Announcement November 2, Updates and Clarifications to the Home Affordable Modification Program

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1 Announcement November 2, 2009 Amends these Guides: Servicing Updates and Clarifications to the Home Affordable Modification Program Introduction Announcement 09-05R, Reissuance of the Introduction of the Home Affordable Modification Program, HomeSaver Forbearance, and New Workout Hierarchy, provided guidance to Fannie Mae-approved servicers on the adoption and implementation of Home Affordable Modification Program (HAMP). Fannie Mae has an ongoing commitment to the success of this modification initiative, and is adopting changes to streamline the program documentation requirements and standardize the evaluation process. This Announcement contains updates and clarifications to the following topics: Updates to Standard HAMP Documents Changes to Eligibility Determination Based on Net Present Value Evaluation Principal Forbearance Thresholds Verifying Borrower Income and Occupancy Status Modification Process Reporting Clarification of Reimbursement of Administrative Costs Effective Date Unless otherwise indicated, all policy changes included in this Announcement are effective immediately. Updates to Standard HAMP Documents Fannie Mae servicers are encouraged to use the following new standard HAMP documents as soon as they become available but must use the documents no later than March 1, The documents will be posted on efanniemae.com in the coming days. Announcement Page 1

2 Making Home Affordable Program Request for Modification and Affidavit (Form 194, referred to as the RMA) combines the borrower s income and expense information with the Home Affordable Modification Program Hardship Affidavit (Form 1021), SIGTARP Fraud Notice, and portions of the Home Affordable Modification Trial Period Plan (Form 3156). When the servicer uses the RMA, the Hardship Affidavit, Fraud Notice, and Trial Period Plan are no longer required. Home Affordable Modification Program Stated Income Trial Period Plan Notice (Form 195) and Home Affordable Modification Program Verified Income Trial Period Plan Notice (Form 196) (generally referred to as TPP Notices) describes the terms and conditions of the trial period plan. Unlike the existing Trial Period Plan (Form 3156), the borrower is not required to sign or return a TPP Notice. Fannie Mae is also modifying its signature requirements for the existing Trial Period Plan (Form 3156) to align with this new policy. Accordingly, a borrower in a trial period plan who makes all required trial period payments, but does not sign and return the current Trial Period Plan prior to the end of the trial period, may receive a HAMP modification as long as the servicer has received all required trial period plan payments and all other HAMP-required documentation from the borrower, including a fully executed Home Affordable Modification Agreement (Form 3157). Refer to the Executing the HAMP Documents section below for additional details on the use of these documents. Changes to Eligibility Determination Based on Net Present Value Evaluation In Announcement 09-05R, servicers were instructed not to use the results of the Net Present Value (NPV) test to determine HAMP eligibility for mortgage loans owned or securitized by Fannie Mae. Fannie Mae is modifying this policy to require a determination of eligibility based on NPV test results for mortgage loans with an initial NPV evaluation on or after December 1, If the mortgage loan is deemed NPV negative (per the NPV model output) where the value for the no modification scenario exceeds the value for the modification scenario by more than $5,000, the servicer may not perform the modification without the express written consent of Fannie Mae. The servicer will need to compute the difference between the modification and no modification scenarios in order to determine whether the $5,000 threshold has been exceeded. For example, if the no modification scenario produces a value of $10,000 and the modification scenario produces a value of $4,000, the servicer needs the express written consent of Fannie Mae to perform the modification. If a mortgage loan is deemed ineligible for HAMP due to the NPV test results, the servicer must explore other foreclosure prevention alternatives following Fannie Mae s workout hierarchy prior to initiating or resuming foreclosure. Announcement Page 2

