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 struggling homeowners avoid foreclosure and assist in stabilizing the housing market. Treasury has established three initiatives funded under TARP to address these issues: MHA, the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (Hardest Hit Fund), and support for loans insured by FHA through the FHA Refinance of Borrowers in Negative Equity Positions program (FHA Short Refinance). Treasury allocated $29.8 billion of the $37.5 billion in TARP housing funds to MHA to encourage the modification of eligible mortgages and provide other relief to distressed borrowers. Only loans originated on or before January 1, 2009, that meet certain requirements are eligible for assistance under MHA. Several programs have been designed under MHA 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 monthly mortgage 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 the companies servicing their mortgages have agreed to participate in the program. To determine whether a participating loan servicer is required to modify a loan, HAMP uses a standardized net present value (NPV) model to compare expected cash flows from a modified loan to 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 make the loan modification. Treasury uses TARP funds to provide 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 are designed to increase the likelihood that the program will produce successful modifications over the long term and take into consideration the servicers’ and investors’ costs for making the modifications. Only financial institutions that signed a Commitment to Purchase Financial Instrument and Servicer Participation Agreement on or before October 3, 2010, are eligible to receive TARP financial incentives under the MHA program. Treasury pays the incentives for HAMP modifications for loans not owned or guaranteed by the housing enterprises Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac bear the cost of HAMP modifications for loans they own or guarantee. primary residence and whose first-lien mortgage payments are more than 31 percent of their monthly gross income, as calculated using the 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. 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 falls to 2 percent. modification. It then gradually increases by increments of no more than 1 percent per year (interest rate step-ups) until it reaches the cap, which is the Freddie Mac Primary Mortgage Market Survey rate at the time of the evaluation for the modification. The interest rate is then fixed at that rate for the remaining loan term. In contrast, under HAMP Tier 2 the interest rate is based on the weekly Freddie Mac Primary Mortgage Market Survey Rate at the time of the modification and remains fixed for the life of the loan. Servicers are not required to reduce interest rates below 2 percent. Interest rate reduction is one step in the HAMP Tier 1 standard modification waterfall. Under the waterfall, servicers must first capitalize accrued interest and certain expenses paid to third parties and add this amount to the loan balance (principal) amount. Next, servicers must reduce the interest rate until the 31 percent DTI target is reached or the interest rate is reduced to 2 percent. If the interest rate reduction does not result in a DTI ratio of 31 percent, servicers must then extend the maturity and/or amortization period of the loan up to 40 years. Finally, if the target DTI ratio is still not reached, the servicer must forbear, or defer, principal until the payment is reduced to the 31 percent target, subject to an excessive forbearance cap. The mortgage holder/investor absorbs the reduced payment until 38 percent DTI is reached, and Treasury and the lender then share payment reductions until 31 percent DTI is reached. period of least 3 months before a loan is permanently modified and any government payments made. Borrowers who redefault on a permanent HAMP loan modification—that is, who miss three consecutive mortgage payments—no longer qualify for borrower incentives under the program. In addition, the servicer and investor do not continue to receive incentives for that loan. Borrowers who experience a subsequent hardship after receiving a HAMP Tier 1 modification or who redefault on a HAMP Tier 1 modification may be eligible for a HAMP Tier 2 modification under certain conditions. These include having undergone a change in circumstances that show a clear need for the program (such as default or imminent default). The Second Lien Modification Program (2MP). According to Treasury, 2MP is designed to work in tandem with HAMP modifications to provide a comprehensive solution to help borrowers afford their mortgage payments. 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 modification and/or full or partial extinguishment of the second lien. Treasury provides incentive payments to second- lien mortgage holders, including 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.principal under HAMP, 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. However, servicers must adopt and follow PRA policies that treat all similarly situated loans in a consistent manner. When servicers include principal reduction in modifications under PRA, the principal reduction amount is initially treated as non- interest-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. There is no requirement to forgive Home Affordable Foreclosure Alternatives (HAFA) Program. Under this program, servicers offer foreclosure alternatives (short sales and deeds-in-lieu of foreclosure) to borrowers who meet the basic eligibility requirements for HAMP and who do not qualify for a HAMP trial modification, do not successfully complete a HAMP trial modification, default on a modification (miss three or more consecutive payments), or request a short sale or deed-in-lieu. The program provides incentive payments to investors, servicers, and borrowers for completing these foreclosure alternatives. Home Affordable Unemployment Program. This program offers assistance to borrowers who are suffering financial hardship due to unemployment. Borrowers are eligible for a 12-month forbearance period during which monthly mortgage payments are reduced or suspended. Servicers can extend the forbearance period at their discretion if the borrowers are still unemployed after the 12-month period. Servicers are required to consider borrowers who later find employment or whose forbearance period expires for a HAMP loan modification or a foreclosure alternative, such as the HAFA program. No TARP funds are provided to servicers under this program. FHA and the Department of Agriculture’s Rural Housing Service (RHS) modification programs. These programs are similar to HAMP Tier 1 and cover FHA-insured and RHS-guaranteed mortgage loans. If a modified FHA-insured or RHS-guaranteed mortgage loan meets Treasury’s eligibility criteria, the borrower and servicer can receive TARP-funded incentive payments from Treasury. In 2009, Treasury entered into agreements with Fannie Mae and Freddie Mac to act as financial agents for MHA. Fannie Mae serves as the MHA program administrator and is responsible for developing and administering program operations, including registering, executing participation agreements with, and collecting data from servicers and providing ongoing servicer training and support. Freddie Mac serves as Treasury’s compliance agent and has a designated independent division, Making Home Affordable Compliance, that is responsible for assessing servicers’ compliance with program guidelines, including conducting on- site and remote servicer loan file reviews and audits. Treasury established the Hardest Hit Fund program in February 2010, 1 year after announcing MHA.