Obama's Standardized Short-Sale Plan 2.17.10 By: Stephen J. Nash Nash & Lodge, PLLP nash@nashandlodge.com   The latest Obama short sale plan is just one of many plans that have been announced over the last three years.  Like all of the other plans, the plan will not be successful unless the lenders actually adopt the plan.  To date, none of the announced plans, even those proposed by the lenders themselves, have been wholeheartedly adopted by the lenders which rendered them relatively meaningless. A number of real estate professionals have misunderstood what the Obama plan is and, as a result, have unrealistic expectations.  I will, therefore, first, set out what the plan really is and then discuss what our expectations should be. What is the HAMP program? The Home Affordable Mortgage Program is a loan modification plan put forth by the Obama administration.  The HAMP program provides loan modification guidelines that the mortgage industry can use.  The program provides benefits to borrowers, servicers and investors to induce them to use the program since the program is voluntary.  The borrower eligibility requirements are as follows:  1) borrower is delinquent on their mortgage or faces imminent risk of default  2) property is occupied as borrower's primary residence  3) mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750.00 for one-unit properties. If the borrower is eligible for the HAMP program the servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower's total pretax monthly income: First, reduce the interest rate to as low as 2%, Next, if necessary, extend the loan term to 40 years, Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount. The servicer can also reduce the principle amount owed in order to meet the 31% target goal.   The Second Lien Modification program (2MP)  The 2MP program is designed to be used with the HAMP program.  The first mortgage would be modified under the HAMP guidelines while the second mortgage would be modified pursuant to the 2MP guidelines.   If the first mortgage is modified under HAMP and the servicer of the second lien is a program participant, the servicer of the second lien must offer to either modify the second mortgage or accept a lump sum payment from the Treasury in exchange for a a complete satisfaction of the second loan.  The 2MP servicer will make their offer based upon the documentation provided to the first lender without additional evaluation by the servicer of the second lien. The guidelines for the 2MP program are as follows: Only second liens with corresponding first liens that have been modified under HAMP are eligible for a modification or extinguishment under 2MP. Second liens originated on or before January 1, 2009 are eligible for a modification or extinguishment under 2MP. Only second liens with an unpaid principal balance (at initial consideration for the second lien modification) equal to or greater than $5,000 are eligible for modification incentive or cost share payments under 2MP.  There are no unpaid principal balance limitations for investor incentive payments in conjunction with extinguishment of second liens under 2MP. A second lien may be modified only once under 2MP. A mortgage loan that is subordinate to a second lien is ineligible under 2MP.     Modification or extinguishment of such a subordinate mortgage loan in place of the second lien will not satisfy the servicer’s obligation under 2MP to modify or extinguish the second lien. If a second lien is modified under 2MP, it is not eligible for payment of extinguishment incentives under 2MP. A home equity loan that is in first lien position is not eligible under 2MP and should be evaluated for modification under HAMP. A mortgage lien that would be in second lien position but for a tax lien, a mechanic’s lien or other non-mortgage related lien that has priority is eligible under 2MP. A second lien on which no interest is charged and no payments are due until the first lien is paid in full (e.g., FHA partial claim liens and/or equity appreciation loans) is not eligible under 2MP. Borrowers may be accepted into the program if a fully executed 2MP modification agreement or trial period plan is in the servicer’s possession on December 31, 2012. Incentive payments for Servicers, Borrowers and Investors. A servicer of a second lien will receive compensation of $500 for each second lien modification that becomes effective under 2MP.  The servicer will also receive an annual “pay for success” fee of $250 for up to three years as long as both the HAMP modification and the 2MP modification remain in good standing and have not been paid in full as of the date the payment is made.  “Pay for success” fees do not accrue during the trial period, if any.  If either the HAMP modification or the 2MP modification ceases to be in good standing or is paid in full, the servicer will cease to be eligible for any further 2MP incentive payments after that time, even if the borrower subsequently cures his or her deliquency. Borrower Incentive Compensation   A borrower will receive an annual “pay for performance” principal balance reduction payment of up to $250 for up to five years following the effective date of the second lien modification as long as both the HAMP modification and the 2MP modification remain in good standing and have not been paid in full as of the date the payment is made.    “Pay for performance” principal balance reduction payments do not accrue during the trial period, if any.    The “pay for performance” principal balance reduction payment will accrue monthly as long as the borrower is current on both the first and second liens and makes his or her monthly payment on time (the payment is made by the last day of the month in which the payment is due) and    The "pay for performance principal balance reduction will be applied annually for each of the first five years after the anniversary of the date the 2MP modification became effective.      This payment will be paid to the servicer of the first lien to be applied towards reducing the UPB on the first lien.      This is in addition to any borrower “pay for performance” compensation for which the borrower may be eligible in connection with a HAMP first lien modification.   If either the modified first lien or the modified second lien ceases to be in good standing or is paid in full, the borrower will be ineligible to receive 2MP incentive payments already accrued or to accrue any future 2MP incentive payments, even if the borrower subsequently cures his or her delinquency. Investor Payment Reduction Cost Share Incentives   One-half of the payment difference between the payment on the modified second lien and the lesser of the payment based on the interest rate and term on the modified first lien or the contract rate and term of the second lien prior to modification.    150 basis points multiplied by the UPB of the second lien, converted to a monthly rate.   Payment reduction cost share compensation will begin to accrue on the effective date of the 2MP modification.    Payment reduction share compensation will be paid monthly for up to five years      First lien modified under HAMP must remain in good standing and cannot been paid in full.  Extinguishment Option As an alternative to modifying an eligible second lien, a servicer, in accordance with any applicable pooling and servicing agreement or other investor servicing agreement, may elect to extinguish the entire second lien in exchange for a lump sum payment paid in accordance with the formula set forth in the table below.  When the extinguishment option is utilized: The second lien servicer, investor and any mortgage or other insurer must relinquish all rights and remedies against the borrower(s) related to the second lien obligation, and  The borrower may not be required to sign a promissory note or be charged a fee.  Following extinguishment, servicers must take all necessary action to cancel the indebtedness and release the second lien in a timely manner.  When the mortgage note is cancelled and the required release and/or satisfaction documents are executed and filed, the servicer must promptly send the cancelled documents to the borrower with a cover letter instructing the borrower to retain t he evidence of cancellation.    The cover letter must explain that the forgiven debt has been reported to the credit bureau as “Cancelled; account charged off.”    The servicer must not charge the borrower a fee for cancelling the indebtedness and releasing or discharging the second lien against the property. Extinguishment is not available for: Second liens that have been modified under 2MP.  Second liens that have already been charged off by the servicer. We've Been Down This Road Before With Disastrous Results Don't Be Fooled Again. NOTICE The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract are, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation. Copyright 2010 Nash & Lodge, PLLP