We are very pleased to have Bankruptcy Boot Camp graduate Margery E. Golant contribute to our blog with this helpful post about what attorneys need to know about how HAMP can be used as a powerful tool combined with a Bankruptcy Chapter 13 filing.
HAMP (the Obama Administration’s Home Affordable Modification Program) is widely known to be a failure. So, why would we want to know more about it or consider using it?
There are two major reasons for the bad marks that HAMP receives. The biggest of these is that the program is set up to be administered by the mortgage servicers. Yes, the very source of failures to appropriately resolve loans and to avoid foreclosures was put in charge of administering the program that was created to help to avoid foreclosure! Strange but true. The second of the major reasons is that HAMP does not have any requirements for principal reduction. In cases that qualify, it can however meaningfully reduce the monthly obligation, convert a crappy interest only or negative amortization loan to a fully amortizing loan, reduce the principal to current agency rates or below. Combining HAMP with a strip of a wholly unsecured junior mortgage, in the right circumstances HAMP can provide a mechanism for keeping clients in their homes, and can turn an ugly predatory mortgage into a relatively normal one.
As I stated at the outset, the worst feature of HAMP is that the servicers run the show. While common sense and conventional wisdom assume that a servicer’s goal is to maximize the recovery (in servicer-speak, ‘reduce loss severity’), and while servicers and their attorneys always state publicly that they have no desire to sell the borrower’s home, in fact the servicers make far more when a loan is in foreclosure than they do when it is performing. Unquestionably, this pits the interests of the servicer in direct opposition to the interests of its investor-client; it is a classic conflict of interest. Ultimately, if the house is foreclosed upon and eventually sold for a tiny percentage of the loan amount, it is not the servicer who suffers, it is the investor’s problem. However, the investor has nothing to say about the day to day decision-making relating to “loss mitigation” decisions – those are normally the province of the servicer. So, there are numerous examples of situations where a loan could have been modified, or reinstated, or the property sold, resulting in a modest loss, yet the servicer refused to cooperate, resulting in a much greater loss – to the investor. There has been quite a lot written on where servicers’ compensation comes from, and from the fact that their motivations are not consistent with modification.
For example, please see:
“Why Servicers Foreclose When They Should Modify” –Diane Thompson, NCLC
“Lucrative Fees Deter May Deter Efforts to Modify Loans” – Peter Goodman, New York Times
In the “usual” case, which has been commented upon, testified to, and is even the subject of a macabre cartoon, borrowers endlessly submit financials to some servicer’s machine, to be told over and over again that the paperwork was not received or was not complete, or are put on “trial plans” that lead nowhere, and are ultimately denied a permanent modification. However, for those you whose client’s are candidates for Chapter 13 and who know how to take the servicers on a la Max Gardner’s Bankruptcy Litigation Model (BLM), and who really understand HAMP, it can become feasible to force the servicer into a permanent modification. While admittedly this does beg the question of who really owns the loan, there are some options to address this issue also.
HOW DOES HAMP WORK ?
The primary rationale underlying HAMP is that in order for a modification to be “sustainable”, the borrower’s total housing payment cannot exceed 31% of gross monthly income. Included in that 31% is principal, interest, taxes, insurance and association dues (referred to as PITIA), but NOT second mortgage obligations. So, the first analysis to be done to ascertain if HAMP is even of potential interest is exactly that: what is the current total housing expense (as defined here) as a percentage of the borrower’s current monthly income? If it is 31% or less, there is nothing further to consider, since, except for the caveat in the next sentence, this is not a borrower who could qualify for HAMP. An important issue though is who actually is the borrower. If only one spouse signed the mortgage note, that spouse is the only borrower, and it may be that you can make the numbers work based on the total housing expense as a percentage of that spouse’s income.
Assuming that the total housing payment currently exceeds 31% of the borrower’s total monthly income, the next challenge is to ascertain what would need to be done to bring the total housing expense down to 31%, using the steps that HAMP allows (called “the Standard Waterfall”), which are:
- Reduce the interest rate, in tiny increments (.0125) down as far as to 2%
- Extend the amortization period (in tiny increments) out as far as 40 years
- Forbear principal – up to 30% of the total principal amount or down to current market value, whichever is less. “Forbear” does not mean the same thing as ‘forgive” something that confuses many people. The portion of principal that is involved in forbearance is put at the back of the loan, as a balloon, where no interest at all is charged.
Under HAMP, the reduced interest rate remains fixed for 5 years. After that, it can increase, but by no more than 1% per year, and with an absolute cap equal to the current agency rate as of the time of entry into HAMP, which as of this writing is 4.61%, so once the rate hits the rate cap, it is permanently fixed.
So, as an example, I have a prospective bankruptcy client now whose total (unmodified) housing expense on his first mortgage is:
- PITIA $3,861 (principal $315k)
- Term 30 years
- With the proposed HAMP Modification, it would be (31% of current total household income of $5,720):
- PITIA – $1,773.20
- Term 40 years
These are older people. The man is a highly qualified architect who, due to the situation in Florida, has no work. He did not buy too much house, did not borrow “irresponsibly”. He bought the house for $382,666, near the top of the market. The second mortgage is in the amount of $90,000 and is now wholly unsecured. The total debt on the 1st with accruals is probably about $345,000. The current property tax appraisal is $287,189. Cyberhomes has the value at $309,882. If the second is stripped, while that does not return him to a positive side LTV, it brings him closer to level. With a sufficiently reduced payment, he can make it and keep the home without resorting to further litigation or uncertainty.
The client has asked the second mortgage servicer to agree to accept a small lump sum in full satisfaction. They have never given him an answer. He has asked the first mortgage servicer, Chase, for HAMP. They have never given him an answer.
