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RHS/RD Implements HAMP Program for Guaranteed Borrowers
On August 26, 2010, the Rural Housing Service (RHS), whose programs are administered by the Rural Development (RD) Division of the Department of Agriculture, announced a new program to help guaranteed loan borrowers who have defaulted on their loans, or who are facing imminent default, avoid foreclosure. Under the program, lenders are authorized to modify the loan by reducing the mortgage interest rate to a rate that is at or below the maximum RHS allowable interest rate and to extend the loan term to 40 years from the time of loan modification. If the modification does not reduce the borrower’s payments to 31% of income, RHS may make a mortgage recovery advance to the borrower. Such an advance may not exceed the sum of 12 months of principal, interest, taxes and insurance payments, legal fees and foreclosure costs related to the cancelled foreclosure action, and a principal reduction, which may not exceed 30% of the principal balance of the loan as of the date of default. Moreover, the amount of the total recovery advance may not exceed the amount necessary to bring the borrower’s mortgage payment to less than 31% of income. The mortgage advance is interest free and is due on the due date of the guaranteed note held by the lender unless the guaranteed loan is paid off early or the property securing the note is transferred, in which case the note is due upon the date of payment or transfer.
On September 17, 2010, the Department of Treasury announced an incentive program to promote participation in the RHS guaranteed loan modification program. Lenders or servicers are eligible for incentive compensation if they reduce the borrower’s monthly mortgage payment by six percent or more. The compensation that they will receive is the lesser of $1,000 per year or one-half of the reduction in the borrower’s annualized monthly payments. The payment may be made for up to three years as long as the loan is in good standing and has not been paid in full at the time the incentive is paid.
Borrowers whose monthly mortgage payment is reduced by six percent or more and who make timely mortgage payments will earn an annual principal reduction payment equal to the lesser of $1,000 or one-half the reduction in the borrower’s annualized monthly payment for each month a timely payment is made. The borrower’s incentive payment will accrue monthly but will be paid annually for up to five years provided the loan is in good standing and has not been paid in full at the time the incentive is paid. Incentive payments made to borrowers are excluded from gross income for income tax purposes.
The October issue of the Housing Law Bulletin will have more detailed information about the new program and the incentives offered by the Department of Treasury.