How MBS relates to HAMP

Why a CPA is a better Choice to Negotiate your Loan Modification

Organization – Calculation – Presentation - Negotiation

Borrower

Brokers

Servicing

Investor Bankers

Wall

Street

Secondary

Market

Understanding the Mortgage Back Security Market

Understanding Securitization

• Lender creates pools of mortgages• Lender a pool of mortgages into a subsidiary called a “Special

Investment Vehicle” (SIV)• The SIV then creates groupings of loans and legally binds them into

certificates to be sold as a “Mortgage Backed Security” (MBS)• Each Certificate represents a fraction of each loan in the group• Since each loan produces cash flow each Certificate represents a

fraction of the loan’s cash flow• Each Certificate also represents a fraction of the mortgage collateral• Certificates are sold to investors on such as hedge funds, pension

funds and insurance companies• A “secondary market” exits to buy or sell mortgage back securities

Your loan might be partially “owned” by hundreds of certificate holders!

Understanding Securitization

In here

Loans the Bank

Originates

The Bank packages

Loans into Certificates

The Secondary Market Buys the MBS and Sells to investors

Your Loan

$100 Million

Pool of

Mortgages

$100 Million

Mortgage

Backed

Security

5

The “Originate to Distribute” Market Structure: Separating Actions From Consequences

HAMP Participation by Servicers

• Participation not generally required– Carrots/Sticks to encourage participation

– Federal regulators are encouraging licensees to participate

– All or Nothing participation (whole portfolio)

• Required For …– Banks that accepted TARP money after 3/4/2009

– Fannie/Freddie portfolio mortgages or MBS pool mortgages guaranteed by Fannie/Freddie

– Loans guaranteed by FHA

6

Servicer Participation Agreement (SPA)

COMMITMENT TO PURCHASE FINANCIAL INSTRUMENTand

SERVICER PARTICIPATION AGREEMENT

This Commitment to Purchase Financial Instrument and Servicer ParticipationAgreement (the “Commitment”) is entered into as of the Effective Date, by andbetween Federal National Mortgage Association, a federally chartered corporation, asfinancial agent of the United States (“Fannie Mae”), and the undersigned party(“Servicer”). Capitalized terms used, but not defined contextually, shall have themeanings ascribed to them in Section 12 below.

Recitals

WHEREAS, the U.S. Department of the Treasury (the “Treasury”) has established aMaking Home Affordable Program pursuant to section 101 and 109 of the EmergencyEconomic Stabilization Act of 2008 (the “Act”), as section 109 of the Act has beenamended by section 7002 of the American Recovery and Reinvestment Act of 2009

HAMP SPA Gotcha for Borrowers2. Authority and Agreement to Participate in ProgramsA. Servicer shall perform the Services for all mortgage loans it services, whether it services such mortgage loans for its own account or for the account of another party, including any holders of mortgage-backed securities (each such other party, an “Investor”).

B. Fannie Mae acknowledges that Servicer may service mortgage loans for its own account or for the account of one or more Investors and may be subject to restrictions set forth in pooling and servicing agreements or other servicing contracts governing Servicer’s servicing of a mortgage loan; Servicer shall use reasonable efforts to remove all prohibitions or impediments to its authority, and use reasonable efforts to obtain all third party consents, waivers and delegations that are required, by contract or law, in order to perform the Services.

C. Notwithstanding subsection B., if (x) Servicer is unable to obtain all necessary consents, waivers and delegations for performing any Services under the Programs, or (y) the pooling and servicing agreement or other servicing contract governing Servicer’s servicing of a mortgage loan prohibits Servicer from performing such Services for that mortgage loan, Servicer shall not be required to perform such Services with respect to that mortgage loan and shall not receive all or any portion of the Purchase Price (defined below) otherwise payable for such Services with respect to such loan.

D. Notwithstanding anything to the contrary contained herein, the Agreement does not apply to GSE Loans. Servicers are directed to the servicing guides and bulletins issued by Fannie Mae and Freddie Mac, respectively, concerning the Programs as applied to GSE Loans.

E. Servicer’s performance of the Services and implementation of the Programs shall be subject to review by Freddie Mac and its agents and designees as more fully set forth in the Agreement.

HAMP Eligibility

• Broad Coverage– Loan balance ≤ $729,750 (higher for 2-4 unit properties)

– Modification yields greater return than foreclosure

– In default or at imminent risk of default.

• Qualified Borrowers – First-lien, owner-occupied

– Document income, and sign affidavit of financial hardship

• Narrow Window– Loans originated on or before January 1, 2009.

– Now thru December 31, 2012 (one mod only per loan)

– Servicers have until Dec. 31, 2009 to sign on.

9

HAMP Carrots

• Servicer Incentives (after 90-day trial period):– $1,000 for each modified mortgage + $1,000/ year for 3 years if

borrower stays current

– $500 for modifications made prior to delinquency

– $250 + more tba by Treasury for release of 2nd lien

– Compensation for foreclosure alternatives (if mod not possible): short sales or deeds-in-lieu

• Borrower Incentives: up to $1,000/year for 5 years for current borrowers toward principal

• Lender/Investor Incentives:– Interest reduction subsidy

– $1,500 payment for pre-default modification delinquency and payments to offset probable losses from home price declines

10

HAMP Modification Process1. Calculate 31% of Borrower’s long-term, stable income.

This value is the amount the fully amortized monthly payment,property taxes HOA and insurance (PITIAS)consumes of monthlyincome.

2. Calculate New Unpaid Principal Balance:Principal Balance + Escrow Shortages + Arrearages = UnpaidPrincipal Balance (UPB)

3. Calculate a new monthly payment:• Use the new UPB

• The current note rate on the mortgage

• The remaining term

* If an affordable payment is achieved, the interest rate will fixpermanently at the current note rate – if not continue

4. Reduce the interest rate in decrements of 0.125 percentto no lower than 2.0 percent**If the modified interest rate is below the market rate, the ratewill remain fixed for five years. In the sixth year, the interest ratewill be subject to annual increases of no more than 1 percent peryear, not to exceed the lesser of the fully indexed rate at the timethe loan was originated or the market rate (PMMS) at the time themodification documents are prepared.

HAMP Modification Process

5. Extend the amortization term

Month-by-month up to 480 months

6. Forebear principal (Balloon Payment)

The interest-bearing principal is not less than 100 percent of currentmarket value.

***Deferred principal will not be subject to interest and requires aballoon payment due upon sale, payoff or maturity. Deferredprincipal will be non-interest bearing and non-amortizing.

7. If a PITIAS-to-income ratio greater than 31 percent isnecessary to support a modification the borrower doesnot qualify for this program.

Why a CPA?

• The NPV test is complicated. Income from all sources, & proper valuation of the subject property makes or breaks many deals

• Knowing the process is very important

• Usually not legal issue• Usually is about

organization, presentation, rapport and timeliness