Modification Dictionary

Amortization:  The paying off of debt in regular installments over a period of time.

Appraisal:  A property valuation issued by a licensed appraiser specifically trained in determining the FMV of property.

AVM Automated Valuation Model used to determine Property Value.

Balloon: An oversized payment due at the end of a amortized loan. In the case of a Principal Forbearance a balloon is the amount of the Principal not included in the amortization.  Another instance of balloon payments in modifications  is when an investor agrees to amortize the new UPB over a period of time greater than the Remaining Term.  This practice of keeping the Remaining Term the same but allowing for extended amortization allows the investor to lower a borrower’s monthly payment yet still allows the investor to recover his principal investment within the original time frame set forth in the original loan docs.  For example, if a borrower has 25 years left on a loan at the time a loan modification is granted and, in order to keep the payment low for the borrower, the investor allowed for a 40 year amortization, any amounts not paid on the principal balance will be due and payable at the end of 25 years.  Many borrowers are scared of this method of modification, however, once it is properly explained most do not mind it all because it is effective at accomplishing the overall goal of lowering the borrower’s monthly payments.

BPO Broker Price Opinion used to determine the FMV  of the property.  A BPO is issued by a licensed real estate agent or broker retained by the lender for the specific purpose of determining a property’s value.

Credit Score: A statistically derived numeric expression of a person’s creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts. A credit score is based on, among other things, a person’s past credit history. It is a number between 300 and 850 – the higher the number, the more creditworthy the person is deemed to be.

Data Collection Date:  The date on which all the data collected by a lender was  used in a loan modification determination.

Escrow: When a borrower pays property taxes and hazard insurance through the lender the total amount of the yearly property taxes and hazard Insurance are divided by 12 and added to the principal and interest payment made by the borrower each month.  This monthly payment is referred to as an Escrow.  These monthly payments are held in an account by the lender and used to pay for the borrower’s property tax and insurance payments as they come due.

Escrow Shortage When a lender has not collected enough money from the borrower to pay the property taxes and hazard insurance when due.  The amount that the lender is short is called the escrow shortage.

Exterior BPO:  Broker Price Opinion based solely on the exterior condition of the property.

FMV:  Fair Market Value is the value of the property based on a free market analysis not subject to any subjective conditions.

Gross income:  Pre-tax wages earned by the borrower.

HAMP: Home Affordable Modification Program (HAMP) also called Making Homes Affordable (MHA) and sometimes referred to as The Obama Plan.  HAMP is a government modification program that investors may participate in that provides incentives to both the investors and servicers to make modifications.  The ultimate goal of HAMP is to try and get a borrower’s PITI payment to below 31% of the borrower’s gross income.

Imminent Default The status of the borrower’s default where the borrower is either current or less than two (2) months late at the time that a loan modification application is reviewed by a lender.

Interest Rate Before Modification The rate of return earned by the investor prior to the loan modification request.

Interior BPO Broker Price Opinion based on both exterior and interior factors related to the property.

Investor:  Many loans are not actually owned by the lender that the borrower makes payments to but merely serviced by the lender on behalf of the actual owner of the loan.  Examples of investors are Fannie Mae, Freddie Mac, Bank of New York Mellon, ING, Ginnie Mae, etc.

Monthly Hazard Insurance:  The monthly cost of a borrower’s yearly hazard insurance represented by dividing the annual premium by 12 months.

Monthly Mortgage Insurance Payment:  The monthly cost of the private mortgage insurance premium.

Monthly Real Estate Taxes The monthly cost of a borrower’s yearly property tax obligations represented by dividing the total amount due per year by 12 months.

Months Past Due The number of months that the borrower is behind on their regularly scheduled monthly payments.

Mortgage Insurance Coverage Percent:  The percentage of private mortgage insurance on a borrower’s loan.

Net Income The amount of money that a borrower actually takes home each pay period after all taxes and deductions are taken out.

NOD/Notice of Default A notification given to a borrower stating that the borrower has not made their payments by the predetermined deadline, or is otherwise in default on the mortgage contract.  In California, the Notice of Default is the beginning of the foreclosure process.  Once an NOD is issued the lender has to wait 90 days before issuing a Notice of Trustee Sale.

NPV:  Net Present Value.  is an extremely important test for any loan modification program.  In general, there are 3 major tests that every lender uses when attempting to determine whether or not a homeowner qualifies for a loan modification.  The first test is the Hardship Test.  Homeowners must have a satisfactory Hardship before a lender will agree to review a loan modification file.  In other words, they are willing to entertain a loan modification if a homeowner has a legitimate reason for needing one.  Lenders are in business to make money and they are not going to adjust or modify the terms of an existing agreement without a valid reason.  The second test lenders use when analyzing a loan modification application can be called the Affordability Test.  The Affordability Test is when a lender takes the financial information supplied by the homeowner and analyzes it against the investor guidelines.  The resulting payment and necessary interest rate; amortization term and principal deferral/reduction (if needed) needed in order to make the proposed payment are then input into the third test, the Net Present Value Test.  NPV is basically a computer program that takes into consideration all of the information related to the loan modification request file and determines for the investor by which avenue the investor will lose less money.  In other words, if, after taking everything into consideration, the NPV Test determines that the investor will lose less money by modifying the loan rather than foreclosing, the homeowner will PASS NPV.  However, if the computer determines that the investor will lose less money by foreclosing, the homeowner will FAIL NPV.  The factors used in the NPV Test are numerous, and include, but are not limited to, the following:  current payment, new projected payment, old interest rate, new interest rate, monthly escrow of property taxes, monthly escrow for hazard insurance, unpaid principal balance, current market value of property, current remaining amortization term, new proposed amortization term, amount (if needed) of principal deferment or reduction, etc.  NPV has the final say on whether or not a homeowner will obtain a loan modification.

Property Value:  The current market value of your property.

NPV Date The date that the NPV test was conducted on the borrower’s loan modification application.

Principal The amount of money loaned to a borrower by a lender.

Principal Forbearance/Deferment The amount of principal an investor is willing to place at the end of the amortization term that will eventually be paid as a balloon payment.  The borrower is not charged interest and does not make payments on this amount until the term of the loan has expired.

Principal Reduction/Forgiveness:  The amount of principal that an investor is willing to forgive/reduce under a loan modification agreement.

Product Before Modification:  The type of loan the borrower held prior to applying for a loan modification.  The type of loan could be a fixed rate, adjustable, step rate, negative amortization, etc.

Property Valuation Date:  The date the Property Value was determined.

Remaining Term:  The amount of time, usually expressed in the number of months, that the borrower has left on the borrower’s existing loan.  In other words the amount of time needed for the borrower to pay off the loan.

Underwriting Guidelines:  The rules provided to servicers by investors setting forth the process and methodology for reviewing loan modification applications.  The Underwriting Guidelines set forth what the investor is willing and not willing to do when considering modification methods.

Unpaid Principal Balance of the Proposed Modification The new proposed balance of a borrower’s loan being considered for a loan modification.  The new proposed balance might be different than the UPB because it might include amounts owed by the borrower for missed payments and unpaid expenses.

UPB:  Unpaid Principal Balance.  The amount of money owed by a borrower prior to  being late.

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