FHA Loss Mitigation: Navigating The Waterfall within the Waterfall

Most seasoned loss-mitigation management and staff are aware of the FHA Waterfall and the order in which home-retention options should be considered:

  1. Forbearance Plan
  2. Repayment Plan
  3. Standard Loan Modification
  4. HAMP Modification

I believe that many servicers have an understanding of this and have been able to put together a decisioning tool in one format or another that allows them to struggle through the river of regulations and at least safely navigate and find the correct path through the first set of falls.

Many servicers, however, fail to understand how to handle the second set of falls. Within the HAMP modification, there are 4 paths that must also be considered in a specific order, otherwise the servicers’ ship will be sunk by FHA in the form of large penalties and demands of indemnification. The second set of falls require the servicer to consider, in order:

  1. A HAMP Loan Modification only
  2. A Partial Claim only
  3. A HAMP Loan Modification where some of the arrears are put in the Partial Claim, with the balance being capitalized in the modification to achieve the target payment
  4. A HAMP Loan Modification where all of the arrears can be placed in the Partial Claim and if necessary a principal reduction in order to reach the target payment amount without exceeding the maximum claim amount

The first set of falls are difficult enough to navigate for servicers. This second set is where you’d better have one of the most complex Excel spreadsheets known to man, or utilize a software created with complex mathematic algorithms designed specifically for FHA loss Mitigation.

DLS Servicing Consultants, LLC has created such a program in WaterfallCalc.com. It will accurately determine, in 10 minutes, the correct FHA loss mitigation home-retention option that the borrower qualifies for. We have found that nearly 75% of loans that are run the system result in one form of the HAMP options.

Some of the features of are:

  • Will calculate the maximum claim amount, less any previous partial claims
  • Calculates the target payment in compliance with FHA guidelines
  • Evaluates whether a standalone loan modification or standalone Partial Claim can be approved based on FHA requirements
  • Determines if a principal reduction is needed to meet the target payment amount
  • Maximizes the allowable claim, and then capitalizes any other amounts that are needed to bring the loan current
  • Only approves a HAMP option if the new payment results in a front end DTI of 40% or under
  • Provides details for the claim breakdown, including amount needed for arrears, legal fees and costs, escrow shortages, netted against trial payments received
  • Will automatically calculate whether 3 or 4 trial payments are required based on whether the loan is already in default or in imminent default
  • Recalculates the borrower’s net surplus income based on the new monthly payment and provides a warning message if the borrower still needs to reduce other spending.
  • Recognizes written variances given to Housing Finance Authorities for interest rate reductions
  • and/or term extensions
  • Will perform the calculation for the maximum rate allowed by FHA, and provide the correct modified interest rate – either the max rate allowed or current rate, whichever is lower
  • Lays out the distribution of claim funds (payment application, legal fees and costs, or escrow shortage recovery), and details how any remaining capitalization was calculated

Many hours of programming and reviewing with HUD to assure compliance have gone into this software, and we believe it is, by far, the best product in the industry. We would very much like to show interested servicers a demo of our software to at least compare it to what you are currently using. We think you will be impressed.

Michael Meroney

and

mmeroney@assistanceoptions.com / 616-570-0199 x127