Washington- FDIC today has responded to public need with it’s comprehensive program to assist at-risk homeowners. We have compiled the following information for our customers to see what the new standard from our nation’s largest bank regulator entails. All new loan modifications will either directly or indirectly be influenced by this new program. Below is the information FDIC has produced for it’s banks. It is information bank customers should know it they are interested in modifying their loans.

Here is the actual government communication:

Philosophy
I. Philosophy
• Keep borrowers in their homes when the borrower is willing and has the capacity to make an
affordable mortgage payment.
• Provide borrowers with immediate payment relief and stable long term mortgage payments.
• Modification must always result in a positive NPV outcome for the investor, i.e., the cost of the
modification must be less than the estimated cost of foreclosure.
Determine what type of modification is most appropriate
The FDIC Loan Modification Program targets distressed borrowers who are currently having
financial difficulty with the scheduled mortgage payment, but have the capacity to make a loan
payment. It uses a streamlined approach to identify modification candidates and to provide a
customized modification offer when the modification minimizes loss. If a borrower does not
qualify for a streamlined modification, an individual loan review may result in a personalized
modification that still maximizes value.

This approach is just one of many loss mitigation strategies that a prudent servicer must consider
when dealing with a distressed borrower. Refinance is an alternative as well as traditional loss
mitigation practices such as repayment plans. However, many borrowers are unable to refinance
their loans in the current economic environment and repayment plans typically do not provide
long- term solutions to borrowers’ financial problems. In cases where the borrower cannot afford
the lowest payment allowed by the NPV Tool, a short sale or deed-in-lieu of foreclosure with
“cash for keys” assistance are preferred methods to avoid foreclosure.

Immediate relief and long term stability
Loan modification will result in a “life of loan” solution by capping interest rates at current market
rates, requiring immediate principal amortization, and setting an initial interest rate subsidy to
provide immediate relief. A predictable payment schedule after the fifth year will step the initial
interest rate up to the market rate. Modification replaces adjustable-rate and interest-only
mortgages with stable rate loans, and eliminates the possibility of future negative amortization.

Minimizes Losses on Distressed Mortgages
Once the borrower-specific modification is determined, the servicer must perform a valuation test
between the cost of modification and the estimated cost of foreclosure to ensure modification
results in a lower cost to the investor. By providing a transparent valuation comparing the cost of
the modification and the estimated cost of foreclosure, the servicer fulfills the terms of most
servicing agreements.

II. Program

Key objectives
• Systematic determination of borrower specific modification terms using a standardized NPV test
to minimize losses on distressed mortgages.
• Target distressed borrowers. Modifications may be available for loans that are at least 60 days
delinquent or where default is reasonably foreseeable.1
• Implement modification program that can be used across a broad range of investors.

Step 1: Determine Eligibility
Servicers typically manage loans for other investors, including Government Sponsored Enterprises (GSEs), private investors owning securities collateralized by the mortgages, and whole loan investors. Each investor type has different standards for approving loan modification. The GSEs have authorized loss mitigation programs for seriously delinquent loans, however some loans owned by the GSEs may be modified based on eligibility standards similar to those used for private investors. The GSEs recently announced the adoption of more streamlined modification plans that apply many of the features of the FDIC Loan Modification Program model.
Loans serviced for private investors are governed by servicing contracts which often contain a
standard clause allowing the servicer to modify seriously delinquent or defaulted mortgages, or
mortgages where default is “reasonably foreseeable”.2 This even holds true for complex private
label securitizations with many tranches and investors.

Loans subject to these contracts are typically eligible for modification given:
• The loan is at least 60 days delinquent where the loan is considered one day delinquent on the
day following the next payment due date.
• Foreclosure sale is not imminent and the borrower is currently not in bankruptcy, or has not been discharged from Chapter 7 bankruptcy since the loan was originated.
• The loan was not originated as a second home or an investment property.
Loans sold whole to individual investors often require a case-by-case approach. These loans are
subject to both servicing and securitization contracts. The Appendix contains guidelines on how to evaluate whole loan servicing agreements.

