The Math Behind Loan Modification - CHAPA Home

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��31% 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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