The HOPE NOW Alliance/American Securitization Forum (ASF) Plan to Freeze Certain Mortgage Interest Rates

The HOPE NOW Alliance/American Securitization
Forum (ASF) Plan to Freeze Certain
Mortgage Interest Rates
Updated June 18, 2008
David H. Carpenter
Legislative Attorney
American Law Division
Edward Vincent Murphy
Analyst in Financial Economics
Government and Finance Division

The HOPE NOW Alliance/American Securitization
Forum (ASF) Plan to Freeze Certain
Mortgage Interest Rates
Summary
In response to the downturn in the U.S. mortgage market, the Bush
Administration helped broker an alliance of mortgage lenders, servicers, counselors,
and investors called the HOPE NOW Alliance, whose stated goals are to “maximize
outreach efforts to homeowners in distress to help them stay in their homes” and to
“create a unified, coordinated plan to reach and help as many homeowners as
possible.” One aspect of the alliance is the Statement of Principles,
Recommendations and Guidelines for a Streamlined Foreclosure and Loss Avoidance
Framework for Securitized Subprime Adjustable Rate Mortgage Loans (the
Framework or ASF Plan), as proposed by the American Securitization Forum (ASF).
Pursuant to the Framework, borrowers who meet certain requirements qualify
for “fast track” loan modification, which may include an interest rate freeze at the
rate prior to reset that, in most cases, lasts for five years. Because this type of
modification is a deviation from the norm, servicers willing to perform loan workouts
in accordance with the Framework’s guidelines could worry that they would open
themselves up to tax, accounting, and contract liability from secondary market
investors and federal regulators of tax-exempt trusts. This potential liability could
deter servicers from engaging in loss mitigation, even those measures outlined in the
Framework.
The Internal Revenue Service issued a revenue procedure (Rev. Proc 2008-28)
on May 16, 2008 to clarify certain tax issues relating to modification of securitized
mortgage loans. The IRS said that it would not challenge the tax status of the trusts
that hold securitized loans, nor would the IRS assert that anticipatory loan
modifications create a tax liability on prohibited transactions, if: (1) the mortgage is
for a single-family (1-4 unit) dwelling; (2) the dwelling is owner-occupied; (3)
overdue mortgages make up less than 10% of the trust’s assets at start-up; (4) there
is reasonable belief that the original loan will result in foreclosure; (5) the loan
modification is less favorable to the holder of the loan than the original loan; and (6)
there is reasonable belief that the loan modification reduces the risk of foreclosure.
The data show that loan modifications and formal repayment plans have been
increasing steadily in each successive quarter since the issuance of the Framework.
However, it is difficult to identify which of these modifications were made pursuant
to the ASF Plan and which occurred through alternative channels. The Framework
only applies to certain mortgages that are current, which makes it distinct from
Project Lifeline, a plan announced on February 12, 2008, for mortgages that are in
serious default.
On June 17, the HOPE NOW servicers announced common measures to
expedite resolution of short sales and second mortgages, which can require third-
party approval.

Contents
In troduction ......................................................1
Features of the ASF Plan............................................1
Potential for Servicer Liability........................................3
Number of Loan Modifications.......................................5
List of Tables
Table 1. Quarterly Loss Mitigation Actions, 2007........................7