Step 2: Calculate an “Affordable” Payment
In order to calculate an affordable payment, recent financial income information must be available for the borrower. Efforts to contact the borrower via special mailings, calling campaigns, email, and other outreach methods are used.
The FDIC Loan Modification Program calculates the modified principal, interest, taxes, and insurance (PITI) payment per a borrower specific HTI ratio of no more than 38 percent. Housing expenses on a PITI basis may include:
• The modified principal and interest payment for the subject loan, as applicable,
• Real estate taxes,
• Property hazard, flood, and mortgage insurance premiums,
• Leasehold estate payments, and
• Homeowners’ association (HOA) dues.
Industry standards set forth by certain FHA lending programs indicate a mortgage payment based on a 31 percent to 38 percent HTI ratio is affordable. The FDIC Loan Modification Program follows these origination standards as illustrated on the next page.

Example of HTI ratio calculation
Monthly Gross Income ___
$3,618 – Borrower 1
$2,756 – Borrower 2
$6,374 – Total Monthly Gross Income
PITI Payment Determination
$6,374 x 38% = $2,422
Monthly Housing Expense ______________________
$2,422 – Maximum Total Monthly Housing Expense
$ – 364 – Taxes, hazard, flood, and mortgage insurance, etc.
$ – 85 – HOA dues
$1,973 – Maximum modified principal and interest payment
Total HTI Ratio_______
$2,422 / $6,374 = 38%

If the initial modification calculation at 38 percent does not decrease the borrower’s payment by 10 percent or more, the HTI ratio is lowered to 35 percent and then lowered to 31 percent to achieve the 10 percent savings. In cases where a 10 percent reduction can not be achieved, the 31 percent HTI ratio is used for affordability.

Step 3: Determine the “Total Debt” by capitalizing certain costs in the unpaid principal balance
• Delinquent interest, taxes, and insurance escrows and
• Third party fees such as foreclosure attorney or trustee fees and property preservation costs.

Step 4: Solve for “Affordable Payment” through a three step waterfall process
1) Interest Rate Reduction: Cap the life-of-loan interest rate at the Freddie Mac Weekly Survey rate as of the week of the modification offer, then reduce the interest rate incrementally to as low as 3 percent to achieve the “affordable” payment per the adjusted unpaid principal balance (UPB) and remaining amortization term. An interest rate floor of 3 percent will enable the borrower to maintain approximately a 38 percent HTI ratio throughout the life of the loan, assuming modest borrower earnings growth commensurate with the inflation rate. The reduced rate remains in effect for 5 years. After this period, the interest rate increases by not more than one percent annually until the Freddie Mac Weekly Survey rate is achieved. If the “affordable” modified PITI payment amount has not been achieved, proceed to the next step.
2) Extend Amortization Term: For loans with an original term of 30 years, re-amortize the adjusted UPB at the reduced interest rate (3 percent floor) over an extended amortization term of 40 years from the original first payment date. For securitized loans, the amortization will be extended to 40 years from the original first payment date, but the maturity date will not change, resulting in a balloon payment. For loans with an original term of less than 30 years, extend the amortization period for only 10 years. If the modified PITI payment amount has not been achieved, proceed to the next step.
3) Partial Principal Forbearance: Reduce the adjusted UPB for amortization purposes and amortize over a 40 year period at the reduced interest rate (3 percent floor). This process splits the debt into an interest-bearing, amortizing portion and a zero percent, zero payment portion of the loan. The repayment of the “postponed” principal will be due when the loan is paid in full. For loans within securitizations, this principal forbearance should be passed as a write-off of principal to the trust, with any future collections at time of pay-off submitted to the trust as a recovery.

Step 5: Apply the NPV Tool
Run the modified loans through the NPV Tool in order to ensure that the modified payment creates a positive economic scenario for the investor.

Step 6: Market via systematic “bulk” approach
A bulk modification model processes large segments of delinquent loans with recent borrower financial information on file. The model performs automated loan-level underwriting based on the existing loan terms and recent financial information obtained from the customer, which is verified prior to completing the modification. The bulk modification process establishes modification eligibility and modification terms as detailed in the previous steps, then uses a traditional marketing approach to provide the borrower with an easy to follow, pre-populated modification offer. The marketing materials also instruct the borrower to either contact the servicer with questions or just send in the signed documents and the first payment to complete the modification offer. The modification offer explicitly states the amount of the borrower’s new monthly principal and interest payment as follows:

Reduce your monthly payment of principal and
interest to $x,xxx.xx and bring your loan current!

