By Lane Houk
THE REST REPORT IS a report generated by the REST software platform, which is a loan disposition analysis system that, in limited different formats, is used by major banks and mortgage servicers with borrowers and properties that are in default, to run an NPV test and to determine qualification for a HAMP Loan Modification. Financial institutions use systems like REST to analyze the various options available when a loan is not being repaid as agreed by the borrower. The purpose of such analysis is to make sure that the bank can choose the path that offers the best financial outcome possible for the investor or owner of the loan; the servicer is simply the agent for the investor with whom most borrowers interface with on a regular basis. Usually, the investor/owner of the loan is unknown to the borrower and, in most cases, is a Special Purpose Vehicle (SPV) more commonly known as a “Trust.”
Although almost all financial institutions and servicers use loan disposition analysis software platforms, these systems are not made available to consumers. They are sophisticated systems only purchased and utilized by banks that have many thousands of loans that need to be analyzed so that outcomes may be determined and optimized.
When homeowners arrange to run a REST Report, the system produces an 11-page document based on the specifics of their property and their financial situation that shows, from the investor and servicer’s perspective, the various financial outcomes that would result from modifying their mortgage compared with the costs and bottom line result of foreclosure and distressed sale. A homeowner can then use the report by submitting it to his or her lender or servicer, along with the required supporting documents, when seeking to obtain a loan modification, or approval for a short sale.
Compare the approach of using an expert financial professional who knows how to use the REST Report to that of today’s homeowners applying for a loan modification without any assistance and without any negotiating leverage whatsoever. Some homeowners attempt to negotiate with their lender or servicer on their own and from a position of weakness, while others hire lawyers or other third parties to represent them, but in either case, all the homeowner ends up submitting to the lender or servicer is information about themselves, and nothing substantive about the possible dispositions of that loan from the bank’s perspective, or in the best interests of investors.
Law firms and other third parties, depending on the state you live in, all concentrate on helping homeowners submit the best possible application… or “proposal” to the bank. In general, that proposal includes the borrower’s information, various documents intended to verify income, a letter describing the hardship that has caused the homeowner to apply for a modification or short sale… all the information that the homeowner or attorney/representative hopes will paint a picture that the servicer will view as qualifying for a loan modification.
But, “hope,” should only be considered a negotiating strategy, when hope is all you’ve got.
When applying for a loan modification with the REST Report, borrowers still submit their application and supporting documentation, but in addition the borrower submits a report, generated by a loan disposition analysis platform that incorporates the same decision analytics used by lenders and servicers. The report clearly shows the servicer the investor’s financial outcome, in terms of net present value, in a range of scenarios, assuming such outcomes are possible, of course. In addition, the REST Report clearly quantifies a borrower’s eligibility for a HAMP Loan Modification and a HAFA short sale or deed in lieu of foreclosure alternatives.
In March 2009, the Obama Administration published detailed program guidelines for the Making Home Affordable (MHA) Program. Mortgage servicers were authorized to begin modifications under the HAMP plan immediately. With the assistance of several government agencies, GSEs, and servicers – this effort involved the development and refinement of servicer guidelines, modification documents, and data collection and modeling tools.
The Home Affordable Modification Program (HAMP) was designed to help as many as 3 to 4 million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. The program provides clear and consistent loan modification guidelines that the entire mortgage industry can use.
Borrower eligibility is based on meeting specific criteria including:
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 for one-unit properties.
After determining a borrower’s eligibility, a 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.
Note: Servicers may elect to forgive principal under HAMP on a stand-alone basis or before any modification step in order to achieve the target monthly mortgage payment.
The Home Affordable Modification Program was designed with good intentions, however, in reality, the servicers are denying thousands of homeowners who actually qualify for a HAMP Modification. There is an answer “why” but that’s another article for another time. In short, if you’re reading this, you are likely one of the tens of thousands of homeowners who have been denied a HAMP Modification even though you really qualify. The problem is that the servicers don’t usually tell the homeowner the specific reason(s) they were denied because, in reality, they should never have been denied. Let’s just say that the real reason for denial is that it’s just not in the servicer’s best interest to modify. They’d rather foreclose because they’ll make more money going that route. It may not make sense to you right now at face value but trust me; they make more money foreclosing than they do modifying a homeowner’s loan.
The simple fact is that when a servicer receives an application for a loan modification from a borrower, that servicer should conduct its own loan disposition analysis in order to determine which outcome, foreclosure or some form of modification or disposition, is in the best interests of the investor who owns the loan. So, when you apply with the REST Report, you provide that loan disposition analysis, causing the servicer to have to verify those numbers. When they find that the report’s analysis is correct, we are seeing modifications granted in situations, and in timeframes, that were unexpected.
Loans and loan modifications are like snowflakes… no two are alike. And while there are law firms or other mortgage professionals that may feel confident about their analysis, the REST Report unquestionably adds a degree of certainty that hasn’t been possible until now.
According to the latest HAMP report from the U.S. Treasury, dated April 30, 2010: Out of 1.2 million HAMP trial modifications there have been 277,640 trials cancelled… and 295,348 permanent modifications granted.
