
  
• Select Portfolio Servicing
• Wells Fargo Bank
  
• Wilshire Credit Corporation

Financialstability.gov provides a link to the agreements with the participating servicers.

Hope Now's website contains a directory of links to mortgage companies.

Massachusetts Subprime Mortgage Settlement with Goldman Sachs

Attorney General Martha Coakley of Massachusetts held a press conference in Boston and issued a press release on May 11, 2009 announcing her settlement agreement dated May 7, 2009 with Goldman Sachs & Co. "on behalf of itself and its affiliates Goldman Sachs Mortgage Company and GS Mortgage Securities Corp." regarding certain subprime mortgage lending issues. The agreement is reported to be the first of its kind in its pursuance of an investment bank facilitating the origination of unfair loans. The AG alleged that many of the loans were unfair and "destined to fail."

Investigation

The agreement states that the AG's investigation concerned:

1. whether securitizers may have facilitated the origination of "unfair loans" under Massachusetts law


2. whether securitizers may failed to ascertain whether the loans purchased from originators complied with the originators' stated underwriting guidelines


3. whether securitizers may failed to take sufficient steps to avoid placing problem loans in securitization pools


4. whether securitizers may have been aware of allegedly unfair or problem loans

The investigation reportedly concerned whether there were failures to correct inaccurate information in securitization trustee reports concerning repurchases of loans and whether there were failures to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations.

Settlement Terms

The settlement agreement is set report to be valued at about $50 million for about 700 Massachusetts subprime borrowers and for $10 million to the Commonwealth of Massachusetts. The AG is to continue with its investigation of subprime mortgage securitization practices.

The deal allows for the provision as to certain "performing" (as of April 1, 2009) first mortgages owned by Goldman Sachs on certain Massachusetts real property of certain incentives (the smaller of 25% of unpaid principal balance or such amount as sufficient to bring the LTF to 96.5%) for refinancing with FHA and similar lending programs and for similar loan forgiveness in connection with arm's lenth shores sales. Goldman Sachs is to use its "best efforts" to facilitate principal forgivenss by any second lien lender to assist in such refinancing or short sale.

As to certain "non-performing" (as of April 1, 2009) first mortgages owned by Goldman Sachs on Massachusetts real property, Goldman Sachs is to offer to forgive up to 35% of the unpaid principal balance to facilitate a refinancing or arm's length short sale. Its mortgage servicer is to instruct it loan servicer to forgo from foreclosure for six months to allow a good faith effort for refinancing or short sale.

Certain "performing" second mortgage liens on Massachusetts real property are to be forgiven up to 50% in exchange for the payoff of the remainder. The listed "non-performing" second mortgages are to be written off.

It is noted that certain of these offers are only "open until November 30, 2009." Goldman Sach's servicers are to use their best efforts to communicate the offers to the borrowers.



Goldman's Mortgage Servicing Affiliate Litton Loan Servicing LLP

Pursuant to the settlement, Goldman Sach's mortgage servicer affiliate Litton Loan Servicing, LLP is also to modify various mortgages. Litton is to hold certain sessions with borrower to help them understand and take advantage of the offers or to "develop other loss mitigation alternatives."

It is reported that settlements with other investment bankers in Massachusetts may be to come. It is also speculated that Attorneys Generals of other States will follow suit in a similar manner.

Bloomberg reported that Goldman Sach's mortgage business (part of its fixed-income, currencies and commodities unit) produced a "record $16.2 billion in revenue in 2007 and helped the securities firm set a Wall Street pay record." Bloomberg further reports that the $60 million settlement was about one and one-third day's revenue for 2007 for its fixed income, currencies and commodities unit which was the largest source of revenue for the firm.



Short Positions - Goldman Sachs as an Empty Creditor

According to Bloomberg, Goldman Sachs, which was the "world's largest securities firm before it became a bank holding company last year, used the ABX Index and credit default swaps to hedge its subprime holding." According to an October 30, 2007 letter to the Securities and Exchange Commission made public on January 14, 2008, the chief Goldman Sachs accounting officer wrote that "During most of 2007 we maintained a net short subprime position with the use of derivaties and therefore stood to benefit from decling prices in the mortgage market."
Bloomberg writes that the collapse of the subprime mortgage market in 2007 caused "at least $1.4 trillion of asset writedowns and credit losses" at various companies.

City of Cleveland "Public Nuisance" Case

Goldman Sachs was named as one of the 21 financial institution defendants in a class action suit brought in the Northern District of Ohio by the City of Cleveland alleging that the defendants' activities in securitizing subprime mortgage constituted a "public nuisance" under Ohio law. The case is reported to have been dismissed as a matter of law in a May 15, 2009 decision. City of Cleveland v.Ameriquest Mortgage Securities, Inc. et al., No. 1:08 cv 139 (N. D. Ohio, May 15,2009)The Ohio Court's rejection of the "public nuisance" claim is reported to have "far-reaching ramifications."


