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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 44 December 2023 F E A T U R E Within bankruptcy, it is unclear how the Supplemental Partial Claim will be accounted for by the trustee or mortgagor. There is also a question of extension of new credit instead of a modification of existing credit for the bankruptcy court. The Issue of Increased Payment in Today's High-Rate, High-Value Environment C reated in the wake of the financial crisis, the Home Affordable Modifica- tion Program (HAMP) was a revolutionary change to save the mortgage industry from losing all of its value through distressed sales. These mortgage mod- ifications were based on rate and term changes to re-amortize the arrears with the principal. This led to "proprietary" modifications for nongovernment/agency mortgages and streamlined modifica- tions for Fannie Mae and Freddie Mac mortgages. These modifications had several characteristics in common. The new rate environment was lower than when the mortgages were originated, with modi- fications as low as 2%. Furthermore, the arrears were re-amortized using a reduced interest rate and extended terms. The result was a lower payment than before and a current loan balance. Today, the issue stems from the inabil- ity to achieve the lower payment that one would typically see from HAMP in a low- er interest environment. The increase in interest rates to over 7%, when mortgage rates are in the 3% range, makes it almost impossible to modify a loan to a decreased payment. It would be necessary to extend the term considerably. The supplemental partial claim suggests extending the term to 480 months, or 40 years. Unfortunately, that only addresses a small percentage of interest rate change and certainly not the 3-4% rate change over the past three years. As a result, FHFA and Freddie have been working on the Supplemental Partial Claim to address the loan resolution with a lower payment. The high-rate, high-value mortgage environment is a two-edged sword. Many say those who have defaulted on their loans can sell at the elevated rate but are stopped because they cannot afford to rent after selling. We see this issue in the Bankruptcy Mortgage Loss Mitigation Program. People who are back to work and can afford to pay more are denied a modification because the payment went up a few dollars. Most people expect to pay something more when they get be- hind and need to catch up. In bankruptcy, you pay the regular payment plus one-six- tieth (1/60) of the arrears each month—or in other words, an increase for a normal repay plan. For some reason, the mortgage indus- try has decided that all workouts must be at a reduced payment, ignoring the details of it making sense. It certainly is easier to explain and get borrower support when you lower the payment, that holds doubly true when rates are artificially low. But with rates up and workouts down, values will start to drop. Once that happens, the 30% UPB maximum partial claim starts to become a 40-50% partial claim. At what point does it become an unrealized loss when marked to market? Conclusion T he Supplemental Partial Claim can be beneficial in certain circumstances and will address a number of defaulted loans. It will not cover the spectrum like HAMP, and in the event of a major hous- ing reset, it will not stop the downward slide in market value. However, allowing some workouts with Supplemental Partial Claims is good for the market and will help with losses. There are also advan- tages to working out a few loans with increased payments. Together, they form the first review for defaulted loans. The strength in working out loans is based in the underlying knowledge of the basics of the loan and in evaluating the ability to re- pay. To repeat, it is based on re-underwrit- ing the loan and its affordability, not just saying the payment must be reduced. We have seen too many borrowers with new jobs and increased pay rejected because the payment did not go down far enough. We need to keep that in focus as we deter- mine possible workout solutions. The high-rate, high-value mortgage environment is a two-edged sword. Many say those who have defaulted on their loans can sell at the elevated rate but are stopped because they cannot afford to rent after selling.