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Servicers must follow the following standard modification steps to modify the second lien.
Step 1: Capitalization
Capitalize accrued interest and servicing advances (costs and expenses incurred in performing second lien servicing obligations, such as those related to preservation and protection of the security property and the enforcement of the mortgage) paid to third parties in the ordinary course of business and not retained by the servicer, if allowed by applicable state law. Accrued interest may be waived or deferred at the discretion of the servicer. The servicer should capitalize only those third party delinquency fees that are reasonable and necessary. Fees permitted by Fannie Mae and Freddie Mac for GSE mortgage loans shall be considered evidence of fees that would be reasonable for non-GSE mortgage loans. Late fees and other ancillary income fees (e.g., insufficient funds fees, over limit fees and annual fees) may not be capitalized and must be waived.
Step 2: Reduce Interest Rate
2.A: For amortizing second liens (payment of both principal and interest): Reduce the interest rate of the second lien to 1.0 percent. After five years, the interest rate on the second lien will reset at the then-current interest rate on the HAMP-modified first lien. If applicable, following the initial interest rate reset, the interest rate of the modified second lien will reset on the same terms and schedule as the interest rate of the HAMP-modified first lien.
Example: The Interest Rate Cap on the modified first lien is 6.5%. The interest rate on the modified first lien is fixed at 5.0% for the first five years and then increases by 1.0% in year six to 6.0%, and by 0.5% in year seven to 6.5%. Thereafter, the interest rate remains at 6.5% for the remaining term of the first lien. Accordingly, the interest rate of the modified second lien will be fixed at 1.0% for the first five years and then increase by 5.0% in year six to 6.0%, and by 0.5% in year seven to 6.5%.
2.B: For second liens with interest-only payments: Reduce the interest rate of the second lien to 2.0 percent. After five years, the interest rate on the second lien will reset at the then current interest rate on the HAMP-modified first lien. If applicable, following the initial rate reset, the interest rate of the modified second lien will reset on the same terms and schedule as the interest rate of the HAMP-modified first lien.
Example: The Interest Rate Cap on the modified first lien is 6.5%. The interest rate on the modified first lien is fixed at 5.0% for the first five years and then increases by 1.0% in year six to 6.0%, and by 0.5% in year seven to 6.5%. Thereafter, the interest rate remains at 6.5% for the remaining term of the first lien. Accordingly, the interest rate of the modified second lien will be fixed at 2.0% for the first five years and then increase by 4.0% in year six to 6.0%, and by 0.5% in year seven to 6.5%.
2.C: For partially amortizing second liens (such as convertible HELOCs): If 50 percent or more of a second lien (based on the unmodified aggregate unpaid principal balance as of the date the 2MP offer is made to the borrower) is currently amortizing, the servicer should follow Step 2.A. above to reduce the interest rate of the second lien. If less than 50 percent of a second lien (based on the unmodified aggregate unpaid principal balance as of the date the 2MP offer is made to the borrower) is currently amortizing, the servicer should follow Step 2.B. above to reduce the interest rate of the second lien.
In the alternative, and at the discretion of the servicer in accordance with any related pooling and servicing agreement or other investor servicing agreement, for the steps above in 2.A., 2.B., or 2.C., the terms of the 2MP modification may include a more gradual interest rate step up. At no time may the interest rate on the modified second lien exceed the interest rate on the modified first lien.
Step 3: Extend Term
3.A: For amortizing second liens (payment of both principal and interest): If the original term of the second lien is shorter than the remaining term of the HAMP-modified first lien, extend the term of the second lien to match the term of the HAMP-modified first lien. If the original term of the second lien is longer than the remaining term of the HAMP modified first lien, do not extend the term of the second lien. In either instance, amortize the modified unpaid principal balance of the second lien over the term of the modified second lien.
3.B: For second liens with interest-only payments: If the original term of the second lien is shorter than the remaining term of the HAMP-modified first lien, extend the term of the second lien to match the term of the HAMP-modified first lien. If the original term of the second lien is longer than the remaining term of the HAMP-modified first lien, do not extend the term of the second lien. In either instance, amortize the modified unpaid principal balance of the second lien beginning at the time specified in the original second lien documents or after year five, whichever is later.
3.C: For partially amortizing second liens (such as convertible HELOCs): If 50 percent or more of a second lien (based on the unmodified aggregate unpaid principal balance as of the date the 2MP offer is made to the borrower) is currently amortizing, the servicer should follow Step 3.A. above to extend the term of the second lien. If less than 50 percent (based on the unmodified aggregate unpaid principal balance as of the date the 2MP offer is made to the borrower) of a second lien is currently amortizing, the servicer should follow Step 3.B. above to determine whether or not to extend the term of the second lien.
Step 4: Principal Forbearance
If there was principal forbearance on the HAMP-modified first lien, forbear principal on the second lien in the same proportion. The proportion of forbearance should be based on the ratio of the principal forbearance amount of the HAMP-modified first lien to the total unpaid principal balance of the HAMP-modified first lien on its modification effective date. If the servicer has deferred accrued interest in lieu of capitalization in Step 1, the deferred amount will be in addition to any principal forbearance required under this Step 4.
Example: The total unpaid principal balance of the HAMP-modified first lien on its modification effective date is $100,000, and the amount of principal forbearance on the first lien is $10,000. Therefore, the servicer must forbear 10% of the second lien. If the total unpaid principal balance of the second lien on the modification effective date is $40,000, the servicer must forbear $4,000.
There is no requirement to forgive principal under 2MP. However, servicers may agree to forgive principal as part of a 2MP modification at their discretion.
Note: All loans modified under 2MP must result in closed end second liens. If the second lien is an open end line of credit, participating servicers must terminate the borrower’s ability to draw additional amounts on the line when the 2MP modification becomes effective. In addition, immediately upon notification that the first lien is entering a HAMP trial period or has been modified under HAMP, servicers should terminate the borrower’s ability to draw additional amounts on open end lines of credit if permitted by applicable law and the second lien loan documents. When terminating the borrower’s ability to draw additional amounts under an open end line of credit, the servicer of the second lien must provide the borrower with disclosures in a manner consistent with applicable law.
Investor and Other Prohibitions
If the applicable pooling and servicing agreement or other investor servicing agreement prohibits the servicer from entering into a modification of the second lien, the servicer must seek approval from the investor’s representative for an exception. In the event that applicable state law prohibits or limits a modification step (e.g., extension of term beyond a specific point in time), a servicer may either skip the modification step or perform the step within the limitations of the law without obtaining prior approval from the investor.
This was taken from The HAMP Administration web site at : https://www.hmpadmin.com/portal/docs/second_lien/sd0905.pdf
Tags: 2MP, government regulation, Home Affordable Modification, second mortgage
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