This continues the comprehensive guide to Obama's Loan Modification Program and specifically the rules and laws of the package.
Definition of Front-End DTI:
Front-End DTI is defined as the ratio of PITIA to Monthly Gross Income. PITIA is an acronym that stands for principal, interest, taxes, insurance (homeowners, hazard, and flood insurance included) and homeowners association and/or condominium fees. The PITIA calculation excludes mortgage insurance premiums.
31% is the target Front-End DTI. The Front-End DTI target will be satisfied by a Standard Waterfall step that produces a Front-End DTI closest to but not below 31%. Although there is no restriction for going below 31% Front-End DTI, the payment reduction cost share would only cover going down to 31%.
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Valuation of Property:
If it so chooses, the servicer is entitled to use a broker price opinion (BPO) or a government-sponsored enterprises (GSEs) automated valuation model (AVM), that is if the AVM produces a dependable confidence score.
Alternately, the servicer can use an internal AVM on the condition that (i) the servicer may be supervised by a Federal regulatory agency, (ii) the model and/or said model's validation has been inspected by the Servicer's primary Federal regulatory agency, and (iii) the AVM produces a dependable confidence score.
If the GSE or servicer ATM cannot produce a value with a dependable confidence score, the servicer will be required to assess the property value using a method of property valuation acceptable to the Federal regulatory agency of the Servicer or a BPO.
The property valuation must be less than 60 days old.
Validation of Earnings and Property:
Each debtor on the note will be required to sign a form 4506-T (Request for Transcript of Tax Form), and in addition the most recent tax return on file will be obtained for said debtor9s). Each wage earner will be obligated to produce their two most recent pay stubs. Self-employed debtors and debtors who don't earn a wage-based income will have their earnings verified by third-party documents that provide reasonably dependable evidence of earnings.
In addition, debtors must also guarantee that they don't have adequate liquid assets to make their monthly mortgage installments.
Gross Monthly Earnings:
The debtor's gross monthly earnings is the total income made before any payroll deductions including overtime pay, fees, commissions, wages and salaries, bonuses, housing allowances, tips, other remunerations for personal services, social security installments, including installments given to adults for or by minors for their support, insurance policies, annuities, retirement funds, death or disability benefits, unemployment payments, and rental and other income. Monthly net income may be used for the purposes of preliminary screening and qualification. If this is used, the net income should be multiplied by 1.25 to obtain an estimate of gross monthly earnings.
Back-End DTI:
Back-End DTI can be defined as the ratio of monthly debt payments (for example, the Front-End PITIA, payments on installment debts, all monthly insurance premiums, all monthly junior lien payments, all installment debt payments, car lease payment, alimony, combined negative net rental earnings from all owned investment properties, and all the monthly mortgage payments from second homes) to the debtor's gross monthly income. Monthly installments, secondary mortgage debt, and revolving debt are required to be validated by pulling each debtor's credit report or (if for a married couple) a joint report. Information relayed orally or in writing from the debtor must also be considered by the servicer.
Debtors who have a post-modification Back-End DTI equal to or greater than 55%, but would otherwise be able to qualify for a modification through the plan will be given a letter explaining the debtor's requirement to work with a HUD-authorized counselor and to sign a statement stating that they would get counseling . The letter will also explain that the statement will be required to be signed in order for the modification to take effect.
Impending / Feasible Default:
All potentially qualified debtors who write or call into their servicer for or about a modification are required to get a hardship screening. The screening will assess whether or not the debtor has experienced a circumstance change that resulted in financial hardship or is facing a recent or future payment increase that will cause financial hardship (payment shock). If a material circumstance change is reported by the debtor, the servicer is required to ask about current assets and income, and current expenses in addition to the exact circumstances regarding the alleged financial hardship. Documentation shall verify these elements.
If it is determined by the servicer that a non-defaulted debtor in financial hardship will imminently default and be unable to make payments in the foreseeable future, the NPV Test must be applied by the servicer.
Discretionary and Mandatory Modifications:
Every loan that is either in feasible default or, by the calculation of MBA delinquency, is not less than 60 days delinquent will require an NPV Test which will weigh the NPV of cash flows expected from modification against the NPV of cash flows expected from no modification. If the modification scenario's NPV is of greater value, the result of the NPV is positive.
The NPV Test does not mandate consideration of forgiveness of principal and only goes for the Standard waterfall. However, the servicer may forgive principal if the servicer believes that doing so will help loan performance and modification value. The required parameters of the NPV Test shall be published separately.
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