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Fannie Mae and Freddie Mac Introduce HAMP Replacement Program Allison Botos Schilz and Mike Nedzbala * Fannie Mae and Freddie Mac have announced their Flex Modification foreclosure preven- tion program (“Flex Mod”). In addition to replacing the Home Affordable Modification Program (“HAMP”), Flex Mod will replace the Enterprises’ Standard and Streamlined Modification programs. The expiration of HAMP means that there will no longer be a stan- dard loss mitigation program that cuts across servicer and investor types. However, federal government agencies continue to emphasize the importance of loss mitigation programs and have encouraged stakeholders to consider guiding principles for future loss mitigation programs. The authors of this article discuss the Flex Modification foreclosure prevention program. In connection with the December 31, 2016, expiration of the Home Affordable Modification Program (“HAMP”), Fannie Mae and Freddie Mac (collectively, the “Enterprises”) have an- nounced their Flex Modification foreclosure prevention program (“Flex Mod”). 1 In addition to replacing HAMP, Flex Mod will replace the Enterprises’ Standard and Streamlined Modifi- cation programs. The expiration of HAMP means that there will no longer be a standard loss mitigation program that cuts across servicer and investor types. However, federal government agencies continue to emphasize the importance of loss mitigation programs and have encouraged stakeholders to consider guiding principles for future loss mitigation programs. In addition, amendments to the Consumer Financial Pro- tection Bureau’s (“CFPB”) mortgage servicing rules that enhance borrower protections sur- rounding loss mitigation are scheduled to take effect later this year. The Flex Modification Program The Enterprises developed Flex Mod at the direction of the Federal Housing Finance Agency (“FHFA”), incorporating certain ele- ments of HAMP, input received from various * Allison Botos Schilz is counsel at Hunton & Williams LLP focusing on regulatory and compliance matters affect- ing the consumer financial services industry. She advises financial institutions, mortgage lenders and servicers, com- munity banks, REITS, investment firms and other industry participants on a variety of regulatory compliance, licensing and transactional issues. Mike Nedzbala, a partner at the firm, co-head of the firm’s structured finance and securitiza- tion practice, and managing partner of the Charlotte office, handles negotiations on a wide range of secondary market transactions involving residential mortgage loans and mortgage servicing rights, representing banks, hedge funds, private equity investors, REITS, servicers, mortgage companies and others. The authors may be reached at [email protected] and [email protected], respectively. The Real Estate Finance Journal E Summer 2017 © 2017 Thomson Reuters 27

Fannie Mae and Freddie Mac Introduce HAMP Replacement ......programs, known as FHA-HAMP, 3 VA-HAMP, 4 and RD-HAMP (referred to as RD Special Loan Servicing). 5 In addition, under Treasury

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Page 1: Fannie Mae and Freddie Mac Introduce HAMP Replacement ......programs, known as FHA-HAMP, 3 VA-HAMP, 4 and RD-HAMP (referred to as RD Special Loan Servicing). 5 In addition, under Treasury

Fannie Mae and Freddie Mac IntroduceHAMP Replacement Program

Allison Botos Schilz and Mike Nedzbala*

Fannie Mae and Freddie Mac have announced their Flex Modification foreclosure preven-tion program (“Flex Mod”). In addition to replacing the Home Affordable ModificationProgram (“HAMP”), Flex Mod will replace the Enterprises’ Standard and StreamlinedModification programs. The expiration of HAMP means that there will no longer be a stan-dard loss mitigation program that cuts across servicer and investor types. However,federal government agencies continue to emphasize the importance of loss mitigationprograms and have encouraged stakeholders to consider guiding principles for future lossmitigation programs. The authors of this article discuss the Flex Modification foreclosureprevention program.

In connection with the December 31, 2016,expiration of the Home Affordable ModificationProgram (“HAMP”), Fannie Mae and FreddieMac (collectively, the “Enterprises”) have an-nounced their Flex Modification foreclosure

prevention program (“Flex Mod”).1 In additionto replacing HAMP, Flex Mod will replace theEnterprises’ Standard and Streamlined Modifi-cation programs.