The HOPE NOW Alliance/American
Securitization Forum (ASF) Plan to Freeze
Certain Mortgage Interest Rates
Introduction
In response to the downturn in the U.S. mortgage market, the Bush
Administration helped broker an alliance of mortgage lenders, servicers, counselors,
and investors, called the HOPE NOW Alliance,¹ whose stated goals are to “maximize
outreach efforts to homeowners in distress to help them stay in their homes” and to
“create a unified, coordinated plan to reach and help as many homeowners as
possible.”² One aspect of the alliance is the Statement of Principles,
Recommendations and Guidelines for a Streamlined Foreclosure and Loss Avoidance
Framework for Securitized Subprime Adjustable Rate Mortgage Loans (the
Framework or the ASF Plan).³ The Framework was proposed by the American
Securitization Forum, a professional forum for many organizations that participate
in the securitization market and a member of the HOPE NOW Alliance.
This report first examines the details of the ASF Plan and then discusses the
potential liability concerns that may arise for servicers who implement modifications
under the Plan. Finally, the effectiveness of the Framework is analyzed based on the
loan workout data provided by the HOPE NOW Alliance.
Features of the ASF Plan
The principles provided in the Framework are voluntary. The Framework’s
stated “overall purpose” is to
provide further guidance for servicers to streamline borrower evaluation
procedures and to facilitate the effective use of all forms of foreclosure and loss
prevention efforts, including refinancings, forbearances, workout plans, loan⁴

modifications, deeds-in-lieu and short sales or short payoffs.
¹ For more information about the HOPE NOW Alliance, see the program’s Web page,
available at [http://www.hopenow.com/].
² Alliance Statement, HOPE NOW Alliance, available at [http://www.fsround.org/media/
pdfs/AllianceStatement.pdf].
³ Available at [http://www.americansecuritization.com/uploadedFiles/FinalASFStatement
onStreamlinedServicingProcedures.pdf]. Hereinafter referred to as “Framework.”
⁴ Id. at 2.

The voluntary Framework structure may be applied to mortgages with the
following characteristics: (1) subprime, (2) first-lien mortgages that (3) were
originated in the one-and-one-half year period between January 1, 2005, and July 31,
2007, with (4) adjustable interest rates that have an introductory fixed-rate period of
less than 36 months, where (5) the first interest rate resets are scheduled to occur
between January 1, 2008, and July 31, 2010, and that (6) have been securitized on the
secondary market.⁵ It should be noted that the Framework does not apply to interest-
only mortgages simply because payments (as opposed to interest rates) increase
within the specified time period. Nor does it apply to prime mortgages or Alt-A
m o r t ga ge s .⁶
Servicers of mortgages that meet all six of the above requirements may separate
borrowers of these mortgages into one of three “segments.” Segment 1 is for
borrowers with loans that are current⁷ and that qualify to be refinanced into an
available FHA (Federal Housing Administration), FHA Secure, or private mortgage
product. Servicers are encouraged to help borrowers of mortgages falling into this
category to refinance if the borrowers are unable to afford the mortgage after reset,
or if they are unwilling to pay for the reset.⁸
Segment 2 is for borrowers with mortgages that meet the six requirements above
but that are not likely to qualify for refinancing, and where four additional
requirements are met: (a) borrowers must be current⁹ with their mortgage payments;
(b) borrowers must reside in the residences securing the mortgage; (c) borrowers
must meet the “FICO test,” i.e., have credit scores below 660 and less than 10%
higher than their scores at the time of origination;¹⁰ and (d) borrowers’ mortgage
payments would have to increase by more than 10% after the scheduled reset.
Borrowers who meet all of the requirements of Segment 2 qualify for “fast track”
loan modification, which may include an interest rate freeze at the rate prior to reset
that, in most cases, lasts for five years. This fast track rate freeze is designed to give

⁵ Id. at 4.
⁶ Alt-A refers to mortgages for borrowers with good credit but some other indicator of risk,
such as lack of income documentation. Prime and Alt-A mortgages account for a
considerable number of foreclosures in the United States. According to CRS calculations
of the Mortgage Bankers Association National Delinquency Survey, approximately 40% of
the foreclosures that took place during the third quarter of 2007 were of non-subprime
mortgages.
⁷ “For purposes of this Statement, ‘current’ means the loan must be not more than 30 days
delinquent, and must not have been more than 1 x 60 days delinquent in the last 12 months,
both under the Office of Thrift Supervision (OTS) method. For servicers who determine
delinquency under the Mortgage Banker’s Association (MBA) method, ‘current’ means the
loan must be not more than 60 days delinquent, and must not have been more than 1 x 90
days delinquent in the last 12 months, both under the MBA method.” Framework at 5.
⁸ Id. at 4-6.
⁹ See, supra fn. 7.
¹⁰ If the borrower meets all other requirements except the FICO test, then the servicer may
conduct alternative analysis to determine if the borrower otherwise qualifies for loan
modification. Framework at 6.

