The Math Behind Loan Modification

The Math Behind

Loan Modification

A Webinar for Housing Counselors

and Loan Modification Specialists

Presented by Bill Allen

Deputy Director, HomeCorps

Overview

? Types of loan modifications

? Estimating eligibility at intake

¨C estimating Debt To Income ratio (DTI)

¨C estimating Loan To Value ratio (LTV)

¨C estimating the ¡°best©\case¡± loan modification

? Understanding the Net Present Value Test (NPV)

? Understanding an offer

¨C confirming full amortization

¨C post©\modification DTI, a HAMP tier 2 example

? 2014 Office of the Massachusetts Attorney General

Types of Loan Modifications

Fully©\Underwritten Permanent First Lien Loan Modifications:

? HAMP

? HAMP Tier 2

? Fannie Mae/Freddie Mac Standard Modification

? FHA loan modifications (including FHA©\HAMP and mods with a ¡°partial claim¡±)

? ¡°In©\house¡± modifications with HAMP©\like underwriting requirements

Distinguish from other ¡°modifications¡± and related foreclosure prevention options:

? ¡°Straight©\capitalization¡± ¨C no change to the contractual terms of the loan

? Fannie Mae/Freddie Mac Streamline modifications ¨C no underwriting

? Temporary modification ¨C interest rate returns to the contractual rate after time

? Forbearance ¨C portion of payment is deferred for a time period but is still owed

? Repayment ¨C arrearages are paid over time in addition to the contractual payment

? Refinancing (including HARP and FHA Short Refi) ¨C creates an entirely new loan

? 2MP ¨C for second liens only

? 2014 Office of the Massachusetts Attorney General

Review ¨C simplified HAMP

modification waterfall

? Determine a target payment¡ª31% DTI

? Capitalize arrearages (increasing the principal balance

due)

? Change the terms of the loan in the following order to

try and reach the target payment¡­

¨C Reduce the interest rate to a step rate with an initial floor

of 2% for the first five years

¨C Extend the maturity date to a max of 40 years

¨C Forbear up to 1/3 of the principal, but not more than

enough to bring the interest bearing principal to 100% LTV

? If the target payment was reached, test the NPV

? If NPV positive, offer the borrower a trial plan

? 2014 Office of the Massachusetts Attorney General

The Intake Interview

(1) Breakdown of the Monthly Mortgage Payment

¨C You¡¯ll want to know principal & interest (P&I), taxes, insurance, and HOA fees (if any)

¨C A breakdown of P&I is not necessary, but you should ask if the current payment is an interest©\

only payment

(2) Estimate of Monthly Gross Income by Source

¨C

¨C

¨C

¨C

¨C

¡°Gross©\up¡± non©\taxable income by 25% (multiply by 1.25)

¡°Gross©\up¡± any net income amounts by 25% (multiply by 1.25)

¡°Gross©\down¡± rental income by 25% (multiply by 0.75)

P&L statements: income = profit + salary +/©\ certain adjustments

Unemployment benefits are not counted

(3) Estimate of the Property Value

¨C A recent appraisal is best, but online tools such as Zillow can provide a rough estimate

(4) Unpaid Mortgage Balance after Capitalization

¨C If no statement is available, you can roughly estimate the unpaid balance as:

unpaid principal + (number of months delinquent) x (monthly P&I payment)

? 2014 Office of the Massachusetts Attorney General

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