Rejections have become a way of life in the Loan Mod Application process. Lenders, simply overwhelmed with the demand, can’t (or won’t) deliver reasonable levels of performance. That is, in spite of almost two years of efforts and 18 months of Making Homes Affordable “encouragement” the banks still produce very few successful modifications…even to very well qualified applicants…without first putting them through rejection, at least once.

But, I have come to think that rejection is a very good sign! A review of my files over the past 6 months shows that not one single modification was granted without a prior rejection. That’s right, every one of the modifications I have completed for clients in 2010 has been rejected before being accepted. Even the ones that began with the encouraging Trial Modification resulted in a rejection of the Permanent Mod before final acceptance. Some of the modifications I have successfully managed were rejected as many as three times before we achieved the modification. Whew!

It’s hard enough to meet the challenging application procedures and follow-up effectively to keep your application on-track. To have to also escalate your rejections to supervisors, managers, Directors , Vice Presidents and CEOs and to contact your local congressperson, the regulatory agencies, the trade associations and even the press in order to get it done? This is tough stuff!

But, that’s the deal so dealing with rejections is now part and parcel of the loan modification process.

There really is no end to the number of reasons for rejection: Your lender does not participate in mod programs, Your app failed the NPV calculation, You make too much money, You make too little money, Your home is too valuable, Your 4506-T has expired, Your Ratios are not right, You failed to provide updated documents, We needed a letter from your renter saying that he pays rent (not just a copy of several of his checks along with a valid/current/signed lease), Your hardship does not qualify and etc. These are bad, but the worst one of all is when the agent can’t explain why you were rejected and claims that they do not have to provide a reason.

All of the reasons above can be valid. Sometimes they are. But, all too often, they are simply erroneous, and are the result of the lender having mismanaged the file or simply untrue statements that slow or end the application process if the borrower does not object.

So, when you get rejected, press on. At least you’re not being ignored! Immediately demand (nicely!) an explanation of exactly why you were rejected. Go through several agents and escalate to a supervisor if you must to get the answer. Then, deal with it. Supply the missing document or sign the updated form or correct the data entry error on your income (No, it’s not $85,000 per month. It’s $850!) or do whatever it takes to get them back on track. You can request reconsideration when you submit the information or correction to the agent.

If you have submitted a good and accurate application upfront, you will eventually be accepted and get the relief that the programs were intended to provide.

Take heart. What is worse than rejection is the months of total disregard and that most of us get in the loan modification process. It’s not likely to change anytime soon. Modifications will continue to be a great way to throttle the foreclosure rate and they are a great way for homeowners to get some relief. It’s just taking a little more perseverance and nerve than it should!


Supplemental Directive 10-05 June 3, 2010

Home Affordable Modification Program – Modification of Loans with Principal Reduction Alternative


In Supplemental Directive 09-01, the Treasury Department (Treasury) announced the eligibility, underwriting and servicing requirements for the Home Affordable Modification Program (HAMP). Under HAMP, servicers apply a uniform loan modification process to provide eligible borrowers with sustainable monthly payments. This Supplemental Directive provides guidance to servicers on a Principal Reduction Alternative (PRA) to give servicers additional flexibility to offer relief to borrowers whose homes are worth significantly less than the remaining amounts owed under their first lien mortgage loans (negative equity). Under PRA, servicers are required to evaluate the benefit of principal reduction for every HAMP eligible loan with high negative equity, defined herein, and are encouraged to offer principal reduction whenever the net present value (NPV) result of a HAMP modification using PRA is greater than the NPV result without considering principal reduction. Treasury is introducing an alternative modification waterfall to perform this evaluation and financial incentives for principal reduction. This Supplemental Directive also provides that the Second Lien Modification Program (2MP) will now require principal reduction in an amount at least proportional to any principal reduction offered on a corresponding HAMP modified first lien mortgage loan.

