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Foreclosure Mediation Program

Foreclosure Mediation Program. Mortgage Foreclosure Filings in Cook County. 2000 12,705 2001 16,228 2002 17,450 2003 15,815 2004 15,632 2005 16,494 2006 22,248 2007 32,651 2008 43,876

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Foreclosure Mediation Program

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  1. Foreclosure Mediation Program

  2. Mortgage Foreclosure Filings in Cook County 2000 12,705 2001 16,228 2002 17,450 2003 15,815 2004 15,632 2005 16,494 2006 22,248 2007 32,651 2008 43,876 2009 47,049

  3. Mortgage Foreclosure Filings in Cook County 2010 • Estimated foreclosure case filings: 48,000 – 52,000 • 60,766 mortgage foreclosure cases were pending as of March 31, 2010

  4. Chicago Volunteer Legal Services “CVLS” • Funded in 1964 • Largest, non-government funded • Over 2,900 volunteers • In 2009, CVLS provided free legal services to 17,427 low income people in the Chicago area

  5. CVLS Contact Information Patricia Nelson, Director of Foreclosure Mediation Program 312-332-5539; pnelson@cvls.org Natalie Weidemier, Attorney Support Supervisor 312-332-1687; nweidemier@cvls.org Rebekah Rashidfarokhi, Staff Attorney 312-332-7399; rrashidfarokhi@cvls.org Shirley Chiu, Staff Attorney 312-332-8239; schiu@cvls.org Veronica Rodriguez, Foreclosure Mediation Administrator 312-332-3508; vrodriguez@cvls.org

  6. Access to Justice • Court appointed by the Chancery Division • Full legal representation for pro-se litigants • 150-200 cases/year • Possible representation for foreclosure cases that do not settle in mediation

  7. Default Foreclosure Timeline

  8. Contested Foreclosure Timeline

  9. Contested Foreclosure Timeline

  10. Contested Foreclosure Timeline

  11. Mediation Process Timeline

  12. Mediation Process Timeline

  13. Mediation Process Timeline

  14. Retention OptionsBorrower Remains in the Property Loan Modification • Lender modifies one or more of these terms: - Interest Rate - Term of the Loan - Principal • Two types: HAMP & Non-HAMP

  15. Retention OptionsBorrower Remains in the Property HAMP Loan Modification • Federal program • Monthly mortgage payment no more than 31% of gross income • Modification sequence: reduce interest rate, extend term of the loan, forbear principal

  16. Retention OptionsBorrower Remains in the Property Forbearance • Lender agrees not to accept payments for a specified period of time • Unemployed borrowers or those experiencing a temporary, finite loss of income • UP Program

  17. Retention OptionsBorrower Remains in the Property Repayment • Borrower pays arrearages (missed payments, attorney’s fees, lender’s costs) over a period of time, usually 6-12 months • Borrower must make regular mortgage payment in addition to repayment amount • Unrealistic for most borrowers

  18. Retention OptionsBorrower Remains in the Property Chapter 13 Bankruptcy • Stays foreclosure if filed before the sale • Borrower’s debt, including mortgage arrearages, consolidated and borrower makes monthly payment to trustee • Borrower must make regular mortgage payment as well • Last alternative – negative impact on credit

  19. Non-Retention OptionsBorrower Surrenders Possession of Property Deed in Lieu of Foreclosure • Borrower deeds property to lender and lender agrees not to pursue personal deficiency • Why? Credit score, cannot reinstate, no equity • Why not? Cook County judges rarely grant personal deficiency judgments, less time in the property, credit still negatively impacted

  20. Non-Retention OptionsBorrower Surrenders Possession of Property Consent Judgment • Similar to DIL except 2nd mortgage on property • 2nd mortgagee bound if proper notice & does not object • 2nd mortgagee can later file a collection case based on the Note even though mortgage foreclosed

  21. Non-Retention OptionsBorrower Surrenders Possession of Property Short Sale • Sale price does not cover outstanding mortgage • Lender approval required • Amount forgiven IS taxable if investment property

  22. Non-Retention OptionsBorrower Surrenders Possession of Property Cash for Keys • DIL variation • Lender pays Borrower to timely vacate home w/out destroying property • Lender avoids incurring eviction costs

  23. Non-Retention OptionsBorrower Surrenders Possession of Property Exit w/ Post-Foreclosure Rental • Lenders’ inventory of foreclosed homes are increasing which may serve as an incentive to rent the property to the Borrower

  24. Non-Retention OptionsBorrower Surrenders Possession of Property Chapter 7 Bankruptcy • Chapter 7 will not stay the foreclosure • Chapter 7 will release Borrower from any debt, including any potential deficiency judgment

  25. OVERVIEW OF HAMP James Brady Legal Assistance Foundation of Metropolitan Chicago

  26. OVERVIEW • What is HAMP? • What loans are eligible? • How do you figure that out? • How does HAMP work? • Waterfall for payment reduction • NPV test • Trial modifications • Denials • Bankruptcy • How does HAMP impact litigation? • Stopping a foreclosure • Waiver • Problems • Related programs

