Monday, December 10, 2007

A Brief Summary Of The New Mortgage Relief Plan

A Brief Summary Of The New Mortgage Relief Plan
© 2007 by Peter M. Johnson, J.D.

On December 6, 2007, the American Securitization Forum issued “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Sub-prime Adjustable Rate Mortgage Loans.” It has been endorsed by The Treasury Department, Department of Housing and Urban Development, and federal bank regulators. It sets forth a voluntary system for lenders to streamline the evaluation of their securitized sub-prime loan portfolios and fast track borrowers into the correct solution for their individual needs.

“Securitized loans” are loans which have been pooled with other loans and sold to investors as securities. Many types of loans including prime mortgages, automobile, multi-family home and even student loans have been securitized. Securitization allows the lenders to make more loans since, rather than waiting for a loan to be repaid over a long period of time they sell it to investors. The lender has more capital to loan and can make more loans. Investors profited because pooling reduced the risk of individual loans going into default, and that risk was factored into the price of the securitized loans.

Securitization played a particularly strong role in the expansion of sub-prime lending. Certain lenders specialized in originating sub prime mortgage loans, and packaging them for the securities market rather than holding them in their own portfolios. As the market moved to this “originate to distribute” model, these specialized lenders took over much of the sub-prime mortgage market.

“Sub-Prime Loans” are loans made to borrowers with a high credit risk. These borrowers, because of their poor credit histories are statistically more likely to fail to pay the loans on time and in full. These loans had higher interest rates and fees as well as significant prepayment penalties in order to compensate the lender for their higher risk.

“Adjustable Rate Mortgages” are mortgage loans in which the interest rate and borrower’s payment may increase over time. Typically these loans had a set interest rate for an introductory period and once that period expired they could be increased. A “2/28” loan meant that the loan had a two year fixed interest rate period and a 28 year adjustable rate period. Another loan “3/27” had a three year fixed period.

Sub-prime mortgages underwritten during the past two years have a higher than normal default rate. More and more of these loans have ended up in foreclosure, because borrowers could not make either the initial payments or the higher payments after the fixed time period expired. Also, in many parts of the country, real-estate prices have quit increasing or have started decreasing. These sub-prime borrowers now find themselves “upside down”, owing more than a property is worth, while simultaneously being unable to afford the higher payments. Foreclosures also drive down the prices of nearby homes thus causing or encouraging other neighbors to walk away from their mortgages. These foreclosures primarily affect lower and middle class neighborhoods. Finally, these defaults have harmed the market for mortgage-backed securities, as well as the financial institutions and investors who have purchas

This plan divides borrowers into four groups and provides a way for lenders to track borrowers into the solution which best serves their needs. Borrowers are segmented into four groups: those eligible for refinancing; those eligible for a loan modification; those who need intensive analysis of their debts and income; and those who can afford the higher reset rate, and therefore need no assistance. The plan encourages lenders to notify borrowers of their options starting more than 120 days before the loan is scheduled to reset.

Which Loans Qualify?

It applies to sub-prime residential adjustable-rate mortgage loans that have an initial fixed-rate period of 36 months including “2/28s” and “3/27s” or less and:

1. Originated between Jan. 1, 2005, and July 31, 2007.
2. Are included in securitized pools of mortgages.
3. Have an initial interest rate reset between Jan. 1, 2008, and July 31, 2010.

Which Borrowers Qualify?

The borrowers must:

1. Live in the residence covered by the mortgage;
2. Be “current” (not more than 30 days late) in all mortgage payments

3. Have less than 2 60 day delinquencies during the preceeding 12 months
4. Have less than 3% equity in the home
5. be unlikely to qualify to refinance.

Categories of Borrowers

The plan divides borrowers into categories and specifies the types of relief available. This only applies to qualified loans made to qualified borrowers. If the loan and/or the borrower do not qualify, then the plan does not provide for any relief.

CATEGORY 1: loan payments are current, and the borrower probably could refinance into other kinds of mortgages, including FHA, FHA secure or readily available mortgage industry products.

The loan servicer will determine whether loans may be eligible for refinancing into readily available mortgage industry products based on ascertainable data not requiring direct communication with the borrower, such as LTV, loan amount, FICO and payment history. Loan servicers will generally not determine current income or DTI to determine initial eligibility for refinancing. If the borrower also has a second lien on the property, this framework contemplates that the borrower is able to refinance the first lien only, on a no cash out basis. In order for the loan to fall into this segment, the second lien does not have to be refinanced; however, any second lien holder will need to agree to subordinate their interest to the refinanced first lien.

CATEGORY 2: loan payments are current, but the borrower is unlikely to be able to refinance into any readily available mortgage product.