The latest Treasury HAMP Report shows the situation clearly. The number of trial modifications that have been cancelled, is about the same as the number of permanent modifications granted, which is not good enough if you find yourself among those that have been declined by HAMP. There are still 637,353 trial modifications awaiting an answer… thumbs up, or thumbs down. I have seen homeowners who have paid 6, 9 and even 12 trial monthly payments (which is outside the allowable guidelines) and they are still awaiting approval for their permanent modification. Still other clients have come to me having faithfully paid their 3 monthly trial period payments only to be denied a permanent modification and for no apparent or good reason.
The latest Treasury data did show some very encouraging trends as well. For example, as of June 1, 2010, borrowers will have to document their income before beginning a trial modification, and many servicers started implementing this policy in April, so there is data, and it is very encouraging in that it shows roughly twice as many homeowners being approved for a permanent modification after successfully completing the trial period.
Well, when it comes to loan modifications under HAMP, the REST Report runs NPV analytics that should fall within HAMP guidelines. So, when the report says you qualify for HAMP, there’s no one else, besides your servicer of course, that can be as sure you do, as the REST Report.
But, what if you don’t qualify for HAMP?
However, for homeowners that don’t qualify for HAMP, the REST Report can be every bit as helpful to the loan modification or short sale process as it is for those applying under HAMP. Perhaps the principal balance on your loan exceeds HAMP’s $729,000 limit. Or, perhaps you’ve been turned down for HAMP and don’t know why. Or, maybe it’s a mortgage on a second home that you’re trying to modify.
Whatever the reason for falling outside of HAMP guidelines, the loan disposition analysis report produced by the REST platform is proving itself invaluable in the negotiations between a homeowner and their lender or servicer.
Mortgage servicers are companies that are hired by investors to “service” mortgages they own. The servicers all work under a contract called a “Pooling and Servicing Agreement,” or PSA. And all PSAs require servicers to make decisions related to the loans they are servicing in the best interests of the investors for whom they work.
So, when you submit a REST Report to your lender or servicer, they don’t just receive information about you, they also receive an analysis of the financial impact to investors of the alternatives to foreclosure compared with the cost of foreclosing on your property.
If the net present value analysis shows that investors would be better off modifying than foreclosing, we’re seeing servicers responding to the report, and offering to modify loans in more cases than we expected.
It’s not that we believe that a servicer would accept the analysis shown in the REST Report at face value, they most certainly would not. But we do know that when they verify the report’s conclusions using their own internal systems, they will find the REST Report’s financial analysis to be accurate.
Does that mean that submitting an application for a loan modification or short sale along with the REST Report guarantees anything? No, no one can guarantee anyone that a lender or servicer will modify a loan, at the end of the day, both participation in HAMP, and their willingness to modify a mortgage internally, is strictly voluntary. And as anyone in the banking industry will readily tell you… banks only modify loans when it’s in their own best financial interest to do so.
And that, folks is precisely the point. When you can quantify and document that the modification (or short sale) is in the best interest of the investor, the servicer will be put in a very precarious position if they then still choose to ignore those findings.
Most importantly, when it comes to a HAMP Modification, the core component of a HAMP approval boils down to the NPV Analysis or NPV Test. NPV stands for “Net Present Value.”
The base NPV model provides consistency in NPV calculations for the Home Affordable Modification Program and was designed to help the mortgage industry move toward a more standard process for evaluating the NPV of mortgages for purposes of making modifications.
A participating servicer in the Home Affordable Modification Program must modify any loan that meets the program’s eligibility criteria if the modification tests “positive” for NPV. I hope you noted that point above. That word is “must.”
When mortgage modifications have a positive NPV, it is in the best interests of lenders, servicers, investors, and borrowers to modify mortgages to reduce the risk of foreclosure. The Home Affordable Modification Program increases the potential number of mortgage modifications that will have a positive NPV, resulting in more servicers modifying mortgages, and keeping more Americans in their homes. The Home Affordable Modification Program specifies a precise method for determining NPV and provides a base NPV model that any servicer can use or customize into a proprietary NPV model that satisfies all of the program’s methodological requirements.
Almost all servicers in the US have by now elected to participate in the Making Home Affordable program and have signed what is called a “Servicer Participation Agreement” (SPA) with the US Department of Treasury, Fannie Mae and Freddie Mac as compliance agent.
The SPA obligates the servicer to follow the HAMP guidelines. If the NPV Test comes back positive and the servicer still refuses to modify, it is likely that a claim for breach of contract could be brought against the servicer; and, there are already about a dozen lawsuits currently pending claiming just that… that the servicer breached their contract with Treasury by wrongfully denying homeowners for a HAMP Modification.
Now, if you are a homeowner who is frustrated beyond belief and looking for relief, I encourage you to pick up the phone and call us. We are one of the few firms around the country authorized to run REST Reports and help homeowners with the process of getting their ducks in a row and putting their best foot forward.
Call the National Institute of Consumer Advocacy at 800-985-4685 or by email at info[at]nioca.org