Supplemental Directive 14-02 Revises HAMP Tier 2 Loan Modification Program

This Supplemental Directive provides administrative updates and clarifications to the Home Affordable Modification Program® (HAMP) and the Second Lien Modification Program℠ (2MP). Servicers that are subject to the terms of a Servicer Participation Agreement and related documents (SPA) must follow the guidance set forth in this Supplemental Directive. This Supplemental Directive amends and supersedes the notated portions of the Handbook, and except as stated herein, is effective July 1, 2014.

This guidance does not apply to mortgage loans that are owned or guaranteed by Fannie Mae or Freddie Mac, or insured or guaranteed by the Veterans Administration, the Department of Agriculture’s Rural Housing Service (RHS) or the Federal Housing Administration (FHA).

HAMP Tier 2 Updates - Interest Rate Adjustment

As described in Section 6.3.2.2 of Chapter II of the Handbook, under Step 2 of the HAMP Tier 2 Standard Modification Waterfall, the NPV model adjusts the interest rate to a fixed rate based on the weekly Freddie Mac Primary Mortgage Market Survey (PMMS) Rate for 30-year fixed rate conforming loans rounded up to the nearest 0.125 percent plus a risk adjustment (currently 50 basis points). With this Supplemental Directive, Treasury is notifying servicers that the risk adjustment is reduced to zero basis points.

Post Modification Principal and Interest Payment

Section 6.3.3 of Chapter II of the Handbook provides that the modified principal and interest payment under HAMP Tier 2 must be at least 10 percent less than the pre-modification principal and interest payment in effect at the time of HAMP Tier 2 consideration (as well as under a failed HAMP Tier 1 trial period plan). If this is not achieved, the loan is not eligible for a HAMP Tier 2 modification. This Supplemental Directive amends this requirement such that the modified principal and interest payment under HAMP Tier 2 must not be greater than the premodification principal and interest payment in effect at the time of HAMP Tier 2 consideration.

The NPV model will calculate whether the modified principal and interest payment is less than or equal to the pre-modification principal and interest payment in effect at the time of HAMP Tier 2 consideration.

Additionally, if the servicer is considering a loan for HAMP Tier 2 that defaulted on a HAMP Tier 1 trial period plan, the servicer must verify that the modified principal and interest payment under HAMP Tier 2 is not greater than the principal and interest payment under the failed HAMP Tier 1 trial period plan. If the modified principal and interest payment is greater than the pre-modification principal and interest payment, the loan is not eligible for modification under HAMP Tier 2 and the servicer must consider the borrower for alternative loss mitigation options.

Notwithstanding the foregoing, servicers may establish a minimum principal and interest payment reduction requirement for HAMP Tier 2 (Servicer’s HAMP Tier 2 Minimum Payment Reduction), provided a reduction of no more than 10 percent is required.

Each servicer that elects to establish a minimum principal and interest payment reduction requirement must, by July 1, 2014, have a written policy describing the requirement and must notify the Program Administrator of the Servicer’s HAMP Tier 2 Minimum Payment Reduction requirement. In addition, such servicers must notify the Program Administrator of any change to the Servicer’s HAMP Tier 2 Minimum Payment Reduction requirement no later than 15 calendar days prior to the change. The policy must be applied consistently for all similarly situated borrowers.

HAMP Tier 2 Modification Prior to Loss of Good Standing

Section 9.4 of Chapter II of the Handbook provides that a loan permanently modified under HAMP Tier 1 that loses good standing may be eligible to receive a HAMP Tier 2 modification on the earlier of (i) the date that is 12 months after the HAMP Tier 1 Modification Effective Date or (ii) following a change in circumstance. This Supplemental Directive provides an additional instance that a loan permanently modified under HAMP Tier 1 may be eligible to receive a HAMP Tier 2 modification prior to the loss of good standing if more than five years have passed since the HAMP Tier 1 Modification Effective Date. Updated HAMP payment processes implementing this guidance are currently under development by the Program Administrator. Servicers will be advised of how to board a HAMP Tier 2 modification prior to the loss of good standing when the updated processes become available.

Priority of HAMP

Section 9.4 of Chapter II of the Handbook also provides that a servicer may not re-modify a loan that has received a HAMP permanent modification until either (i) the loan has lost good standing or (ii) more than five years has passed since the effective date of the permanent modification. This Supplemental Directive clarifies that, in both instances, a loan permanently modified under HAMP Tier 1 must be considered for HAMP Tier 2 prior to consideration for other loss mitigation alternatives.