Fremont Investment & Loan Action

The AG's press release referred to her office's previous suit against Fremont Investment & Loan (reviewed here) which was filed on October 4, 2007 in Superior Court civil action number 07-4373-BLS1. The court issued a preliminary injunction enjoining Fremont from foreclosing on any any "structurally unfair" loan without further prior court approval and a final hearing on the merits. The lower court's preliminary injunction was subsequently upheld by the Supreme Judicial Court of Massachusetts ruling on December 9, 2008 on a direct appellate review. Commonwealth v. Fremont Investment & another, 452 Mass. 733 (2008)(Botsford, J.) The lower court's ruling February 25, 2008 was reportedly the first of its kind in the nation that restricted a subprime lender's ability to foreclose based on unfair or deceptive loan origination misconduct. The four characteristics found by the Freemont court as establishing unfairness were

1. the loans were ARM loans with an introductory rate period of three years or less


2. an introductory rate for the initial period that was at least three per cent below the fully indexed rate


3. made to borrowers for whom the debt-to-income ratio would have exceeded fifty percent measured on the fully indexed rate


4. the loan-to-value ratios was 100% or the loan featured a substantial prepayment penalty.

The AG's office also previously sued also sued Option One and its parent H&R Block alleging unfair, deceptive and predatory lending practices.

Status of the Mortgage Rescue

According to Cnn and New York Times articles, mortgage rescue efforts face several hurdles.

Loan servicers are "overwhelmed by a flood of applications" according to the Cnn article. The administration's guidelines were issued on March 4, but it has taken servicers many weeks to implement their programs. "Many did not even start accepting applications until early-to mid-April..." Servicers may take many weeks to process an request for modification.

Investors in mortgage backed securities are angry about congressional bills providing loan servicers a certain "safe harbor" from suit based on mortgage modifications. Mortgage servicers may be otherwise limited in their ability to modify mortgages due to their contracts with the investors. Investors argue that servicers already have some flexibility to modify mortgages.

Administration Announces Progress Under "Making Home Affordable Program", New Programs

Today Treasury Secretary Tim Geither and HUD Secretary Shaun Donovan announced details of the implementation of the Making Home Affordable ("MHA") program. It is about two months since the program guidelines have been released.

Some data has been published as the the number of homeowners that have obtained relief under the U.S. Treasury Department's Making Home Affordable Program ("MHA") since it was and initiated in early March, having been first announced by the Administration on February 18, 2009.

The Secretaries report that "thousands of underwater borrowers" have refinanced under the Home Affordable Refinance Program. The program is expected to provide access to refinancing for up to 4 to 5 million homeowners. Apparently "more than one million" other Americans have been otherwise able to refinance since the implementation of the Home Affordable Refinance Program due to historically lower interest rates with FNMA seeing 233,000 eligible refinancing application.

It was also announced that more than 55,000 loan modification offers "have been extended to qualifying borrowers" under the Home Affordable Modification Program. This program is expected to assist up to 3 to 4 million troubled homeowners.


Home Price Decline Protection Incentives

Secretary Geithner also announced the new $10 billion "Home Price Protection Incentives("HPD P") program. This program is designed to provide an additional incentive to lenders for modification where "home price declines have been most severe and lenders fear these declines may persist... " Under HPD P, an "innovative payment" will be made to "provide[ ] compensation based on recent home price declines." This additional incentive together with the already provided incentive payments for all modified home is meant to "help cover the incremental collateral loss on those modifications that do not succeed." The HPD P payments are to be "linked to the rate of recent home price decline in a local housing market, as well as the average cost of a home in that market."


Foreclosure Alternatives - Short Sales and Deeds-in-Lieu

Another new program provides incentives to servicers and borrowers to pursue "short sales" and "deeds-in-lieu" where modification is not possible. This program is for situations where "the borrower is generally eligible for a MHA modification but does not qualify or is unable to complete the process". The program is meant to "simply and streamline the process of pursuing short sales and deeds-in-lieu by standardizing the process flow and documentation and offering financial incentives to the servicer and borrower.


Servicer Contracts and Coverage Otherwise for GSE Loans

The Secretaries reported that fourteen servicers, including the five largest, have signed contracts under the program and have begun modifications. It is reported that between the loans covered by these servicers (non-GSE loans) and loans serviced by Fannie Mae or Freddie Mac (GSE loans), more than 75% of all mortgage loans are accounted for.

The refinancing program is set to end in June, 2010 while the loan modification program is set to end December 31, 2012. Reportedly fourteen servicers, including the five largest, have already executed contracts under the program.