  27. WHAT IS HAMP? • Home Affordable Modification Program • Component of Making Home Affordable initiative. • Voluntary incentive-based plan • For non-GSE loans, servicers choose whether to participate or not • Mandatory for all Fannie Mae and Freddie Mac insured loans, even if servicer not participating. • Similar HAMP programs for VA and FHA loans • Participating servicers supposed to screen everybody, subject only to investor limits • Uniform modification characteristics • Payments reduced to 31%, following standard waterfall • Modification results in a positive Net Present Value (NPV) for investors • Trial modification followed by permanent modification

  28. WHERE IS THERE GUIDANCE? • No regs • No statute • Guidance • Non-GSE: Supplemental Directives, Model Forms & FAQs (hmpadmin.com) • Fannie Mae: Announcements (efanniemae.com) • Freddie Mac: Bulletins (freddiemac.com) • FHA: Mortgagee letters (hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm) • VA: Circulars (homeloans.va.gov/valeri.html)

  29. SERVICER INCENTIVES $1000 for each completed loan mod $1000 a year for 3 years for sustained loan modification, if payment reduced by 6% (or ½ of the amount the borrower’s monthly payment is lowered by, if less) Incentives for deed in lieu or short sale $500 for pre-default loan modification

  30. INVESTOR INCENTIVES • $1500 pre-default loan modification with payment reduced by at least 6% • Partial loan guarantees for modified loans (declining principal coverage) • Interest or principal reduction subsidies for half the difference between a payment at 38% DTI and 31% DTI • Home Price Decline Protection (HPDP) payments • Increase as • House price decline index (MSA or non-MSA region) increases • UPB balance increases up to $259,000 • MTM-LTV increases, up to 90% • Permanent mods, payment reduced at least 6%, NPV run after 9/1/09 • HPDP: Supplemental Directive 09-04

  31. HAMP IS FLOOR, NOT CEILING • Servicers can do modifications that go deeper than HAMP and still receive incentive payments • FAQs #3, 19 • Servicers can offer non-HAMP modifications, although everyone should be screened for and offered a HAMP mod

  32. LOAN ELIGIBILITY • All Fannie Mae/Freddie Mac loans covered • Search engine online to see if either owns the loan • List of participating servicers • List with contact information available online • Applies to operating subsidiaries/affiliates • Servicer Participation Agreement (SPA) available online • Websites: • www.makinghomeaffordable.gov • www.financialstability.gov

  33. FANNIE/FREDDIE SIMILAR PROGRAMS • Similar programs for Fannie & Freddie • Fannie: Announcement 09-05R • Freddie: Chapter C65 of Seller/Servicer Guide • Servicers get same incentives

  34. PARTICIPATING SERVICERS MUST MODIFY LOANS • Mandates that banks receiving TARP money on a “going forward basis” offer loan modifications • Servicers who sign contract must modify all eligible loans • Approximately 85% of eligible mortgage debt covered by HAMP servicers • Servicers of GSE loans must modify GSE loans • Servicers, not investors, participate

  35. CAN INVESTORS FORBID HAMP MODS? • HAMP doesn’t override PSAs. • BUT, the program follows “the “usual and customary industry standards” • If investor forbids modification, servicer must request waiver • Supp. Dir. 09-01: servicers required to use “reasonable efforts” to get approval. • Supp. Dir. 10-02: servicers required to provide list to Treasury of investors not participating in HAMP and to contact each in writing at least 1x to encourage participation. • 15 U.S.C. §1639a creates safe harbor from investor litigation for servicers who modify under HAMP

  36. TWO STEP SCREENING PROCESS • Is the borrower eligible? • Default or imminent risk of default • Current payment greater than 31% of income • Property eligibility • Loan eligibility • Does the borrower qualify? • Hardship affidavit • Verified income • NPV test (will the investor profit more by a mod than without a mod?)

  37. DEFAULT? • Default: must have been caused by hardship • Or default is “imminent” due to hardship • Is the rate about to reset? • Lost income in the home? • Employment income • Divorce/ separation • Death • Fraud in origination • Low cash reserves • Imminent default guidance: • Fannie Mae: Announcement 10-02 • Freddie Mac: Bulletin 2010-01 • Non-GSE loans: Supp. Dir. 09-01 gives servicers wide latitude; FAQ #19 refers servicers to GSE guidelines

  38. 31% OF WHAT?THE EXPENSES/INCOME RATIO • Income • Gross income for borrowers. Can include income for non-borrower household members. • Net income gets multiplied by 125% • Rental income gets multiplied by 75% • Borrowers receiving unemployment benefits not eligible • Must be able to document monthly income • Borrower DOES NOT have to disclose child support or alimony • Expenses • PITIA on first mortgage only • Mortgage insurance not included • Note: Neither income nor expenses are an absolute bar, but a borrower’s income may be too low or too high for a HAMP mod • Too low and the borrower will fail the NPV test • Too high and the borrower may already be at or under 31% DTI Supp. Dir. 09-01, Supp. Dir. 10-01, Supp. Dir. 10-04

