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Loan Modification Programs: The Evolution of the Solution
By Caroline Ritchie

Starting in mid-2006, when borrowers began to fall behind on their mortgage loan payments at a rapidly accelerating pace, servicers have been faced
with unprecedented losses, dramatic market changes and sweeping government programs designed to help distressed homeowners. Unfortunately,
despite herculean efforts to mitigate and remediate the flood of delinquent loans, borrowers continue to default on their mortgage loans at historically
high levels. According to LPS Applied Analytics, nearly 5 million homeowners were behind on their mortgage loan payments and another 2 million were
already in foreclosure at the end of September 2010.

 The challenges for servicers have been as tremendous as the magnitude of the problems driving them: dramatic personnel recruitment, training and
re-training demands, unprecedented regulatory and compliance requirements, skyrocketing operating costs and a rapidly deteriorating housing market
that has reduced the value of collateral assets by up to a third or more in many areas of the country.

At the same time, servicers have also continued to evolve and adapt to the radically shifting mortgage environment. They have attempted to reach out
to borrowers in new ways, worked to better understand the cause of their difficulties, and sought creative solutions to help them stay in their homes.
Both federal and state governments have also announced wide-ranging programs to help servicers assist distressed homeowners, but thus far, no
‘silver bullet’ has been found.

While it’s clear that a great deal of work has already been done, millions of homeowners still struggle to meet their mortgage obligations. Much more
will be required to get through this crisis, but to understand where we’re headed, it is instructive to review where we’ve been.

The Birth of Federal Loan Modification Programs

Shortly after taking office in February 2009, the Obama Administration announced the creation of the Homeowner Affordability and Stability Plan
(HASP) aimed at stabilizing the housing market and helping the nearly 3.6 million American homeowners who were in default or at risk of default on
their mortgage. The program had two primary components: The Home Affordable Refinance Program (HARP) program supported the Government-
sponsored Enterprise (GSE) loans to help borrowers refinance into loans with lower interest rates, and the Home Affordable Modification Program
(HAMP) supported non-GSE loans to allow homeowners that are delinquent or at “imminent risk of default” to modify their loans and stay on track.

However, this was not the first effort made by the government to help stem the rising tide of mortgage delinquencies and foreclosures. After the num-
ber of non-current mortgages continued to increase starting around July of 2006 - roughly the same point in time when home values began an equally
steep decline – the American Securitization Forum (ASF) rolled out its Streamlined Foreclosure and Loss Avoidance Framework. Announced on De-
cember 6, 2007, this program encouraged servicers to proactively initiate discussions with homeowners with adjustable rate subprime mortgage loans.
The goal was to preemptively modify loans poised for payment increases associated with interest rate resets, as long as borrowers were in relatively
good standing on their mortgages and met other program requirements.

The next loan modification program arose from the IndyMac failure and takeover by the Federal Deposit Insurance Corporation (FDIC) in July of 2008.
The agency originally developed a loan modification program to help homeowners who were over 60 days delinquent and had a mortgage serviced or
securitized by IndyMac. Known as the “Mod in a Box,” this program used net present value (NPV) to determine whether a loan should go to foreclosure
or be modified. For loans that were to be modified, the program included a cascading “waterfall” of steps designed to help lower the front-end debt-to-
income ratio of homeowners to no more than 38%.

In October 2008, the Bush Administration announced the Hope for Homeowners Program (H4H), which allowed homeowners with a Federal Housing
Administration (FHA)-insured mortgage loan to refinance as long as they met certain criteria, such as a front-end debt-to-income ratio in excess of
31%. Yet, despite the efforts associated with this program and the ones that preceded it, the combined number of delinquent loans and loans already
in foreclosure rose to a staggering 11% of all mortgages by December 2008.

When the Obama Administration launched the HAMP program in March of 2009, there were high hopes that it would help the majority of distressed
homeowners get back on track and stay in their homes. But the numbers tell a different story. According to statistics published in the September 2010
report, The Obama Administration’s Efforts to Stabilize The Housing Market and Help American Homeowners released by the U.S. Department of
Housing and Urban Development and U.S. Department of the Treasury, only about 1.4 million HAMP trial modifications have been started since pro-
gram inception through the end of September 2010, and half of those failed before converting to a permanent modification.

Alternative Modification Programs

While certainly well-intentioned, the original loan modification programs were insufficient to address the default tsunami that continued to plague the
country. With the challenges mounting and the nature of borrower struggles coming into sharper focus, the federal government began to develop and
release a series of program revisions and alternative modification options almost immediately following the early 2009 launch of HAMP. By late April
2009, the Treasury first revised the HAMP program by announcing that servicers should consider loans for the H4H refinance program as an option
in the waterfall of programs to assist the borrowers. The financial Incentive for servicers to go this route was $1500 more than for the original HAMP
waterfall modification, and servicers attempted to refinance homeowners who could qualify for this solution.