The expiration of HAMP means that therewill no longer be a standard loss mitigationprogram that cuts across servicer and investortypes. However, federal government agenciescontinue to emphasize the importance of loss

mitigation programs and have encouragedstakeholders to consider guiding principles forfuture loss mitigation programs. In addition,amendments to the Consumer Financial Pro-tection Bureau’s (“CFPB”) mortgage servicingrules that enhance borrower protections sur-rounding loss mitigation are scheduled to takeeffect later this year.

The Flex Modification Program

The Enterprises developed Flex Mod at thedirection of the Federal Housing FinanceAgency (“FHFA”), incorporating certain ele-ments of HAMP, input received from various

*Allison Botos Schilz is counsel at Hunton & Williams LLP focusing on regulatory and compliance matters affect-ing the consumer financial services industry. She advises financial institutions, mortgage lenders and servicers, com-munity banks, REITS, investment firms and other industry participants on a variety of regulatory compliance, licensingand transactional issues. Mike Nedzbala, a partner at the firm, co-head of the firm’s structured finance and securitiza-tion practice, and managing partner of the Charlotte office, handles negotiations on a wide range of secondary markettransactions involving residential mortgage loans and mortgage servicing rights, representing banks, hedge funds,private equity investors, REITS, servicers, mortgage companies and others. The authors may be reached [email protected] and [email protected], respectively.

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This article presents the views of the author(s), which do not necessarily reflect those of Hunton & Williams or its clients. The information presented is for general information and education purposes. No legal advice is intended to be conveyed; readers should consult with legal counsel with respect to any legal advice they require related to the subject matter of the article.
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industry participants and features of theEnterprises’ Standard and StreamlinedModifications. For loans secured by primaryresidences, Flex Mod can be used for loansthat are 60 days or more delinquent, or forloans that are current or less than 60 days de-linquent if at risk of imminent default.

Prior to implementing a Flex Mod, servicersmust continue to follow the existing loss miti-gation evaluation hierarchies imposed by theEnterprises. Servicers are required to evaluateborrowers under Flex Mod no later thanOctober 1, 2017. However, servicers were ableto begin submitting cases to Fannie Mae asearly as March 1, 2017. Freddie Mac beganallowing servicers to evaluate borrowers for aFlex Mod Trial Period Plan on February 15,2017 and updated its system to allow for datasubmission as of May 1, 2017. While servicersare permitted to use the existing Standard andStreamlined Modifications prior to October 1,once a servicer starts evaluating a borrowerunder Flex Mod, it must discontinue using theexisting programs.

Eligibility requirements for Flex Mod are sim-ilar to Standard and Streamlined Modifications,with minor updates to the eligibility exclusions.Borrowers less than 90 days delinquent arerequired to submit a Borrower ResponsePackage. For such borrowers, the Flex Modwill target a 20 percent payment reduction and40 percent housing expense-to-income ratio.Streamlined provisions are available to bor-rowers that are 90 days or more delinquent;such borrowers are not required to submit aBorrower Response Package, and the pro-gram will target a 20 percent paymentreduction.

Among other eligibility criteria, a mortgage

must have been originated at least 12 monthsprior to evaluation date for the FlexModification. Loans insured by Federal Hous-ing Administration (“FHA”), Department ofVeterans Affairs (“VA”), and Rural HousingService (“RHS”) are ineligible for the program(although, as described below, such loans maybe eligible for loss mitigation programs offeredby those agencies).

Servicers will be eligible to receive incentivepayments in connection with Flex Mod. ForFannie Mae, the incentive payments will beconsistent with those for a Fannie MaeStreamlined Modification. For Freddie Mac,the incentive payments will follow the currentstructure for Freddie Mac Standard andStreamlined Modifications.