In addition, this Supplemental Directive expresses Treasury’s position regarding the applicability of the servicer safe harbor (Servicer Safe Harbor) set forth in Section 129A of the Truth In Lending Act, 15 U.S.C. 1639a (TILA), to residential loan modifications under HAMP and 2MP, as well as to short sales and deeds-in-lieu of foreclosure under the Home Affordable Foreclosure Alternatives (HAFA) Program. This Supplemental Directive also expresses Treasury’s position regarding the accounting treatment to be employed by servicers and other transaction parties for HAMP modifications that include principal forbearance.

This Supplemental Directive provides guidance to servicers of first and second mortgage lien loans that are not owned or guaranteed by Fannie Mae or Freddie Mac, or insured or guaranteed by a federal agency, such as the Federal Housing Administration.

This Supplemental Directive covers the following topics:

PRA Requirements

Alternative Waterfall

Net Present Value Model

Application of Principal Reduction

Documentation Requirements Supplemental Directive 10-05 Page 2

Servicer Reporting

Credit Bureau Reporting

Incentive Compensation


Document Retention

Impact on Second Lien Modifications

Servicer Safe Harbor

Treatment of Principal Forbearance in HAMP

PRA Requirements

Beginning on the later of (i) October 1, 2010; or (ii) the implementation date for version 4.0 of the HAMP NPV model (PRA Effective Date), servicers must evaluate any loan that is being considered for HAMP with a mark-to-market loan-to-value (MTMLTV) ratio greater than 115 percent using both the standard HAMP modification waterfall (Standard Waterfall) and an alternative modification waterfall that includes principal reduction as the required second step in the waterfall (Alternative Waterfall). When determining the loan’s unpaid principal balance (UPB), servicers should include any amounts that would be capitalized in accordance with HAMP guidelines. Servicers should follow regulatory and investor guidance when selecting the appropriate valuation method to determine the mark-to-market value of the property and use this value for both the NPV model and the PRA MTMLTV ratio calculation.

Servicers may immediately offer HAMP modifications utilizing PRA as of the date of this Supplemental Directive in accordance with the guidance set forth herein. Guidance relating to principal reduction and related investor incentives for first lien mortgage loans in HAMP trial period plans or permanent HAMP modifications prior to the date of this Supplemental Directive will be provided in a future Supplemental Directive.

Alternative Waterfall

Under the Alternative Waterfall, servicers use principal reduction between Step 1 (capitalization) and Step 2 (interest rate reduction) of the Standard Waterfall set forth in Supplemental Directive 09-01 as follows:

Reduce the UPB by an amount necessary to achieve either the target monthly mortgage payment ratio of 31 percent or a MTMLTV ratio equal to 115 percent, whichever is reached first;

If the UPB is reduced to create a MTMLTV ratio of 115 percent and the target monthly mortgage payment ratio of 31 percent has not been achieved (based on a fully amortizing principal and interest payment over the remainder of the current loan term and using the current mortgage interest rate), continue with the standard HAMP modification waterfall steps of interest rate reduction, term extension and principal forbearance, each as necessary, until the target monthly mortgage payment ratio of 31 percent is achieved.

Supplemental Directive 10-05 Page 3

The servicer must use the NPV model to evaluate the proposed modifications generated by application of both the Standard Waterfall and the Alternative Waterfall.

As set forth in Supplemental Directive 09-01, if the NPV result for the proposed modification generated by applying the Standard Waterfall is positive, servicers must modify the loan.

If the NPV result for the proposed modification generated by applying the Alternative Waterfall is positive, servicers are encouraged, but are not required, to perform a HAMP loan modification utilizing PRA, even in instances where the NPV result from the Standard Waterfall is negative or is less than the NPV result generated by application of the Alternative Waterfall.

If neither the Standard Waterfall NPV nor the Alternative Waterfall NPV is positive, the servicer is not required to modify the loan.