By this time, the increase in distressed home equity loans also became an area that required the attention of the Treasury, though the rate of home

Loan Modification Programs
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equity defaults lagged that of first lien mortgages. It became clear that loan assistance for home equity products was also needed, and by August
2009, the Treasury Department released the details of another HAMP enhancement, called the Second Lien Modification Program or 2MP. This revision
allowed for a second lien loan to be modified under the same terms and conditions as the first lien modification associated with a specific property.

By April 2010, the Treasury Department’s Home Affordable Foreclosure Alternatives Program (HAFA) took effect to further complement HAMP. This
program was designed to help borrowers who could meet the eligibility requirements of HAMP, but were unable to keep their homes due to other hard-
ship constraints. HAFA provides borrowers, servicers and investors with financial incentives that are triggered when these defaulted loans are resolved
through short sale or deed-in-lieu of foreclosure transactions, and also releases borrowers from any future liabilities associated with their original
mortgage loans.

The Treasury then introduced guidance about the Principal Reduction Alternative (PRA) in June 2010 (later updated in October 2010). This option of-
fers financial incentives to investors that agree to forgive a portion of the principal owed on a first lien mortgage or second lien loan. The alternative is
designed to help borrowers who owe significantly more on their mortgages than their homes are worth. However, the PRA is only available for loans not
owned by Fannie or Freddie or guaranteed by any federal agency.

July 1, 2010 was the effective date of the Home Affordable Unemployment Program, yet another modification alternative. This program enables ser-
vicers of first lien mortgage loans (that are not owned or guaranteed by Fannie Mae or Freddie Mac or insured or guaranteed by a federal agency) to
provide loan assistance to borrowers who are behind in their payments due to unemployment. The assistance is in the form of payment forbearance,
but the borrower must apply for the assistance before becoming seriously delinquent.

Of course, Fannie Mae and Freddie Mac represent about 60% of the mortgage market and have their own versions of the mortgage assistance pro-
grams and alternative options. Fannie Mae has HAMP-related offerings, an alternative modification program, a second lien program and a forbearance
(unemployment assistance) program. Freddie Mac also offers HAMP-related provisions, a back-up modification alternative program, a ‘Cap to Rein-
state’ program that enables servicers to capitalize missed payments under certain conditions and a HAFA-related program. These are agency-specific
borrower assistance programs, as are the programs offered by the Veterans Administration, Federal Housing Authority and the Rural Housing Service.

Where We’re Headed

Recent statistics provided by LPS Applied Analytics demonstrate that new problem loans (60 or more days delinquent or in foreclosure) are back on
the rise as of September 30, 2010. Approximately 1.1 million loans that were current at the beginning of January 2010 are at least 60 days delinquent
or in foreclosure as of September 30, 2010. This most likely signals that new modification alternatives and enhancements are still to come in the ongo-
ing effort to stabilize the housing market and keep people in their homes.

With the Fannie Mae and Freddie Mac modification programs scheduled to expire in 2010, no new programs have been announced. However, it is
likely that Freddie Mac expects servicers to continue to offer HAMP mods and then the standard Freddie Mac mod or other foreclosure alternatives as
applicable. Fannie Mae is making adjustments to their standard modification program, which should be offered when loans do not qualify for HAMP.

As the 2012 sunset date for the rest of today’s standard and alternative modification programs approaches, it may also become clear that more time is
needed to ensure that everyone who can be helped benefits from the options that have been developed. Even more likely is the possibility that addi-
tional alternatives will be announced in the months ahead. While nothing for certain has been announced as of this writing, as the rate of modifications
slows and foreclosures continue to rise, it is almost certain that new programs or changes to existing programs will occur to try to mitigate loans from
going to foreclosure. Some have speculated that Fannie Mae or Freddie Mac may offer principal forgiveness in the future, though the agencies have
not announced anything to that effect.

The mortgage industry is a completely different place than it was in July 2006, and many more changes are likely to come. Those that have survived
thus far have done so by constantly reinventing their organizations while strengthening their focus on the fundamentals. As the industry continues its
important work to help distressed homeowners and bring stability to the housing market, it will also become more agile and sharpen its performance
through proven principles and data-driven decision making. The many lessons that have been learned and the significant advances that have been
made will continue to serve the industry well as it moves steadily through and ultimately beyond today’s difficult challenges.

About the Author

Caroline Ritchie serves as vice president of Product Strategy for LPS’ Mortgage Servicing division.

Caroline has been with LPS for 18 years and has 24 years of experience in the mortgage banking industry. In prior LPS positions, she has served as a
mortgage banking consultant with Professional Services as well as a manager and consultant within the Conversion and Acquisition department. Prior
to LPS, Caroline worked for HomeSide Lending, Inc., serving as vice president on the expatriate team for the parent company National Australia Bank.

Caroline earned her Bachelor of Science degree in Business Administration from the University of Florida and is an active member of the Mortgage
Bankers Association. She can be reached at

Loan Modification Programs

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