Federal and Agency Loss MitigationPrograms

As noted above, Flex Mod comes at theheels of the expiration of HAMP, which wasintroduced by the U.S. Department of Trea-sury (“Treasury”) in response to the financialcrisis in 2009 as part of the Making Home Af-fordable (“MHA”) Program. To help borrowersavoid default and foreclosure, HAMP provideda uniform, standardized loss mitigation pro-cess across servicer and investor types toreduce borrowers’ monthly payments to an af-fordable and sustainable amount. HAMPprovided incentive compensation to servicers,borrowers and investors upon the reporting ofa permanent modification.

In the years following HAMP’s enactment,additional loss mitigation options were rolledout under the MHA, such as the Home Afford-able Foreclosure Alternatives Program(“HAFA”), and loss mitigation offerings underHAMP were expanded. In 2011, the Enter-

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prises, at the direction of FHFA, rolled out theirServicing Alignment Initiative (“SAI”), whichset default servicing standards to limit theEnterprises’ financial losses.

The application deadline for HAMP wasDecember 30, 2016.2 For applications submit-ted prior to that date, the effective date of themodification must be on or before December1, 2017. To be considered for a StreamlineHAMP modification after December 30, 2016,the borrower must have submitted at least onecomponent of a loss mitigation application onor before that date (and meet certain othercriteria), and the effective date of the modifica-tion must be on or before December 1, 2017.For borrowers that default on a HAMP trial pe-riod plan on or after December 31, 2016, aservicer may still extend a Streamline HAMPoffer, provided that certain conditions are metand the permanent modification is effective onor before December 1, 2017.

Although the application deadline has ex-pired, Treasury will pay incentive compensa-tion for permanent modifications that havebeen reported before May 1, 2018, followingthe April 2018 reporting cycle. If a modificationis completed by December 1, 2017, but notreported before May 1, 2018, Treasury will notmake any incentive payments, and for non-GSE loans the servicer must still honor allterms of the modification, including paymentof incentives to the borrower, servicer orinvestor.

For loans guaranteed or insured by govern-ment agencies, FHA, VA, and Rural Develop-ment each introduced their own loss mitigationprograms, known as FHA-HAMP,3 VA-HAMP,4

and RD-HAMP (referred to as RD SpecialLoan Servicing).5 In addition, under Treasury

FHA-HAMP and RD-HAMP, borrowers andservicers are eligible for incentive paymentsfrom Treasury. To be eligible, the borrowermust have made a written request for modifica-tion on or before December 30, 2016, and theeffective date of the permanent modificationmust be on or before December 1, 2017.Notwithstanding these deadlines for Treasuryincentive payments, the agency-specific HAMPprograms (or related replacement programs,such as the recently-announced VA AffordableModification6) continue to be available pastDecember 2016.

Federal Agency Loss MitigationRecommendations

As HAMP’s expiration approached, the Trea-sury, FHFA, and FHA (collectively, the “Agen-cies”) published a joint white paper in July2016 recommending guiding principles forfuture loss mitigation programs in a post-crisisera, including accessibility, affordability, sus-tainability, transparency and accountability.7

The CFPB issued its own document inAugust 2016 addressing principles for loss mit-igation solutions in a post-HAMP environment,noting that such principles are intended tobuild on, but are distinct from, the CFPB’smortgage servicing rules, supervisory author-ity and enforcement authority.8 While the CFPBalso echoed the need for accessibility, afford-ability, sustainability and transparency, itindicated that its mortgage servicing rulesprovide a framework for the accountabilityprinciple.

Loss Mitigation Under the CFPB’sServicing Rules

The CFPB’s servicing rules do not impose aduty on a servicer to provide any specific loss

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mitigation option, but according to the CFPB,the rules act as “regulatory guardrails” to theloss mitigation process. Although the CFPBcannot mandate a particular loss mitigationoption, it has devoted significant attention toloss mitigation issues over the years throughits rulemaking, supervisory highlights, bul-letins, and enforcement activities.

The CFPB’s mortgage servicing rules, whichbecame effective in January 2014, alreadyincorporate some servicing standards fromHAMP and SAI into the servicing standardscontained in Regulation X, such as the prohi-bition on dual tracking borrowers for foreclo-sure and loss mitigation, the requirement toprovide a single point of contact to borrowersduring loss mitigation, and mandatory outreachto delinquent borrowers during a specified timeperiod.