3 Principal Forbearance Thresholds Principal Forbearance for NPV Positive Mortgage Loans For mortgage loans eligible for HAMP and deemed NPV positive (per the NPV model output) on or after December 1, 2009, servicers are not required to forbear more than the greater of: 30 percent of the unpaid principal balance of the mortgage loan after capitalization, or an amount resulting in a modified interest bearing balance that would create a current markto-market loan-to-value ratio of less than 100 percent. If the borrower s monthly mortgage payment cannot be reduced to the target monthly mortgage payment ratio of 31 percent unless the servicer forbears more than the amount described above, the servicer may not perform the modification without the express written consent of Fannie Mae. Principal Forbearance for NPV Negative Mortgage Loans Servicers are reminded that, as provided in Announcement 09-05R, when applying the principal forbearance step of the standard modification waterfall, the modified interest-bearing balance (i.e., the unpaid principal balance excluding the deferred principal balloon amount) must create a current mark-to-market LTV (current LTV based upon the new valuation) greater than or equal to 100 percent if the result of the NPV test is negative. Verifying Borrower Income and Occupancy Status Clarifications Related to Income Fannie Mae is changing the requirement related to the age of financial documentation for the purposes of qualifying for HAMP. A borrower s income documentation may not be more than 90 days old as of the date that such documentation is received by the servicer in connection with evaluating a mortgage loan for HAMP. There is no requirement to refresh such documentation during the remainder of the trial period. Fannie Mae is also changing the aging requirement for property valuation documentation. Property value information must be less than 90 days old on the NPV submission date. The information will remain valid for the duration of the trial period and does not need to be updated for any subsequent NPV evaluation. Servicers must use good judgment when determining if there are acceptable alterations or omissions to the verification documents. Servicers may elect to accept documents with alterations (blank fields, erasures, use of correction tape, inaccurate dates, etc.) if the servicer determines that the imperfections are immaterial to the business decision, are not indicative of fraud, and do not impact the servicer s ability to verify the completeness and accuracy of the borrower s financial position. Announcement Page 3

4 IRS Tax Return Transcripts and Federal Income Tax Returns Servicers must obtain the most recently filed federal income tax return if a borrower is in imminent default. All other borrowers may elect to provide signed federal income tax returns but are not required to do so. Every borrower must provide a signed and completed IRS Form T (Request for Transcript of Tax Return) or IRS Form 4506T-EZ (Short Form Request for Individual Tax Return Transcript) that will allow the servicer (directly or through an authorized designee) to obtain the borrower s most recent federal income tax transcript from the Internal Revenue Service. Form 4506T-EZ, published by the IRS on October 21, 2009, is a permissible substitute for Form 4506-T for borrowers who filed a Form 1040 series tax return on a calendar year basis. All other borrowers should continue to provide Form 4506-T. The servicer must submit the borrower s Form 4506-T or Form 4506T-EZ to the IRS for processing unless the borrower provides a signed copy of his or her most recent federal income tax return. The servicer also must submit the borrower s Form 4506-T or Form 4506T-EZ to the IRS for processing when required by the Compliance Agent. When the servicer obtains the federal income tax return, it must include all schedules and forms. If a borrower submits an unsigned tax return, evidence of an electronically filed tax return is considered acceptable to satisfy this requirement. If the borrower is unable to provide evidence that the return was filed electronically, the servicer must either execute Form 4506-T or Form 4506T-EZ with the IRS (or designee), or forward the tax return to the borrower for signature. Upon execution, the borrower must return the signed federal income tax return to the servicer. If a tax return or transcript is not available for the most recent tax year, the servicer may accept a signed tax return, electronically filed tax return, or transcript for a prior tax year but must execute the borrower s signed Form 4506-T or Form 4506T-EZ with the IRS to confirm that the borrower did not file a current tax return. If a borrower is not required to file a tax return, the borrower must document why he or she was not required to file a tax return. The servicer should review the tax return information for all borrowers to verify income and identify discrepancies. If the tax information identifies income relevant to the HAMP decision that the borrower did not disclose on the RMA, the servicer must obtain other documentation to reconcile the inconsistency. In resolving inconsistencies, servicers must use reasonable judgment to determine whether such income is no longer being earned or has been reduced to the amounts disclosed on an RMA. The servicer should ask the homeowner to explain material differences between the federal income tax returns/transcript and the RMA, and document such differences in their servicing system. If the verified documentation reasonably indicates that a borrower is committing fraud, the servicer should not extend the modification. Benefit Income (excluding Unemployment Income addressed below) Servicers are no longer required to make a determination on the probability that benefit income will continue. Examples of benefit income include Social Security income, disability income, death benefits, pension income, public assistance, and adoption assistance. Announcement Page 4