The primary purpose of completing the Alternative Waterfall analysis is to demonstrate whether reducing principal on loans with MTMLTV ratios greater than 115 percent results in a positive NPV. However, when making the determination to reduce principal, servicers may, consistent with investor guidelines and contractual obligations, reduce the UPB of a loan to an amount that results in a MTMLTV ratio that is greater or lesser than the 115 percent target ratio in the Alternative Waterfall. Because servicers have this discretion in offering principal reduction, servicers must develop and adhere to a written policy for making principal reduction determinations that treats all similarly-situated loans in a consistent manner and in compliance with fair lending and other applicable laws and regulations.

Servicers will qualify for PRA investor incentive payments as set forth in this Supplemental Directive for reductions creating a MTMLTV ratio as low as 105 percent, even if the reduction results in a monthly mortgage payment ratio below the 31 percent target. Servicers are not precluded from reducing principal below a 105 percent MTMLTV ratio; however, PRA investor incentives will not be paid on the portion of any principal reduction that reduces the MTMLTV ratio below 105 percent. Additionally, pursuant to Supplemental Directive 09-01, Investor Payment Reduction Cost Share Incentives will only be paid based on modification terms that reflect the target monthly mortgage payment ratio (31 percent).

Net Present Value Model

Pursuant to Supplemental Directive 09-01, all loans that meet the HAMP eligibility criteria must, prior to offering a trial modification using verified borrower income, be evaluated using a standard NPV model that compares the NPV result with a modification to the NPV result without a modification. An updated NPV model ("NPV 4.0"), under development by Treasury, will reflect principal reduction incentives and will compare the NPV result of modifications with and without principal reduction with the NPV result without modification. The software application for NPV 4.0 will be available on the Home Affordable Modification Program servicer web portal accessible at On this portal, servicers will have access to NPV 4.0 as well as detailed guidelines for submitting proposed modification data. Supplemental Directive 10-05 Page 4

In addition to the evaluation using NPV 4.0, servicers may conduct other evaluations to determine the level of principal reduction that is in the best interest of investors. However, servicers must only submit the results of the Standard Waterfall and Alternative Waterfall evaluations completed with NPV 4.0 to Treasury's system of record.

Application of Principal Reduction

PRA is a deferred principal reduction program that allows a borrower to earn principal reduction over a three-year period by successfully making payments in accordance with the modified loan terms. If the loan is modified pursuant to PRA, the principal reduction amount should be initially treated as non-interest bearing principal forbearance (PRA Forbearance Amount). The PRA Forbearance Amount is separate and exclusive of any other forbearance that may be offered in conjunction with a HAMP modification.

If the borrower is in good standing (as defined in Supplemental Directive 09-01) on the first, second and third anniversaries of the trial period effective date, the servicer must reduce the UPB of the loan on each anniversary date in installments equal to one-third of the initial PRA Forbearance Amount.

If a borrower is in good standing and pays the loan in full (i) at any time more than 30 calendar days after the HAMP modification effective date; (ii) after the PRA reporting and payment processes are made available; and (iii) prior to application of the entire PRA Forbearance Amount, the borrower shall immediately be fully vested in and entitled to the unapplied PRA Forbearance Amount as a curtailment. When the servicer receives a payoff request on behalf of a borrower that meets these requirements, the unapplied PRA Forbearance Amount shall be deducted from the payoff balance.

Documentation Requirements

The documents for PRA are the same as those required under HAMP. However, the Trial Period Plan Notice and the Home Affordable Modification Agreement must be modified to include language regarding the deferred principal reduction terms. This language will be set forth in the revised documents that will be available on prior to the PRA Effective Date. This language will include a notification to the borrower that principal reduction is reported to the Internal Revenue Service and may have tax consequences. The language will also advise borrowers to seek guidance from a tax professional.

