In January, Treasury announced significantly enhanced payments to encourage investors to consider or expand principal reduction modifications under HAMP. To effectuate this change, Treasury issued Supplemental Directive 12-01 on February 16, 2012, tripling the investor incentives that can be earned for permanent modifications under HAMP’s Principal Reduction Alternative Program, known as PRA, for loans with trial period plan effective dates on or after March 1, 2012. Few of the existing HAMP incentives have enjoyed the market success desired, and only time will tell whether this initiative is more fully embraced.
PRA provides an option for servicers to offer modifications that include principal reduction when borrowers owe significantly more on their mortgage than their home is worth, but does not obligate servicers to offer such modifications, given that principal reductions generally require the investor’s consent. In an attempt to get more investors to agree to principal reductions, Treasury will offer three times the incentives it previously offered. For loans that are not severely delinquent, the calculation of the incentives is based on the Mark-to-Market Loan-to-Value ratio (MTMLTV), which is the loan-to-value ratio based on a current valuation (e.g., AVM or BPO) of the mortgaged property.
The amounts of the incentives are:
1) $0.63 per dollar of the principal reduction forgiveness amount for loans with an MTMLTV less than 115% and greater than 105%
2) $0.45 per dollar of the principal reduction forgiveness amount for loans with an MTMLTV of 115% – 140%
3) $0.30 per dollar of the principal reduction forgiveness amount for loans with an MTMLTV greater than 140%
Treasury will provide investors incentive payments to reduce principal down to an MTMLTV of 105%, but will not provide incentives to go below that ratio. Investors are paid substantially less, however, if the loan was more than six months past due at any time during the 12-month period prior to the NPV evaluation date. Under those circumstances, an investor will be paid $0.18 per dollar of principal reduction, regardless of the MTMLTV achieved.
The investor incentive is paid over three annual installments in the month of the anniversary of the first trial period payment due date, as long as the loan is in good standing and has not been paid in full. If a loan is paid off before the modification’s third anniversary (but not within the modification’s first month), the investor may receive the unpaid incentive payments at payoff. The money is paid to the servicer, and the servicer then passes the amount to the investor. The PRA incentive payments are in addition to those that are generally offered to investors under HAMP.
The PRA Program does not apply to loans owned or guaranteed by the GSEs, nor to other government insured or guaranteed loans. Treasury has offered to provide the GSEs with incentives to permit principal reductions on their loans, but the GSEs have yet to accept.