Truth in Foreclosure

This is a follow-up to our article on determining imminent default for a Home Affordable Modification, which lists the Freddie Mac guidelines for these calculations.  If you have questions as you go through this, please refer to that article.

Tom was laid off from his job six months ago. Although Tom has recently found new employment, his monthly income is now 50% lower than his previous monthly income. The reduction in income has forced Tom to borrow against his 401(k) in order to meet all his monthly payment obligations, including the mortgage payment on his primary residence. Currently, Tom pays his mortgage payment on time but he may not be able to continue making timely mortgage payments in the near future, due to the decrease in his income and dwindling cash reserves. The following chart outlines Tom’s current financial information.
Tom’s Current Financial Information

Determining Eligibility and Solving for an Affordable Payment

Tom contacts his Servicer to explain his financial situation and expresses an interest in obtaining assistance under the Home Affordable Modification program (program).  Since Tom is current on his mortgage, the Servicer proceeds to evaluate Tom for a Freddie Mac Relief Refinance Mortgage^SM first.  However, since the Servicer’s records indicate that the mortgage appears to have a loan-to-value of 109.20%, Tom is ineligible for the Relief Refinance Mortgage.  The Servicer gathers more information from Tom and reviews the mortgage file to determine eligibility under the program.

Based on this information, the Servicer determines that Tom is in imminent default and is eligible for a modification under the program.

To modify Tom’s mortgage and calculate a projected principal and interest (P&I) payment that would achieve a PITIAS-to-income ratio as close as possible to 31%, the Servicer must reduce the interest rate to the floor of 2%, extend the term of the mortgage to 40-years and do a partial principal forbearance of $2500.

The following chart compares Tom’s current mortgage terms to the new terms of his mortgage under the program.

Tom’s Current Mortgage/Modified Mortgage

For the first 5-years of Tom’s modified mortgage, the interest rate will be 2.00%.  Beginning with the sixth year (month 61), the modified interest rate will then increase annually by 1.00%, until the interest rate reaches the Interest Rate Cap of 5.00%.  Thereafter, the 5.00% Interest Rate Cap remains fixed for the reminder of the modified mortgage term.

To determine Tom’s debt payment-to-income ratio, the Servicer uses the sum of the following monthly expense information divided by the gross monthly income of $4,000:

New Monthly Principal & Interest Payment   =   $665.24

Real Estate Tax, Insurance and HOA fee monthly payment   =   $550.00

Monthly Liabilities   =  $2,000.00

Debt payment-to-income ratio =   80%

Since Tom’s new debt payment-to-income ratio exceeds 55%, HUD-approved credit counseling is required.

Tom is eligible for incentive payments under the program if timely monthly payments are made on the modified mortgage.

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