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Mortgage Modifications Part 4: The HAMP Waterfall

Back when I was of prom-going age, there was a tradition of going to “after prom”. I believe that tradition still persists. One after prom event that I particularly remember involved a “champagne fountain”, though it was really more of a waterfall. The glasses were stacked up and champagne poured into the top glass. As it overflowed, it spilled down into the glasses in the next row below it, and then as they overflowed to the row beneath them and so on.

So, it is with the Home Affordable Modification Program (HAMP) waterfall. You must completely fill up, or use up, the relief in each tier before you can take advantage of the tier below. The goal of the HAMP waterfall is to get the borrower’s monthly payment down to 31% of the borrower’s gross monthly income.

These steps must be followed in this exact order and you cannot move on to the next step until you have exhausted the step before.

1)      Calculate the capitalization of outstanding interest, escrow advances, and out-of-pocket servicing expenses (but not late fees).

2)      Begin calculating monthly payment at incrementally reduced interest rates (1/8 % increments) until you either reach 31% of monthly gross income or get down to a 2% interest rate. If you hit the 2% interest rate, and the monthly payment is still more than 31% of gross monthly income, move on to the next step.

3)      Begin calculating monthly loan payment by incrementally extending payment periods until you either reach 31% of monthly gross income or reach a 40 year repayment period. If you hit 40 years, and the monthly payment is still more than 31%  of gross monthly income, move on to the next step.

4)      Defer a portion of the principle, interest free until the loan is paid off or refinanced.

Pay attention: there is nothing in this program that requires your lender to FORGIVE any portion of the debt. Nothing stops them from forgiving a portion, and supposedly lenders are “strongly encouraged” to forgive principle by the Treasury Department, but nothing in this program requires forgiveness of principle.

If the borrower meets the minimum qualifications described in Part 2 of this series, and the payment can be brought down to 31%, the bank will still have to evaluate whether or not your loan should be modified using a Net Present Value (NPV) test . The NPV test is a mathematical model that should reveal whether or not the investor in your mortgage does better by modifying or liquidating the loan.

Next in our series: Part 5, the NPV test — Math or Scam

[Earlier posts in this series and related links at Kouril’s Foreclosure Fraud Resources]

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Cynthia Kouril

Cynthia Kouril

Cynthia Kouril is a former Special Assistant United States Attorney in the Southern District of New York under several different U.S. Attorneys, former counsel to the Inspector General for the N.Y.C. Department of Environmental Protection where she investigated threats to the New York City water supply and other environmental crimes, as well as public corruption and fraud against the government, former Examining Attorney at the N.Y.C. Department of Investigation and former Capital Construction Counsel at New York City Parks and Recreation.
She is now in private practice with a colleague whom she met while at the USA Attorney's Office. Ms. Kouril is a member of the Steering Committee, National Committeewoman and Regional Coordinator for the New York Democratic Lawyers Council, a member of the Program Committee of the Federal Bar Council and a member of the Election Law Committee at the Association of the Bar of the City of New York. She is active in several other Bar Associations.
Most important of all, she is a soccer mom.

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