Following are details of the Bush Plan to bailout the housing industry. Registration at the above link is free but many will not want to do so. Here are the details:

Framework for streamlined refinancing

  • Applies to first lien owner occupied residential adjustable rate loans (ARMS) with initial fixed rate for 36 months or less
  • Must be originated between 1/1/05 and 7/31/07 and included in securitized pools with reset date between 1/1/08 and 7/31/10
  • Servicers should apply before reset and should begin contacting borrowers 120 days prior to reset
  • Plan divides these loans into 3 “Segments”
    • Segment 1 – loans where borrower appears to be likely to refinance to some available loan product, including but not limited to FHA, FHA Secure loans
      • Servicer is to make determination by things such as LTV, loan amount, FICO and payment history and generally won’t have to determine current income or DTI to determine eligibility for refinancing
      • Program doesn’t cover second liens other than noting second lienholders should agree to subordinate their interest to the refinanced first lien
      • Servicer may evaluate loans on case by case basis or apply any framework consistent with applicable servicing standard in PSA
      • Servicer is to take “all reasonable steps” allowed by PSA and governing documents to encourage/facilitate refinancing
    • Segment 2 (the heart of the program—streamlined/fast track modification) – includes current loans where borrower is unlikely to be able to refinance into any available product
      • “Current” means not more than 30 days delinquent and not more than 1 X 60 days delinquent in last 12 months under OTS or not more than 1 x 90 days delinquent under the MBA calculation method
      • LTV > 97% – Current loans with LTV greater than 97% are deemed to be ineligible for refinance under other products so would be deemed to be within Segment 2 (LTV/CLTV determined on information at origination; also if LTV is below 97%, servicer “may” obtain updated home value by AVM, etc.
      • Not FHA Secure Qualified -Current loans that don’t otherwise satisfy FHA Secure requirements are also deemed within Segment 2 unless servicer can determine they qualify for some other product without performing an underwriting analysis
      • Servicer is to determine for these borrowers: (1) owner occupancy based “solely” on borrower’s representations at origin [note many of whom actually made gross misrepresentations] and on other information known by or readily available to servicer; (2) FICO score change since origination
        • If FICO is
        • If FICO > 660 or current FICO is 10% or more higher than at origination, borrower considered to have FAILED the FICO test and then servicer uses a more detailed analysis to determine borrower’s current income/debts
        • Servicer must determine if payment after reset will go up by EITHER (1) more than 10% if meets FICO test; or (2) if failed FICO test, an amount that servicer determines borrower cannot afford
        • Servicer has option to conduct more detailed DTI analysis instead of using the above tests.
        • Borrowers falling within Segment 2 would be eligible for modification that freezes the interest rate at the pre-reset rate for 5 years
        • This streamlined option is NOT exclusive and does NOT prevent servicer from conducting a more individual indept analysis consistent with applicable servicing standard in the transaction documents to determine if a LONGER TERM modification would be appropriate
        • Servicer may make following presumptions if loan falls into Segment 2:
          • Borrower is able to repay under the modification based on current payment history prior to reset date
          • Borrower is willing to pay under the modification based on (a) an agreement to the modification after being contacted; or (b) if borrower’s affirmative agreement isn’t obtained [many don’t respond to mailings of the modification docs] by the payment of 2 payments under the modified loan after being notified of the terms
          • Borrower is unable to pay and default is reasonable foreseeable after the scheduled reset based on size of payment increase if meets FICO test or based on current income if fails FICO test
          • The modification maximizes the net present value of the recoveries for the trust and is in investors’ best interest IN THE AGGREGRATE as refinancing options not likely and borrower can/will pay under the modified loan
    • Segment 3 – loans where borrower is not current showing could not even meet the introductory rate (i.e., refinance would not help them)
      • Servicer is to determine appropriate loss mitigation approach consistent with applicable servicing standard but without using the streamline/fast track procedures used in Segment 3 and should maximize the net present value of recovery; approach can include, e.g., forebearance, short sale, rate/principal reduction, foreclosure)
      • Servicer will need to do more intensive analysis of current debt/income to determine best mitigation approach.

Mike “Mish” Shedlock
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