While some borrowers may appear to have the capacity to pay, their ability to do so may be inhibited by
other debt obligations. Bankers and servicers should consider establishing relationships with community
groups willing to contact and provide credit counseling to these borrowers. Entering into compensation
agreements with local non-profit organizations with HUD-approved counselors also may assist in
contacting borrowers, obtaining the requisite financial information, and completing the modification.
Compensation should be based on a borrower contact and modification completion. For example,
IndyMac Federal Bank pays participating community groups $150 for borrower contact and counseling
services, and an additional $350 once the loan modification is completed. A copy of a counseling
compensation agreement is provided on the FDIC website.

NPV Test

60+ DQ Loans
60+ DQ Loans
Modification:
NPV Mod
Modification:
NPV Mod
Default:
(1-Cure Rate) x
Expected REO
Disposition Value
Default:
(1-Cure Rate) x
Expected REO
Disposition Value
Payoff: Cure Rate x Par
Payoff: Cure Rate x Par
Standard FC:
REO/NPV
Standard FC:
REO/NPV
Successful Mod:
(1 – Redefault Rate) x NPV
of Discounted Payments
(including Forbearance, if
applicable)
Successful Mod:
(1 – Redefault Rate) x NPV
of Discounted Payments
(including Forbearance, if
applicable)
Re-default:
Redefault Rate x Expected
REO Disposition Value
(including additional interest
advances)
Re-default:
Redefault Rate x Expected
REO Disposition Value
(including additional interest
advances)
Compare loss estimate for Mod vs. Standard Foreclosure
Borrower pays off or defaults Borrower can handle mod payments or re-defaults

NPV Test
Once the modification terms are established, the impact of the modification concessions to the investor are
compared to the estimated loss given foreclosure. If the modification is less costly than foreclosure, it is
approved. This test ensures that modifications mitigate the loss for investors. This diagram illustrates the NPV
test:

???? Cure rate is based on recent industry or servicer data. It is based on a combination of
delinquency status, combined loan-to-value (LTV), FICO and original income documentation. A
12 month cure period is used.
???? Expected REO Disposition Value:
???? Liquidation Value:
???? Interest Advances/Accruals includes delinquent interest advanced (securitized/sold
loans) or accrued (owned loans).
???? Corporate Advances include non-escrow advances already made on the borrowers
behalf.
???? Escrow Advances already made on the borrowers behalf.
???? Future Cost to Collect is an estimate of future interest accruals, T&I payments, and FC
expenses.
???? MI Recovery (if applicable) is estimated based on MI coverage percentage adjusted for
possible MI claim denial.
Loan Value = Cure Rate * Par +
(1 – Cure Rate) * Expected REO Disposition Value
???? Forecasted Depreciation is based on an industry standard such as Moody’s
Economy.com metropolitan statistical area (MSA) level data. Depreciation timeline is
one year in the future or case-specific.
???? Current Property Value is determined by an interior appraisal, Broker Price Opinion
(BPO), Automated Valuation Model (AVM), or original appraisal value adjusted by
MSA level home price change to date. This value is then adjusted by forecasted MSA
level home price changes.
???? REO Stigma Discount reflects differences in experienced liquidation values versus
estimated property values.
???? Selling Costs include 10 percent for broker commission, potential repairs and
maintenance costs.
Forecasted Liquidation Value of property at REO =
Current Property Value * (1 – Forecasted Depreciation – “REO Stigma” Discount –
Selling Costs)

???? The formula used to estimate the cost of foreclosure is:
Description of the formula terms:
Liquidation value – Interest Adv/Accrual – Corporate Advances – Escrow
Advances – Future Cost to Collect + MI Recovery
FDIC Loan Modification Program Page 13
????Re-default rate is estimated per historical re-default experience for other modification programs and
a program specific projection.
????NPV of discounted payments is the net present value of the adjusted UPB (cash outflow) and the
modified payment stream (cash inflow) discounted at the Freddie Mac Weekly Survey rate as of the
week of the modification offer. An NPV example is provided in the Appendix.
????REO disposition value (see above).
????Additional costs include 9 additional months of accrued interest, taxes, and insurance payments
plus additional forecasted home price depreciation, as applicable.3
3 Currently, the Case-Shiller forecast provided by Moody’s Economy.com projects that home prices
will reach their trough in about one year from today, which also is equivalent to the base case
timetable for REO disposition in the NPV Tool. This means that delaying foreclosure will not lead to
further home price declines at REO disposition for most geographical areas.
Loan Value = (1 – Redefault Rate) x NPV of Discounted Payments + Redefault Rate x (REO
Disposition Value + Additional Accrued Costs)

???? The formula used to estimate the cost of modification is:
Description of the formula terms:

