Treasury’s Office of Homeownership Preservation within the Office of Financial Stability, which administers Treasury’s TARP-related efforts, is tasked with finding ways to help prevent avoidable foreclosures and preserve homeownership. The $27.8 billion in TARP funds that Treasury has obligated for MHA is to be used to encourage the modification of eligible mortgages and to provide other relief to distressed borrowers. Only loans that were originated on or before January 1, 2009 and that meet other requirements are eligible for assistance under the MHA program. In December 2015, Congress mandated that the MHA program be terminated on December 31, 2016, with an exemption for HAMP loan modification applications made before that date. Congress also provided Treasury with the authority to extend its authority under EESA with respect to the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (Hardest Hit Fund) to December 31, 2017 for current program participants and to obligate up to $2 billion of TARP funds to that program. Treasury uses contracts with its servicers to establish the amount of funds that each servicer may receive under MHA for incentives or other payments. Treasury initiated HAMP and the other TARP housing programs using its authority under EESA and authorized Fannie Mae to act as a financial agent. At Treasury’s request, Fannie Mae signed contracts with banks and other mortgage servicers. As prescribed by EESA, the contracts took the form of agreements to purchase financial instruments from the servicers. For the MHA program, in these contracts, known as servicer participation agreements, Treasury, through Fannie Mae, committed to pay servicers for completing modifications of mortgage loans according to the terms of HAMP and other MHA programs. Each of these contracts establishes a maximum amount that Treasury, through Fannie Mae, is obligated to pay the servicer. Each of the contracts established a maximum amount that Treasury would have to pay, and Treasury recorded these amounts for each contract as obligations, for a total of approximately $27.8 billion. All of the contracts were signed and the corresponding funds obligated in fiscal years 2009 and 2010. Treasury has not obligated any new funds for MHA since the end of 2010 but has made many adjustments to the amounts originally set out in the contracts, pursuant to provisions set forth in the contracts. The contracts do not require upfront payments of the full maximum amounts; Treasury expends funds as servicers enroll borrowers in modifications and complete other activities. As of October 2015, $12.6 billion had been expended for all the MHA programs, leaving $17.2 billion in obligated but unexpended funds. Of this $17.2 billion, according to Treasury’s estimate, a maximum of $9.5 billion could be expended through future payments to servicers for HAMP loan modifications completed before October 2015 and for other activities that servicers have already initiated. The remaining $7.7 billion in obligations represents the amounts potentially available to servicers for future HAMP modifications and other MHA transactions, as established in the original contracts. Due to restrictions imposed by the Dodd-Frank Act, Treasury may obligate TARP funds only for programs that were initiated prior to June 25, 2010. MHA consists of several programs designed to help struggling homeowners and prevent avoidable foreclosures. HAMP first-lien modifications. The largest component of MHA is the first-lien modification program. The program was intended to help eligible borrowers stay in their homes and avoid potential foreclosures by reducing the amount of their monthly payments to affordable levels. Modifications are available for single-family properties (one to four units) with mortgages no greater than $729,750 for a one-unit property. Borrowers are eligible only if companies servicing their mortgages have signed program participation agreements. Participating loan servicers use a standardized net present value (NPV) model to compare a modified loan’s expected cash flows to the cash flows that would be expected from the same loan with no modifications, using certain assumptions. If the expected cash flow with a modification is positive (i.e., more than the estimated cash flow of the unmodified loan), the participating loan servicer is required to offer the loan modification. HAMP provides both one-time and ongoing incentives to mortgage investors, loan servicers, and borrowers for up to 6 years after a loan is modified. These incentives take into consideration the servicers’ and investors’ costs for making the modifications and are designed to increase the likelihood that the program will produce successful modifications over the long term. They include principal balance reductions for borrowers who make payments on time and incentives for servicers tied to the amount by which a modification reduces the borrower’s monthly payment. The HAMP first-lien modification program has three components—the