5 Treatment of Nontaxable Income For the purpose of determining gross monthly income when nontaxable income is used to qualify for HAMP, the servicer must develop an adjusted gross income for the borrower by adding an amount equivalent to 25 percent of the nontaxable income to the borrower s income. If the actual amount of federal and state taxes that would generally be paid by a wage earner in a similar tax bracket is more than 25 percent of the borrower s nontaxable income, the servicer may use that amount to develop the adjusted gross income. Calculation of Rental Income Announcement 09-05R states that monthly net rental income must equal 75 percent of the gross rent, with the remaining 25 percent being considered vacancy loss and maintenance expense. This Announcement is clarifying that if the rental income is earned from property other than the one- to four-unit property which secures the borrower s principal residence, the servicer must multiply the monthly gross rental income from Schedule E of the signed federal income tax return by 75 percent and then subtract the monthly debt payments required (principal, interest, taxes, and insurance payment(s) required - including mortgage insurance and association fees - if applicable) for the rental property. If the result is positive, the amount should be included as income; otherwise, the negative amount should be included in the total monthly debt ratio as an expense. For example, if a borrower is receiving monthly rental income of $1,000 for a property other than the borrower s principal residence, and the monthly debt payments (as defined above) equal $900, the servicer must multiply $1,000 by 75 percent ($750.00) and then subtract the monthly debt payments ($900), resulting in $150 to be included in the total monthly debt ratio as an expense. Use of Alimony, Separate Maintenance, or Child Support Income If the borrower elects to include alimony, separate maintenance, or child support income, a servicer is no longer required to determine the probability that the income will continue. Use of Unemployment Income HAMP program guidance states that if a borrower receives unemployment income, the servicer must determine that the income will continue for at least nine months. Any applicable period of extended unemployment benefits may be used to qualify the borrower if the borrower s state of residence has such benefits. However, the extended unemployment benefit must be available to the borrower without any additional qualification requirements (apart from the act of registering for the extended benefits), and the availability of the program at the time the primary unemployment benefits expire can be documented. The servicer may then combine the remaining primary unemployment benefit term with the extended benefit term to determine if a borrower has at least nine months of remaining unemployment benefits to use that income for qualification purposes. The duration of benefit eligibility by geographic area including federal and state extensions may be evidenced by a screenshot or printout from the Department of Labor Unemployment Benefit Estimation tool, which is available on the Department of Labor s Web site. Announcement Page 5

6 Passive and Non-Wage Income With the exception of borrowers facing imminent default, passive and non-wage income (including rental income, part-time employment, bonuses, tips, investment, and benefit income) does not have to be documented if the borrower declares such income and it constitutes less than 20 percent of the borrower s verified total gross income. For a borrower facing imminent default, passive and non-wage income that exceeds $100 per month must be documented prior to being deemed eligible for the trial period; however, all passive and non-wage income must be verified based on documentation prior to final modification. Non-Borrower Household Income A servicer should not consider expenses of non-borrower household members but may consider the portion of his or her income that the non-borrower routinely contributes to the household as part of the monthly gross income calculation. Verifying Occupancy Fannie Mae is updating the requirements in Announcement 09-05R to allow the servicer to rely solely on the address indicated on the credit report to verify occupancy as long as the credit report lists the property address as the borrower s current residence. The servicer is no longer required to verify the borrower s principal residence using other documentation. If the credit report does not indicate the property address as the borrower s current residence, the servicer must perform additional due diligence to verify occupancy prior to extending a HAMP offer and must document the results of such due diligence in the loan file or servicing system for compliance review purposes. Modification Process Executing the HAMP Documents A servicer must acknowledge the borrower s request for HAMP participation by sending the borrower one of the following documents within 10 business days following receipt of verbal borrower financial information or a completed RMA: If the servicer is evaluating borrower eligibility based on verbal income information and is prepared to offer the borrower a trial period plan, the servicer must send the TPP Notice for Stated Income (Form 195). If the servicer is going to qualify a borrower for a trial period plan based on verified income information, a written notice with information describing HAMP must be sent in addition to the appropriate forms and a list of verification documents and the specific date by which documentation must be received. If the servicer determines that a borrower cannot be approved for a trial period plan, the servicer must communicate that determination to the borrower in writing and consider the borrower for another foreclosure prevention alternative. Announcement Page 6