The borrower must meet one of several tests to fit into this category:

LTV Test All current loans with an LTV (based on the first lien only) greater than
97% are deemed not to be eligible for refinance into any available product, and thus
are within Segment 2. (97% is the maximum LTV allowed under FHA Secure.)

Not FHA Secure eligible: All current loans that otherwise do not satisfy FHA Secure
requirements, including delinquency history, DTI at origination and loan amount
standards for this program, are within Segment 2 unless the servicer can determine
whether they may meet eligibility criteria for another product, by reviewing eligibility
criteria without performing an underwriting analysis.

CATEGORY 3 includes loans where the borrower is not current as defined above,
demonstrating difficulty meeting the introductory rate.

4. Types of Available Relief

Category 1 – Re-finance:

Category 1 borrowers should re-finance their loans, if they are unable or unwilling to meet their reset payment. However, a servicer may evaluate each borrower in this category on a case by case basis or apply any framework consistent with the applicable servicing standard in the transaction documents for a loan modification or other loss mitigation outcome. The servicer will facilitate a refinance in a manner that avoids the imposition of pre-payment penalties wherever feasible. This may be accomplished by timing the re-finance to occur after the upcoming reset date. Servicers should take all reasonable steps permitted under the pooling and servicing agreement and other governing documents to encourage or facilitate refinancing for borrowers in Category 1, or to borrowers in Category 2 who become eligible for a refinance, including, where permitted, providing borrowers with information about FHA, FHA Secure and other readily available mortgage industry products, even if that servicer is not able to provide those products through any affiliated originator.

Category 2 – Loan Modification

The servicer will first determine borrower occupancy of the property, the current FICO score, and the FICO score at the time the loan was originated. The servicer will use several tests to determine if the loan should be modified. Most homeowners who qualify under this category can get an interest rate freeze for five years, following the initial interest rate reset.

“The FICO test”: If the FICO score is less than 660 and is less than a score 10% higher at loan origination then the borrower has passed the FICO test. If the borrower passes the FICO test the servicer will generally not determine the borrower’s current income.

If the FICO Score is greater than 660 and is at least 10% higher than the score at loan origination, then the borrower is considered to have not met the FICO test. The servicer will use an alternate analysis to see if the borrower is eligible for a loan modification.

Category 2 borrowers are eligible for a fast track modification if the borrower currently uses the home as a primary residence, the borrower meets the FICO test and the servicer determines that at the upcoming reset, the payment will increase by more than 10%. These borrowers may be offered a loan modification under which the interest rate will be kept at the existing rate following the upcoming reset.

The plan also creates several presumptions on which the servicer may rely:

1. The borrower is able to pay under the loan modification based on his or her
current payment history prior to the reset date.

2. The borrower is willing to pay under the loan modification, as evidenced by a) an agreement to the modification after being contacted or b) in the event that the affirmative agreement of the borrower cannot be obtained, the borrower’s payment of two payments under the loan as modified after receiving notice of the modified terms.

3. The borrower is unable to pay (and default is reasonably foreseeable) after the
upcoming reset under the original loan terms, based on the size of the payment
increase that would otherwise apply.

4. The modification maximizes the net present value of recoveries to the
securitization trust and is in the best interests of investors in the aggregate,
because refinancing opportunities are likely not available and the borrower is
able and willing to pay under the modified terms.

For those borrowers who do not meet the FICO test, the servicer will use an alternate
analysis to determine if the borrower is eligible for a loan modification, as well as the
terms of the modification (which may vary). This may include a) conducting an
individual review of current income and debt obligations, debt-to-income analysis,
and considering a tailored modification for a borrower, or b) applying any other
framework consistent with the applicable servicing standard in the transaction
documents to determine if a borrower is eligible for a loan modification.

For borrowers that are eligible for a fast track modification, the fast track option is
non-exclusive and does not preclude a servicer from using an alternate analysis to
determine if a borrower is eligible for a loan modification, as well as the terms of
the modification.

Category 3 – Loss Mitigation:

For loans in this category, the servicer will determine the appropriate loss mitigation
approach in a manner consistent with the applicable servicing standard in the
transaction documents, but without employing the fast tracking procedures described
under Category 2. The approach chosen should maximize the net present value of the
recoveries to the securitization trust. The available approaches may include loan
modification (including rate reduction and/or principal forgiveness), forbearance,
short sale, short payoff, or foreclosure. These borrowers will require a more intensive analysis, including where appropriate current debt and income analysis, to determine the appropriate loss mitigation approach.

While this new plan is far from perfect, it will help some homeowners remain in their homes and avoid foreclosure. It also provides another way for mortgage brokers to advise and assist their clients.

Peter M. Johnson is an attorney and founder of
A-Z Financial Solutions, LLC, a firm specializing in debt negotiation and credit restoration. He may be reached at or by telephone at 303-488-3323. Personal Finance News