In Addition to Updated Liquidation Value, a Servicer must Formally Backtest Servicer and/or Portfolio Specific Assumptions and Regularly Update Assumptions Based on Industry Standards
1. Forecasted Depreciation (industry standard)
• Updated monthly to incorporate latest home price data.
2. Cure Rates (servicer and/or portfolio specific)
• Updated quarterly and based on 12 month history (to adjust for current credit environment).
Suggested cure factors include the current delinquency status of the loan, combined LTV,
borrower FICO, and original income documentation.
3. REO Stigma (servicer and/or portfolio specific)
• Updated monthly to incorporate latest experience by region.
4. Re-default Rate (servicer and/or portfolio specific)
• Based on past re-default experience for other modification programs and a program specific
projection. The servicer should carefully monitor and incorporate the program’s actual
re-default rate.
5. Discount Rate (both industry standard and servicer and/or portfolio specific)
• Freddie Mac Weekly Survey rate as of the week of the modification offer is used to discount the
modified payment cashflow. A required return methodology is used to discount the estimated
foreclosure value.
6. Prepayment rate (servicer and/or portfolio specific)
• The model assumes a voluntary prepayment rate of zero.

III. Process
Key Objectives
• Leverage large scale modification offer/delivery process.
• Give collections and loss mitigation staff the ability to offer tailored solutions based on borrower
need, willingness and ability to pay, balanced with investor guidelines and a formal NPV test.
• Streamline paperwork and income verification process.
• Establish a protocol for community group referrals.
Once eligibility is established, the loan modification offer is based on the borrowers income
information. For borrowers with recent income information on file, a firm offer may be extended,
contingent on income verification. However, verified income may be different from that on file and
tolerance for some variation should be established. For borrowers with no recent income information on file, a conditional offer may be extended, contingent on income verification. This type of offer should use a more rigorous verification process requiring both tax returns and recent pay stub information.

For both firm and conditional modification offers, the key to program success is a scalable offer
delivery process, which immediately provides the borrower with modification terms and instructions.

Offer/Delivery process – Two-Tiered Approach:
1. Bulk Approach: Loans processed through the bulk modification process are sent a pre-approved offer with pre-populated modification documents, income verification forms and informational material. This modification package provides the borrower with a custom modification offer and instructions to complete the modification with a quick one-touch close. Modification paperwork is handled via an automated process. The modification agreement is pre-populated and the loans are pre-qualified; as a result, the operations process is simplified to collecting the modification agreements, verifying income documentation, and completing system updates to ensure the borrower receives modified terms on the next statement.
2. Point of Sale Approach: Use of traditional inbound and outbound customer service and collection staff should allow borrowers to obtain fast and customized solutions. Loss mitigation staff require access to a modification tool which allows the collector to discuss all viable workout options before proceeding with an offer. For example, a delinquent borrower calls collections and is unable to afford the current mortgage payment. The collector enters the borrower’s information into a desktop tool which immediately provides the collector with possible workout solutions such as modification, short sale, and cash for keys programs. If the modification is NPV positive, the collector informs the borrower of modification eligibility, collects the first modified payment, updates the system, and either generates the modification documents from the system, or includes borrower in the next bulk mailing.

One of the Benefits: Saying “Yes” to the borrower and providing the reduced modified payment
amount motivates the borrower to finish submitting the final documentation needed to complete the modification. Once the borrower verbally accepts the modified payment, the collector initiates a 60-day payment plan at the new amount and takes the paperwork off the foreclosure path. When the documents are received and income is verified, modification changes are processed permanently in the system.

Community group referrals should be prioritized through a dedicated hotline and email address.
Groups with a relationship with the servicer should be trained on the specific information required to complete the modification. This provides another venue to streamline the paperwork processing.

Income Verification
Income verification minimizes re-default and ensures the affordability standard is uniformly implemented. The gross monthly income for all borrowers who have signed the mortgage note must be supported by either last years tax returns or recent pay stubs. A dedicated underwriting group reconciles verbal financial information on file to documented income.

Conclusion
It is very clear that FDIC has put a lot of thought into this program. It is important to know they wish for their member banks to modify as many loans as possible. It is also important to note that all modifications must fit “in the box”. If a loan doesn’t fit, they give some latitude to customize, but very little. The goal is to decrease the “thinking” and increase the standardization so a much greater volume can be produced. Make sure that you keep these thoughts in mind when compiling your loan modification package.