The financial markets in all their forms (banking, mortgage, investment, etc.) find themselves turning on their collective ears trying to deal with the psychological blow of near collapse combined with a new set of rules and regulations tied to Troubled Assets Relief Program (TARP) money that rescued them from their actual or perceived downfall.
Ignoring the philosophical and political implications of significant government intervention in the banking and financial system, banks are faced with practical challenges and opportunities to shore up weak loan portfolios and generate new sources of income through programs funded by TARP money.
As stated in a Federal Reserve Bank (FRB) press release dated March 4, 2009, “The Treasury Department …. has indicated that institutions receiving financial assistance in the future under the Financial Stability Plan established under the Troubled Assets Relief Program will be required to implement loan modification programs in accordance with the Treasury Department’s guidelines.”
These new programs and guidelines in a sense become forced strategic initiatives and opportunities created by government intervention that need to be supported and sustained to comply with the proverbial strings attached. As with all government assistance, there are strings attached that cannot be ignored if you have received TARP money as a financial institution. The more public or visible strings (executive compensation limits) have less operational impact on the organization than the carrots (incentives) and sticks (compliance) associated with programs such as the Home Affordable Modification Program (HMP).
In this entry I will address the incentives (carrots) associated with this new program for servicers, borrowers, and investors. In subsequent entries I will address compliance issues (the stick) that must be adhered to in order to take advantage of the incentives offered. Finally I will look at the role that training and support in all its forms plays in successfully implementing this new “strategic initiative” designed to strengthen the marketplace as a whole, shore up individual bank balance sheets, and provide relief for consumers.
Servicer Incentive Compensation
It is important to understand that no incentives of any kind will be paid if (i) the servicer has not executed the Servicer Participation Agreement, or (ii) the borrower’s monthly mortgage payment ratio starts below 31 percent prior to the implementation of the HMP. Be aware that the calculation and payment of all incentive compensation will be based strictly on the borrower’s verified income.
A servicer will receive compensation of $1,000 for each completed modification under the HMP. In addition, if a borrower was current under the original mortgage loan, a servicer will receive an additional compensation amount of $500.
If a particular borrower’s monthly mortgage payment is reduced through the HMP by six percent or more, a servicer will also receive an annual “pay for success” fee for a period of three years. The fee will be equal to the lesser of: (i) $1,000 ($83.33/month),or (ii) one-half of the reduction in the borrower’s annualized monthly payment. The “pay for success” fee will be payable annually for each of the first three years after the anniversary of the month in which a Trial Period Plan was executed.
Borrower’s Incentive Compensation
To provide an additional incentive for borrowers to keep their modified loan current, borrowers whose monthly mortgage payment is reduced through the HMP by six percent or more and who make timely monthly payments will earn an annual “pay for performance” principal balance reduction payment equal to the lesser of: (i) $1,000 ($83.33/month), or (ii) one-half of the reduction in the borrower’s annualized monthly payment for each month a timely payment is made. A borrower can earn the right to receive a “pay for performance” principal balance reduction payment for payments made during the first five years following execution of the Agreement provided the loan continues to be in good standing as of the date the payment is made.
Investor Payment Reduction Cost Share and Up Front Incentives
If the target monthly mortgage payment ratio is achieved, investors in Non-GSE Mortgages (Non-Government Sponsored Enterprises) are entitled to payment reduction cost share compensation. This compensation equals one-half of the dollar difference between the borrower’s monthly payment under the modification at the target monthly mortgage payment ratio and the lesser of (i) what the borrower’s monthly payment would be at a 38 percent monthly mortgage payment ratio; or (ii) the borrower’s pre-modification monthly payment.
Additionally, investors will receive a one-time incentive of $1,500 for each Agreement executed with a borrower who was current prior to the start of the Trial Period Plan.
For banks and mortgage companies that service thousands and tens of thousands of loans this can become a significant source of income and can reduce risk to the servicing portfolio if it is implemented and supported successfully and in compliance with treasury guidelines. It also becomes a source of risk if the bank is not in compliance with TARP guidelines having received money from the Treasury as part of the bail out. Next time we will look at some of the guidelines that must be followed to receive the identified incentives and to comply with TARP requirements being recipients of TARP money.
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