Loan Modifcications by a CPA

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How MBS and HAMP are related and why a CPA is better suited to assist a borrower in the loan modification process. …

How MBS and HAMP are related and why a CPA is better suited to assist a borrower in the loan modification process.
dean.gittleson@gmail.com

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  • 1. How MBS relates to HAMP Why a CPA is a better Choice to Negotiate your Loan Modification Organization – Calculation – Presentation - Negotiation
  • 2. Understanding the Mortgage Back Security Market Wall Street Borrower Secondary Market Brokers Servicing Investor Bankers
  • 3. Understanding Securitization • Lender creates pools of mortgages • Lender a pool of mortgages into a subsidiary called a “Special Investment Vehicle” (SIV) • The SIV then creates groupings of loans and legally binds them into certificates to be sold as a “Mortgage Backed Security” (MBS) • Each Certificate represents a fraction of each loan in the group • Since each loan produces cash flow each Certificate represents a fraction of the loan’s cash flow • Each Certificate also represents a fraction of the mortgage collateral • Certificates are sold to investors on such as hedge funds, pension funds and insurance companies • A “secondary market” exits to buy or sell mortgage back securities Your loan might be partially “owned” by hundreds of certificate holders!
  • 4. Understanding Securitization The Secondary Market Buys the MBS and Sells to investors The Bank Loans the packages Bank Loans into Originates Certificates In here Your Loan $100 Million $100 Million Mortgage Pool of Backed Mortgages Security
  • 5. The “Originate to Distribute” Market Structure: Separating Actions From Consequences 5
  • 6. HAMP Participation by Servicers • Participation not generally required – Carrots/Sticks to encourage participation – Federal regulators are encouraging licensees to participate – All or Nothing participation (whole portfolio) • Required For … – Banks that accepted TARP money after 3/4/2009 – Fannie/Freddie portfolio mortgages or MBS pool mortgages guaranteed by Fannie/Freddie – Loans guaranteed by FHA 6
  • 7. Servicer Participation Agreement (SPA) COMMITMENT TO PURCHASE FINANCIAL INSTRUMENT and SERVICER PARTICIPATION AGREEMENT This Commitment to Purchase Financial Instrument and Servicer Participation Agreement (the “Commitment”) is entered into as of the Effective Date, by and between Federal National Mortgage Association, a federally chartered corporation, as financial agent of the United States (“Fannie Mae”), and the undersigned party (“Servicer”). Capitalized terms used, but not defined contextually, shall have the meanings ascribed to them in Section 12 below. Recitals WHEREAS, the U.S. Department of the Treasury (the “Treasury”) has established a Making Home Affordable Program pursuant to section 101 and 109 of the Emergency Economic Stabilization Act of 2008 (the “Act”), as section 109 of the Act has been amended by section 7002 of the American Recovery and Reinvestment Act of 2009
  • 8. HAMP SPA Gotcha for Borrowers 2. Authority and Agreement to Participate in Programs A. Servicer shall perform the Services for all mortgage loans it services, whether it services such mortgage loans for its own account or for the account of another party, including any holders of mortgage-backed securities (each such other party, an “Investor”). B. Fannie Mae acknowledges that Servicer may service mortgage loans for its own account or for the account of one or more Investors and may be subject to restrictions set forth in pooling and servicing agreements or other servicing contracts governing Servicer’s servicing of a mortgage loan; Servicer shall use reasonable efforts to remove all prohibitions or impediments to its authority, and use reasonable efforts to obtain all third party consents, waivers and delegations that are required, by contract or law, in order to perform the Services. C. Notwithstanding subsection B., if (x) Servicer is unable to obtain all necessary consents, waivers and delegations for performing any Services under the Programs, or (y) the pooling and servicing agreement or other servicing contract governing Servicer’s servicing of a mortgage loan prohibits Servicer from performing such Services for that mortgage loan, Servicer shall not be required to perform such Services with respect to that mortgage loan and shall not receive all or any portion of the Purchase Price (defined below) otherwise payable for such Services with respect to such loan. D. Notwithstanding anything to the contrary contained herein, the Agreement does not apply to GSE Loans. Servicers are directed to the servicing guides and bulletins issued by Fannie Mae and Freddie Mac, respectively, concerning the Programs as applied to GSE Loans. E. Servicer’s performance of the Services and implementation of the Programs shall be subject to review by Freddie Mac and its agents and designees as more fully set forth in the Agreement.
  • 9. HAMP Eligibility • Broad Coverage – Loan balance ≤ $729,750 (higher for 2-4 unit properties) – Modification yields greater return than foreclosure – In default or at imminent risk of default. • Qualified Borrowers – First-lien, owner-occupied – Document income, and sign affidavit of financial hardship • Narrow Window – Loans originated on or before January 1, 2009. – Now thru December 31, 2012 (one mod only per loan) – Servicers have until Dec. 31, 2009 to sign on. 9
  • 10. HAMP Carrots • Servicer Incentives (after 90-day trial period): – $1,000 for each modified mortgage + $1,000/ year for 3 years if borrower stays current – $500 for modifications made prior to delinquency – $250 + more tba by Treasury for release of 2nd lien – Compensation for foreclosure alternatives (if mod not possible): short sales or deeds-in-lieu • Borrower Incentives: up to $1,000/year for 5 years for current borrowers toward principal • Lender/Investor Incentives: – Interest reduction subsidy – $1,500 payment for pre-default modification delinquency and payments to offset probable losses from home price declines 10
  • 11. HAMP Modification Process 1. Calculate 31% of Borrower’s long-term, stable income. This value is the amount the fully amortized monthly payment, property taxes HOA and insurance (PITIAS)consumes of monthly income. 2. Calculate New Unpaid Principal Balance: Principal Balance + Escrow Shortages + Arrearages = Unpaid Principal Balance (UPB) 3. Calculate a new monthly payment: • Use the new UPB • The current note rate on the mortgage • The remaining term * If an affordable payment is achieved, the interest rate will fix permanently at the current note rate – if not continue 4. Reduce the interest rate in decrements of 0.125 percent to no lower than 2.0 percent **If the modified interest rate is below the market rate, the rate will remain fixed for five years. In the sixth year, the interest rate will be subject to annual increases of no more than 1 percent per year, not to exceed the lesser of the fully indexed rate at the time the loan was originated or the market rate (PMMS) at the time the modification documents are prepared.
  • 12. HAMP Modification Process 5. Extend the amortization term Month-by-month up to 480 months 6. Forebear principal (Balloon Payment) The interest-bearing principal is not less than 100 percent of current market value. ***Deferred principal will not be subject to interest and requires a balloon payment due upon sale, payoff or maturity. Deferred principal will be non-interest bearing and non-amortizing. 7. If a PITIAS-to-income ratio greater than 31 percent is necessary to support a modification the borrower does not qualify for this program.
  • 13. Why a CPA? • The NPV test is complicated. Income from all sources, & proper valuation of the subject property makes or breaks many deals • Knowing the process is very important • Usually not legal issue • Usually is about organization, presentation, rapport and timeliness