GSE Flex Modification

The GSE Flex Modification program will replace the GSE Standard and Streamlined Modification programs no later than October 2017. Fannie and Freddie servicers may begin to evaluate for Flex Modifications in March 2017.

Some eligibility features include:

• The home does not need to be borrower-occupied, but cannot be abandoned. If the borrower is 60 days or less behind on payments, then the home needs to be a primary residence.
• The loan must have been originated at least 12 months prior to the evaluation date for the loan modification.
• The loan must not have been modified three or more times previously.
• The borrower must not have failed a Flex Modification Trial Period Plan within 12 months of being evaluated for eligibility for another Flex Modification.
• The loan must not have received a Flex Modification and become 60 days or more delinquent within 12 months of the modification effective date without being reinstated.

A Flex Modification consists of five steps:  

1. Capitalizing allowable arrears
2. Setting a fixed interest rate:
   1. If the loan has a fixed interest rate, then the interest rate will not change if the MTMLTV is less than 80%; if the MTMLTV is more than 80%, then the interest rate will be set to the lesser of the contract rate and the GSE’s standard modification rate.   
   2. If the loan has a step rate or adjustable rate, then the outcome depends on whether or not the current rate is at the final rate or the cap rate. Loans that have reached the final or cap rate are treated in a manner identical to fixed rate loans. Loans that have not reached the final or cap rate have the interest rate set to the lesser of the GSE’s standard modification rate and the final or cap rate.
   3. To set the interest rate, both Fannie Mae and Freddie Mac both use in-house rates that are available online (see links:  Fannie and Freddie).
3. Extending the term of the loan to 480 months from the modification date.
4. Forbearing principal: in the first evaluation for principal forbearance, the Flex Modification Waterfall forbears the lesser of (1) the amount necessary to create an amortizing loan to value ratio of 100%, and (2) 30% of the capitalized unpaid principal balance.
5. Testing for further principal forbearance:
   1. For loans that were more than 90 days delinquent at the time of the modification application, the Flex Modification Waterfall determines how much forbearance is necessary to create a 20% reduction in the monthly principal and interest payment. The waterfall then forbears the lesser of (1) the amount of forbearance to create a 20% reduction in principal and interest payment, (2) the amount required to create an amortizing loan to value ratio of 80% and (3) 30% of unpaid principal balance.
   2. For loans that were less than 90 days delinquent at the time of the modification application, the Flex Modification Waterfall determines the amount of forbearance needed to create a 40% housing expense to income ratio. The waterfall then forbears the lesser of (1) the greater of: (a) the amount of forbearance needed to create a 40% housing expense to income ratio, and (b) the amount of forbearance to create a 20% reduction in principal and interest payment, (2) the amount required to create an amortizing loan to value ratio of 80% and (3) 30% of unpaid principal balance.

Regardless of the payment reduction amount and the housing expense to income ratio, the borrower will still be eligible as long as the modification results in a payment less than or equal to the pre-modification payment.

Tip
To save time, plug in the numbers using MFY’s Flex Modification Waterfall Worksheet (see Relevant Resources) and keep a copy of the worksheet in case the servicer disputes the numbers.