Servicers that offer HAMP modifications utilizing PRA prior to issuance of the revised documents must modify the Home Affordable Modification Agreement to include the deferred principal reduction terms. Supplemental Directive 10-05 Page 5

Borrower Notice

Upon receipt of a written request from a borrower or an authorized representative of the borrower related to principal reduction, the servicer must, within 30 calendar days of receipt of the request, respond in writing. The response, when applicable, must include the reason(s) that principal reduction was not offered to the borrower.

Servicer Reporting

The PRA reporting and payment processes are currently under development by Fannie Mae, in its capacity as Treasury’s financial agent. Subsequent guidance will be provided describing the PRA reporting and payment processes and when they will be available (the time period between the date of this Supplemental Directive and the date the PRA reporting and payment processes are available shall be referred to herein as the Interim Period). Servicers who offer loan modifications with PRA during the Interim Period will be required to report the transaction to the Treasury system of record. Any PRA principal reduction on Interim Period loans should be reported in the existing principal write-down field. Servicers should not, however, reduce the UPB by the amount of any PRA principal reduction in the Treasury system of record for Interim Period loans (though servicers should reduce the UPB by any principal reduction that is not related to PRA). When the PRA reporting and payment processes are implemented, servicers shall submit a correction transaction that will move the PRA principal reduction to a new PRA specific principal forgiveness field. During the Interim Period, Servicers must collect and retain PRA specific information so that the necessary data can be reported when the processes become available.

The HAMP Data Dictionary and Supplemental Directive 09-06 Data Dictionary will be revised to reflect new and modified edits for PRA and will be posted on Servicers will be required to report the Standard Waterfall NPV model inputs, the Alternative Waterfall NPV model inputs, final modification terms, and NPV outputs for both NPV evaluations.

Credit Bureau Reporting

Servicers should report a "full-file" status report to the four major credit repositories for any loan modified pursuant to this Supplemental Directive in the same manner they report a loan modified under HAMP as set forth in Supplemental Directive 09-01. In addition, as each installment of the PRA Forbearance Amount is applied to the UPB of the loan, the servicer should update the credit repositories with the current balance owed and amend the K-4 segment to reflect the reduced UPB.

The "due date" in the K4 Segment should reflect the scheduled maturity date of the HAMP modified loan. However, if the Principal Forbearance Amount no longer applies after the portion of the loan is forgiven, the servicer should no longer report the K4 Segment. Supplemental Directive 10-05 Page 6

Incentive Compensation

No incentives of any kind will be paid if the servicer has not executed the Servicer Participation Agreement to participate in HAMP. The calculation and payment of all incentive compensation will be based strictly on the borrower’s verified income. Servicers must apply or remit, as applicable, all borrower and investor incentive compensation it receives with respect to any PRA modified loan within timeframes as required by applicable law, but in no event later than 30 calendar days after receipt.

Additionally, as detailed in Supplemental Directive 09-01, if a borrower loses good standing it cannot be restored even if the borrower subsequently cures the default. A loan that is not in good standing is not eligible to receive borrower, servicer or investor incentives and/or reimbursements and such payments will no longer accrue for that mortgage loan. If a borrower loses good standing before the entire PRA Forbearance Amount has been applied to the UPB, the unapplied PRA Forbearance Amount shall remain as non-interest bearing principal forbearance for the remaining life of the loan.

Investor Incentive Compensation

For each loan modified under PRA, investors receive the Investor Payment Reduction Cost Share and if applicable: (i) the one-time current borrower incentive payment described in Supplemental Directive 09-01 and (ii) the Home Price Decline Protection incentive payments described in Supplemental Directive 09-04.


Additionally, investors will receive PRA investor incentive payments based on the delinquency status of the loan, the MTMLTV ratio used to complete the Alternative Waterfall analysis and the amount of principal reduction installment actually applied by the servicer. Principal Reduction Incentive Schedule:

Per Dollar of UPB Forgiven in MTMLTV Ratio Range (Loans Less than or Equal to Six Months Past Due)

MTMLTV Ratio Range

105% to <115%

115% to 140%