Does Q1222-01 Require Your Lender To Modify?

Q1222-01 of the Supplemental Documentation – Frequently Asked Questions under the HAMP program raises an interesting question. It speaks in terms of mandatory requirements for servicers to offer permanent mods after a borrower meets certain requirements. I am wondering if anyone has seen a court actually enforce this yet. I am not aware of any written opinions in the entire country where a court has yet to compel a modification based on this but it does seem like a valid legal argument that can be asserted in some cases.

Q1222-01 How should servicers handle situations where an eligible borrower successfully completed the HAMP trial period but has not been converted by the servicer to a permanent modification in a timely fashion?

In situations where an eligible borrower successfully completed the trial period (including providing the required documentation and making the required payments) and should have been converted to a permanent modification, but for reasons beyond their control were not timely evaluated for a permanent modification, the servicer must promptly make a determination as to whether the borrower is eligible for a permanent HAMP modification. If the borrower is eligible, then the servicer must offer the borrower a permanent HAMP modification as soon as possible, but in no event later than sixty days after discovering the error, including, but not limited to, discovery through notification from MHA Compliance, the servicer’s own procedures, or notice provided by the borrower. In addition, servicers must make permanent HAMP modification offers to eligible borrowers that are identified as currently being in this situation by February 28, 2010. The permanent HAMP modification offered must put the borrower in the same position as he or she would have been had the servicer converted the borrower to a permanent modification in accordance with the program requirements. A borrower in this situation remains eligible for a permanent HAMP modification regardless of whether the borrower failed to make trial period payments following the successful completion of the trial period.
In order to achieve this result, the servicer should take the following steps:

• the modification should be made effective as of the date the modification would have become effective if the servicer had converted the borrower in a timely fashion (the “Modification Effective Date”) and the applicable Interest Rate Cap shall be the first Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) Rate for 30-year fixed rate conforming loans, rounded to the nearest 0.125 percent, issued in the month prior to the Modification Effective Date. For example, for a loan with a Modification Effective Date of July 1, 2009, the Interest Rate Cap should be 5.29% which is the PMMS Rate issued on June 4, 2009, the first PMMS rate issued in June 2009 (the PMMS archives are available at http://www.freddiemac.com/pmms/docs/30-yr_historics.xls);
• the initial unpaid principal balance of the modification should be the unpaid principal balance of the loan as of the Modification Effective Date, plus all accrued but unpaid amounts allowed to be capitalized under HAMP as of the Modification Effective Date; Home Affordable Modification Program – 2009 Conversion Campaign FAQs – Page 4
• any payments made by the borrower after the Modification Effective Date until the time of conversion should be applied retroactively in accordance with the modified terms; however, any shortfalls between the actual payments made by the borrower after the Modification Effective Date (including any missed payments) and payments that are due under the modified terms until the time of conversion must be advanced by the servicer, capitalized and deferred as a non-interest bearing amount that is due and payable by the borrower at the time of payoff, maturity or transfer. The servicer may collect this amount subject to such restrictions as the investor may establish including, but not limited to, restrictions on collecting this amount in the event of a short payoff or other disposition of the loan;
• if, due to a shortfall in payments, amounts are deferred, the servicer must amend the Home Affordable Modification Agreement in accordance with the Document Summary for the modification agreement; and
• the servicer must take the necessary steps to correct any credit reporting for the borrower since the Modification Effective Date.

As part of its regular compliance activities, MHA Compliance will test for compliance with this guidance. In addition, MHA Compliance has been conducting, and intends to continue to conduct, focused file reviews on populations of aged trial modifications.

Servicers should note that this guidance does not apply to situations where a borrower has been granted a Trial Period Extension under HAMP Waiver #20090803 because the borrower made all required trial period payments during the original trial period but did not submit all necessary documentation. In that situation, the borrower must make an additional trial period payment for each extension month by the end of the Trial Period Extension to receive a permanent HAMP modification.