  39. ELIGIBILITY • Property must be: • Primary residence. Investment properties not eligible. • One to four units • Loan must be: • First lien originated on or before January 1, 2009 • Home equity loans eligible if loan is first or only lien on property • Unpaid principal balance cap • 1 unit: $729,450 • 2 unit: $934,200 • 3 unit: $1,129,250 • 4 unit: $1,403,400 • Not previously modified under HAMP Supp. Dir. 09-01

  40. APPLYING FOR HAMP • Submission of “Initial Package” triggers servicer’s duty to review for HAMP • Request for Modification and Affidavit (RMA) • 4506T-EZ form • RMA and 4506T-EZ Forms available at makinghomeaffordble.gov or hmpadmin.com • Proof of income • As of 6/1/10, will not accept oral/unverified income • Checklist available at makinghomeaffordable.gov Supp. Dir. 10-01

  41. SERVICER RESPONSE TIME 10 business days from receipt of Initial Package to acknowledge borrower’s request in writing. 30 calendar days from receipt to approve, deny, or request more information in writing If denied, 10 business days from determination to notify of denial in writing. Supp. Dir. 09-07, Supp. Dir. 09-08, Supp. Dir. 10-02

  42. WATERFALL ANALYSIS • Target payment – PITIA 31% of gross monthly income • If servicer reduces payment to 38%, Treasury subsidizes rate reduction to 31% • Waterfall Analysis • Capitalize arrearage • Reduce interest rate • Amortization term extended to 40 years • Principal forbearance • Allowed to forgive principal, but not required. • Servicers will only take steps necessary to get payment to target amount. Supp. Dir. 09-01

  43. PRINCIPAL DEBT WILL INCREASE • Capitalized arrearage includes: • Past due principal and interest • Escrow deficiencies/advances, though doesn’t have to be. • Foreclosure costs • Servicing fees: property inspections, credit report fee • CANNOT include: • Late fees: unpaid fees will be waived • Additional modification fees: no charge for HAMP. Supp. Dir. 09-01.

  44. INTEREST RATE • Reduced to as low as 2% for 5 years (to get to 31%) • Can go lower, but incentives only paid down to 2% • Increase at 1% after 5 years to lower of • Freddie Mac rate • Interest rate cap in note • Once rate increases to cap, fixed for life of loan.

  45. PRINCIPAL FORBEARANCE AND PRINCIPAL REDUCTION • Forbearance • Limited to 30% of unpaid principal balance or 100% LTV (Supp. Dir. 10-01) • Treated as non-interest bearing balloon payment • Reduction: • Not required • Additional incentives available ($1,000/year for 5 years of successful mod) Supp. Dir. 10-01

  46. HOW TO REVIEW EXCESSIVE FORBEARANCE • What are the loan mod terms? • Payment • Income • Escrow • Forbearance required • FDIC Loan Mod in a Box • What is the unpaid principal balance? • 30% • What is the current value? • Difference between unpaid principal balance and current value

  47. HAMP NPV TEST • Measures the benefit to the investor of a loan mod • Not servicer • Not borrower • Weighs value and probability of • Current payments • Foreclosure • Loan mod • Foreclosure after loan mod • Positive NPV test= HAMP loan mod • Negative NPV test—still possible to have a loan mod, but unlikely to qualify for HAMP.

  48. HAMP NPV TEST • HAMP NPV test not public • Should demand entire NPV in discovery • FDIC has comparable model online at FDIC.gov. • Default model based on: • FICO score • MTM LTV • Current delinquency • DTI • Value of current loan reduced by probability of default • Value of loan mod reduced by probability of redefault. • Servicers can generate their own NPV and use their own numbers for required inputs

  49. REASONS FOR FAILING NPV • Current income stream on loan is high • Small likelihood of default (high FICO, low LTV, current, low DTI) • Foreclosure looks attractive • High home value • Chance of cure is high • Mod looks risky • Declining home prices • High chance of redefault • Mod doesn’t generate enough income • Borrower’s income is so low that at 31%, the mod doesn’t generate enough income

  50. IF APPROVED… • Trial Period Plan • At least 3 months trial at proposed modified payment • Arrears will accrue during trial. Payments are held in suspense and only credited when equal to full monthly payment under note. • Will be reported to credit bureaus as either in default or making payments under a plan • May be required to get housing counseling if back end ratio is more than 55% DTI but need not be completed before modification. • Will be converted to permanent modification upon completion of trial modification • If fails trial period: no further HAMP mod. “1 bite at the apple.” Supp. Dir. 09-07, Supp. Dir. 10-01

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