original HAMP (Tier 1), an additional first-lien modification known as HAMP Tier 2, and a modification with reduced borrower documentation requirements known as Streamline HAMP. Announced in March 2009, HAMP Tier 1 is generally available to qualified borrowers who occupy their properties as their primary residence and whose first-lien mortgage payments are more than 31 percent of their monthly gross income, as calculated using the front-end debt-to- income (DTI) ratio. HAMP Tier 2, which was announced in January 2012, is available for both owner-occupied and rental properties, and borrowers’ monthly mortgage payments prior to modification may be less than 31 percent DTI. Streamline HAMP, which was announced in July 2015 and requires servicers to have an implementation policy in place as of January 2016, offers modification terms and eligibility criteria similar to those of HAMP Tier 2 but does not require documentation (or verification) of borrower income. As part of the HAMP Tier 1 modification, servicers reduce a borrower’s interest rate until the DTI is 31 percent or the interest rate reaches 2 percent. The new interest rate is fixed for the first 5 years of the modification. It then gradually increases by increments of no more than 1 percent per year until it reaches the cap, which is the Freddie Mac Primary Mortgage Market Survey rate at the time of the modification agreement. The interest rate is then fixed at that rate for the remaining loan term. In contrast, under HAMP Tier 2 and Streamline HAMP, the interest rate is adjusted to a rate that remains fixed for the life of the loan. The fixed rate is set using the weekly Freddie Mac Primary Mortgage Market Survey Rate at the time of the modification agreement. For HAMP Tier 1, HAMP Tier 2, and Streamline HAMP, borrowers must demonstrate their ability to pay the modified amount by successfully completing a trial period of 3 months or more before a loan is permanently modified and any government payments are made. When a borrower defaults—misses three consecutive monthly mortgage payments—after the loan has been permanently modified, Treasury stops paying financial incentives to the borrower, servicer, and investor for that modification. Borrowers who have received a HAMP Tier 1 modification may be eligible for a HAMP Tier 2 or Streamline HAMP modification under certain conditions. These include having undergone a change in circumstances, having entered into a permanent HAMP Tier 1 loan modification at least 12 months earlier, or having defaulted on the HAMP Tier 1 modification (referred to as redefault). In all cases, borrowers must otherwise meet HAMP eligibility criteria, such as having a financial hardship. The Second Lien Modification Program (2MP). 2MP is designed to work in tandem with HAMP modifications to provide a comprehensive solution to help borrowers afford their mortgage payments. Under 2MP, when a borrower’s first lien is modified under HAMP and the servicer of the second lien is a 2MP participant, that servicer must offer a modification and/or full or partial extinguishment of the second lien. Treasury provides incentive payments to second lien mortgage holders in the form of a percentage of each dollar in principal reduction on the second lien. Treasury has doubled the incentive payments offered to second lien mortgage holders for 2MP permanent modifications that include principal reduction and have an effective date on or after June 1, 2012. Principal Reduction Alternative (PRA). In October 2010, PRA took effect as a component of HAMP to give servicers more flexibility in offering relief to borrowers whose homes were worth significantly less than their mortgage balance. Under PRA, Treasury provides mortgage holders/investors with incentive payments in the form of a percentage of each dollar in principal reduction. Treasury has tripled the PRA incentive amounts offered to mortgage holders/investors for permanent modifications with trial periods effective on or after March 1, 2012. Participating servicers of loans not owned by the housing enterprises (Fannie Mae or Freddie Mac) must evaluate the benefit of principal reduction for mortgages with a loan-to-value (LTV) ratio that is greater than 115 percent when evaluating a homeowner for a HAMP first-lien modification. Servicers must adopt and follow PRA policies that treat all similarly situated loans in a consistent manner but are not required to offer principal reductions, even when the NPV calculations show that the expected value of the loan’s cash flows would be higher with a principal reduction than without it. When servicers include principal reduction in modifications under PRA, the reduction is initially treated as noninterest-bearing principal forbearance. If the borrower is in good standing on the first, second, and third anniversaries of the effective date of the modification’s trial period, one-third of the principal reduction amount is forgiven on each anniversary. Home Affordable Foreclosure Alternatives (HAFA) Program.