In 2016, the CFPB published a final servic-ing rule (the “2016 Rule”) that, among otherthings, will enhance borrower protections inthe loss mitigation area. The 2016 Rule revisesand clarifies a number of the loss mitigationprovisions of Regulation X, including, but notlimited to, the following:

E A servicer is required to meet the lossmitigation requirements more than oncein the life of a loan if a borrower becomescurrent on payments between loss miti-gation applications.

E Upon receiving a complete loss mitiga-tion application, a servicer must providewritten notice to the borrower within fivedays containing certain requiredinformation.

E If a borrower submits a complete loss mit-igation application more than 37 days

before a foreclosure sale, a servicer maynot move for an order of sale or conducta foreclosure sale (even when a thirdparty administers or conducts the sale),except under certain specifiedcircumstances.

E If a servicer is joining the foreclosure ac-tion of a superior or subordinate lien-holder, it is not required to wait until aborrower is more than 120 daysdelinquent.

E When a transferee servicer receives aloan for which there is a loss mitigationapplication pending, the transferee ser-vicer must comply with the loss mitiga-tion timeframes that were applicable tothe transferor servicer.

The 2016 Rule also affords new consumerprotections for successors in interest. Forexample, a confirmed successor in interestwill have the same right as a borrower when itcomes to the loss mitigation requirementsunder Regulation X.

The enhanced loss mitigation provisions ofthe 2016 Rule are scheduled to take effectOctober 19, 2017, while the provisions regard-ing successors in interest are scheduled totake effect April 19, 2018.

Conclusion

Although borrowers may no longer submitapplications for HAMP, Enterprise and agency-specific loss mitigation programs continue tobe available. As an important overlay to theseprograms, servicers should be working dili-gently toward operationalizing and implement-ing the CFPB’s servicing rule amendments,which, once effective, will impose important

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requirements on servicers offering loss mitiga-tion options to borrowers.

NOTES:1For additional information and complete require-

ments, see Fannie Mae’s Fact Sheet, available at https://www.fanniemae.com/content/fact_sheet/fanniemae-flex-modification-fact-sheet.pdf; Lender Letter LL-2016-06, available at https://www.fanniemae.com/content/announcement/ll1606.pdf; Freddie Mac’s Bulletin 2016-22,available at http://www.freddiemac.com/singlefamily/guide/bulletins/pdf/bll1622.pdf; Bulletin 2017-1 and the Fred-die Mac Flex Modification Reference Guide, available athttp://www.freddiemac.com/singlefamily/guide/bulletins/pdf/bll1701.pdf.

2Servicers should consult the Making Home Afford-able Program Handbook for Servicers of Non-GSE Mort-gages for complete details regarding HAMP expiration(available at: https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/mhahandbook_51.pdf), along with

any supplemental directives, such as SupplementalDirective 17-01 (available at https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/sd1701.pdf).

3See https://www.hmpadmin.com/portal/programs/fha_hamp.jsp and https://portal.hud.gov/hudportal/HUD?src=/hudprograms/fhahamp.

4See http://www.benefits.va.gov/homeloans/documents/circulars/26_14_22.pdf.

5See https://www.hmpadmin.com/portal/programs/rd_hamp.jsp.

6See http://www.benefits.va.gov/HOMELOANS/documents/circulars/26_17_10.pdf.

7“Guiding Principles for the Future of Loss Mitigation:How the Lessons Learned from the Financial Crisis CanInfluence the Path Forward,” July 25, 2016 (available athttps://www.treasury.gov/press-center/press-releases/Documents/guiding-principles-future-of-loss-mitigation.pdf).

8“CFPB’s Principles for the Future of Loss Mitiga-tion,” August 2, 2016 (available at http://files.consumerfinance.gov/f/documents/20160802_CFPB_Principles_for_Future_of_Loss_Mitigation.pdf).

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