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How The Program Works
U.S. Department Of The Treasury
Washington
March 4, 2009
• The Home Affordable Modification program has a simple goal: reduce the amount
homeowners owe per month to sustainable levels to stabilize communities. This program will
bring together lenders, investors, servicers, borrowers, and the government, so that all
stakeholders share in the cost of ensuring that responsible homeowners can afford their
monthly mortgage payments – helping to reach up to 3 to 4 million at-risk borrowers in all
segments of the mortgage market, reducing foreclosures, and helping to avoid further downward
pressures on overall home prices. The program has several key components:
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i. Shared Effort to Reduce Monthly Payments: Treasury will partner with financial
institutions and investors to reduce homeowners’ monthly mortgage payments.
- The lender will have to first reduce monthly payments on mortgages to a specified affordability
level (specifically, the lender must bring down monthly payments so that the borrower’s monthly
mortgage payment is no greater than 38% of his or her income).
- Next, the program will match further reductions in monthly payments dollar-for-dollar,
from 38% down to 31% debt-to-income ratio for the borrower.
- To ensure long-term affordability, the modified payments will be kept in place for five
years and the loan rate will be capped for the life of the loan. After five years, the interest
rate can be gradually stepped-up by 1% per year to the conforming loan survey rate in place at
the time of the modification.
- To reach the target affordability level of 31%, interest payments will first be
reduced down to as low as 2%. If at that rate the debt to income level is still over
31%, lenders then extend the term or amortization period up to 40 years, and finally
forbear principal at no interest, until the payment is reduced to the 31% target.
- Treasury will share the costs of reducing the payment from 38% DTI to 31%
DTI dollar for dollar.
- Note: Lenders can also bring down monthly payments to these affordability
targets through reducing the amount of mortgage principal. The program will provide
a partial share of the costs of this principal reduction, up to the amount the lender
would have received for an interest rate reduction as long as the lender reaches the
target rate of affordability at 31% debt-to-income.
ii. “Pay for Success” Incentives to Servicers:
- Servicers will receive an up-front fee of $1,000 for each eligible modification meeting
guidelines established under this initiative. Servicers will also receive “pay for success”
fees –as long as the borrower is successful at staying in the program – of $1,000 each year
for three years, subject to a de minimis threshold.
- Servicers will get similar incentives if they modify FHA, VA, or Agriculture
Department loans, or refinance loans according to the Hope for Homeowners or
similar FHA programs.
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