7 Within 30 calendar days following the servicer s receipt of a completed RMA, IRS Form 4506-T or 4506T-EZ, and all required income and other financial information (including all required documentation and either the borrower's tax transcript or tax return when using the verified approach), the servicer must complete its evaluation of borrower eligibility and notify the borrower of its determination. If the servicer determines that the borrower is approved for a trial period plan, the servicer must either: send a TPP Notice for Verified Income (Form 196) to the borrower, or if the borrower is currently in a trial period plan pursuant to a stated income TPP Notice, send a written notice that the borrower has been approved for a HAMP modification pending timely receipt of all trial period payments. If the servicer determines that a borrower cannot be approved for a trial period plan, the servicer must communicate that determination to the borrower in writing and consider the borrower for another foreclosure prevention alternative. Servicers must retain a copy of the TPP Notice in the mortgage loan file and note the date that it was sent to the borrower. Receipt of the first trial period payment under the TPP Notice by the Trial Period Offer Deadline will be deemed as evidence of the borrower s acceptance of the trial period plan and its terms and conditions. HAMP program guidelines require that, unless a borrower or co-borrower are deceased or borrower and co-borrower are divorced, all parties who sign the original mortgage loan documents (or their duly authorized representative) must sign the HAMP documents. In cases where a borrower and co-borrower are unmarried and either borrower or co-borrower relinquish all rights to the property securing the mortgage loan through a recorded quitclaim deed, the nonoccupying borrower that has relinquished property rights is not required to provide income documentation or to sign the HAMP documents but remains liable for the outstanding mortgage debt. In Announcement 09-05R, Fannie Mae indicated that unless a borrower or co-borrower is deceased or divorced, all parties who signed the original note AND security instrument (or their duly authorized representative(s)) must execute the HAMP documents. This Announcement is clarifying that all parties who sign either the original note OR the security instrument (or their duly authorized representative(s)) must execute the HAMP documents. Retaining First Lien Position Announcement 09-05R outlines servicing requirements intended to ensure that a mortgage loan modified under HAMP retains first lien position. Fannie Mae is clarifying and supplementing requirements with respect to the steps that must be taken to ensure that the modified mortgage loan retains its first lien position and is fully enforceable. First, Fannie Mae is eliminating the requirement for servicers to obtain subordination agreements. Second, when the final interest rate on the modified mortgage loan is greater than the pre-modified interest rate in effect on the mortgage loan, Fannie Mae now requires that the Announcement Page 7

8 modification agreement be in recordable form, be recorded, and that a title endorsement or similar insurance product issued by a title insurance company be obtained. Third, Fannie Mae is removing the requirement that modification agreements in New York be recorded, although they must still be obtained in recordable form so that they may be recorded later if necessary. Under these new requirements, a title endorsement or similar insurance product issued by a title insurance company is required when either the amount capitalized is greater than $20,000 (aggregate capitalized amount of all modifications of the mortgage loan), or the final interest rate on the modified mortgage loan is greater than the interest rate in effect prior to modification of the mortgage loan. Program Waivers From time to time, program waivers related to HAMP are posted on HMPadmin.com. This Announcement clarifies that such waivers are applicable to Fannie Mae servicers, and as such, Fannie Mae servicers must ensure compliance with the terms of such waivers. Reporting Delinquency Status Reporting In the event that the borrower files bankruptcy during the trial period, servicers must continue to report Delinquency Status Code 09 - Forbearance until the borrower either successfully completes the trial period, in which case the status code would be changed to reflect 28 modification, or the borrower fails the trial period, in which case the status code would be changed to reflect the appropriate bankruptcy status code. Reporting Phase II Data Elements to Treasury In addition to reporting to Fannie Mae through the HomeSaver Solutions Network, servicers must report HAMP loan activity (i.e., loan set up of the approved modification) to Treasury at the start of and during the modification trial period, and monthly after the modification is set up through the servicer Web portal accessible through HMPadmin.com. Servicers must refer to Supplemental Directive 09-06, Home Affordable Modification Program Data Reporting Requirements Guidance, accessible on HMPadmin.com to obtain more detailed information on the required data elements and reporting time frames. Announcement Page 8

9 Clarification of Reimbursement of Administrative Costs To obtain reimbursement for any administrative fees and costs (e.g., notary fees, recordation fees, title costs) incurred in connection with a HAMP, the servicer should submit a Cash Disbursement Request (Form 571) to Fannie Mae. For mortgage loans considered under HAMP, Fannie Mae will waive the requirements that the claim equal at least $ or that the mortgage loan be at least six months delinquent. Administrative fees and costs associated with a HAMP should be included on an individual Form 571. In order for the claim to be paid, servicers must reference HAMP in the comments section of the electronic form. If Form 571 is submitted in hard copy, the servicer must write HAMP on the top of the form. For example, the servicer incurs a cost of $20 for a BPO for a HAMP. The servicer immediately files a claim for $20 through the 571 process. Line 78 (Broker's Price Opinion) is completed with the $20 cost and indicates BPO for HAMP in the comments. Fannie Mae receives the claim and it is paid in full. If there was no comment, the claim would be denied, as Fannie Mae would have no way of knowing that it was related to HAMP. ***** Servicers should contact their Servicing Consultant, Portfolio Manager, or the National Servicing Organization s Servicer Support Center at FANNIE5 ( ) with any questions regarding this Announcement. Marianne E. Sullivan Senior Vice President Single-Family Chief Risk Officer Announcement Page 9