So, assuming we can get this man into HAMP, he will wind up with a payment he can manage, and the second will be stripped.
How Does a Borrower Qualify for HAMP ?
There is a rather complex calculus involved in ascertaining some of the finer details to determine if a borrower qualifies. The formula basically involves two sides: NPV (net present value) of modified loan >= NPV of foreclosed loan. So, a calculation is necessary to determine whether, assuming the borrower now has a total housing expense which exceeds 31% of total income, and assuming that by utilization of as many as three stages of the standard waterfall the total housing expense can be brought to 31% of total income, the resulting NPV of the modified loan will be at least as high as that of the foreclosed loan. Generally, if the NPV of the modified loan is positive relative to the NPV of the foreclosed loan, as long as the servicer has signed a HAMP Servicer Participation Agreement, which most have, the servicer MUST allow the borrower into HAMP. The Servicer Participation Agreement between the servicer and Treasury was an extremely weird approach, since the servicer does not own the loan. It goes without saying that the more underwater a property is as to the first mortgage, the better the chances are of a favorable NPV outcome. The reverse is also true; where the LTV is less than 100%, a positive outcome is unlikely. Boot Camper Rick Rogers, who spoke at the Max’s September 2009 Mortgage Securitization and Servicing Seminar, provided a terrific Excel spreadsheet tool which gives a great informal method for quickly ascertaining if a borrower seems to qualify and if so, generally on what terms. Rick has also offered, for a nominal fee, to provide a detailed report to attorneys.
There are more nuances and details to HAMP that are beyond the scope of this article. However, attorneys who intend to dive in do need to be sure to be fully literate on all of the potential issues and pushbacks, so that they can be ready to fend off servicer BS.
What Are the Benefits of HAMP to a Bankruptcy Case and Vice-Versa ?
As already discussed, the servicers are the gatekeepers of HAMP, and have done a wretched job of analyzing situations and of giving borrowers entry into the program, for the reasons discussed above. So, the challenge, when HAMP may be of use to a particular client, is to find a way to remove the servicer from control.
HAMP has undergone many tweaks since it was first rolled out. Recent ones prohibit servicers from denying HAMP to qualified borrowers in active bankruptcies, and allow borrowers to utilize their schedules and bankruptcy documentation as their HAMP application. In addition, borrowers in active bankruptcy cases can skip the dreaded “trial plan”. In some bankruptcy courts, the judges are applying pressure to the mortgage industry to gain borrowers entry into HAMP. As an example, SD-FL now allows petitioners to propose entry into HAMP as their cure of the first mortgage delinquency. If the petitioner can make a credible case that he/she/they qualify, and the servicer or its client objects to confirmation, the court has been shifting the burden to the mortgage side to demonstrate that the petitioner does not qualify. Needless to say, there are few if any servicers’ counsel who understand the HAMP program at all or who understand qualification criteria, so cannot put on any sort of meaningful case, and there are few if any servicer personnel who can testify to explain why a petitioner does not qualify. Their role is generally limited to data entry and then reading back the resulting computer screen. Numerous errors, in particular in property value and/or in analysis of borrower income, can result in a false negative. If counsel for the petitioner can effectively rebut any lame and poorly articulated objections, there is a good chance the plan will be confirmed over objection.
Other bankruptcy courts which are taking a more pro-active role in this process are MD-FL and SD-NY, where the courts have created mediation programs designed to get mortgage servicers and borrowers together to come up with a mutually agreeable solution. It is entirely possible that more bankruptcy courts are adopting this approach, or can be convinced to do so, since, after all, most servicers have signed a written commitment agreeing to do it. To optimize negotiating power, a nice, well-articulated objection to the first mortgage POC and/or an AP to avoid a mortgage are great touches. Assuming a knowledgeable Boot Camp attorney who has become fluent in HAMP handles the case, it should be straightforward for petitioner’s counsel to demonstrate either to the court in SD-FL or via a mediation that:
HAMP inside a Chapter 13 case imposes discipline on the servicer that does not exist otherwise. Probably the biggest reason the financial services community hates bankruptcy court is that the servicer and lender lose control. That is the biggest reason the consumer and his/her/their counsel should love bankruptcy court. In the HAMP context, the goal is that the servicer does not get to make the sole call as to whether a borrower qualifies, does not get to withhold a permanent modification if the borrower successfully runs the gauntlet, and does not get to claim that payments were not made if the Trustee’s records show otherwise.
Until the advent of HAMP, the typical solution available to a Chapter 13 debtor looking to find a mortgage solution, short of all-out war in an Adversary Proceeding to avoid a mortgage, was a plan which cured the arrears over the life of the plan. To an economically struggling client, this was often impossible, since it would entail paying the entire post-petition contractual payment current, plus taxes, insurance and association dues, PLUS 1/36 or 1/60 of the arrears, PLUS the Trustee’s commission. However, if the client can force his/her way into HAMP, this issue is gone; the HAMP payment is limited to 31% of income; the arrears go to the back of the loan. Depending on the amount of leverage developed in the contested case and/or AP, it may even be possible to make the agreement notwithstanding dismissal of the Chapter 13 case.
HAMP is a poor substitute for cramdown, and in its native form, borrowers are left without any enforcement ability or recourse when the servicer says no or jerks them around. However some bankruptcy courts are starting to recognize the benefit of the program both to the borrower and to the mortgage holder, since it is demonstrable that both fare better than if a foreclosure is concluded. Therefore, it cannot help but be less difficult to persuade a bankruptcy judge that this is a sensible outcome, provided a borrower / petitioner qualifies. While this is still an emerging area, it is another potential tool that can be of use, depending on the circumstances.