The Math Behind Loan Modification - CHAPA
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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