borrowers and lenders time to refinance into more affordable loans in order to limit
the number of mortgages going into default and reduce the number of homes for sale
in an already saturated market.¹¹ In part because eligibility for this segment is defined
by readily available financial data, servicers should be able to apply this fast track
rate freeze to borrowers in a more efficient and streamlined fashion than is normally
the case.¹²
The final segment is for all mortgages meeting the six requirements above, but
that do not qualify for either Segment 1 or 2. Servicers may apply a more
individualized analysis of these mortgages to determine the best way to mitigate
losses “in a manner consistent with the applicable servicing standard....”¹³
Servicers of securitized mortgages who do not fall within the scope of the
Framework may perform loan modifications in accordance with the governing
service contracts.
Potential for Servicer Liability
As described above, the Framework provides servicers guidance in identifying
borrowers who are in danger of defaulting on mortgages and in helping them provide
effective refinancing, loan modification, and loss mitigation measures for these
borrowers in ways that likely are in accordance with governing Pooling and Servicing
Agreements (PSAs).
PSAs are contracts that govern the legal relationship between mortgage-backed
securities (MBS) trustees, MBS investors, and servicers of the mortgages comprising¹⁴
these trusts. While not all PSAs are exactly alike, one relevant feature of typical
agreements is the scope of permission for servicers to perform loss mitigation for
borrowers who have yet to miss a mortgage payment. Industry standards issued in the
summer of 2007 stated that servicers could modify loans if default was reasonably
foreseeable, provided that such action increased the net present value (NPV) of the

¹¹ Id. at 6-7. This fast track modification “is non-exclusive and does not preclude a servicer
from using alternate analysis to determine if a borrower is eligible for a loan modification,
as well as the terms of the modification.” Id. at 8.
¹² The Framework’s fast track modification, because it only applies to mortgages that are
current, differs from Project Lifeline, a plan announced on February 12, 2008, that would
impose a 30-day “pause” on foreclosure proceedings for certain mortgages that are
“seriously delinquent,” i.e., mortgage payments that are 90 or more days late. The HOPE
NOW Alliance has not publicly released specific data on the implementation of Project
Lifeline, nor has it provided guidance as to when a pause may be appropriate. One reason
for the lack of specificity regarding this program is that servicers commonly slow the
foreclosure process in situations in which borrowers contact the servicer.
¹³ Framework at 8.
¹⁴ These contracts also may be called Servicing Agreements (SAs). The term “PSA” will be
used in this report to refer to both PSAs and SAs.

mortgage pool.¹⁵ A fast track modification that freezes interest rates could potentially
create gains for MBS trusts, thus increasing their NPV, by minimizing losses as a
result of avoiding foreclosure expenses from the troubled borrowers, but also could
potentially create losses by freezing rates for borrowers capable of paying the higher
reset. Satisfying the NPV test generally would require a comparison of the likely
gains and losses of a particular plan, which historically has been done through
individual loan analysis. Loan-by-loan modification, however, is time consuming and
expensive.
In the summer of 2007, many loan servicers and policymakers recognized that
a large number of upcoming payment resets could potentially overwhelm the
resources of servicers willing to conduct voluntary modifications. These servicers
likely would not have been able to help applicable borrowers in need in a timely
fashion if action only took place on a mortgage-by-mortgage basis. For this reason,
one of the Framework’s goals was to create a structure by which broad swaths of
mortgages could be modified as a group, hence the fast track loan modification plan.
Because broad swath modification is a deviation from the norm, servicers
willing to perform loan workouts in accordance with the Framework’s guidelines
could worry that they would expose themselves to tax, accounting, and contract
liability from secondary market investors and federal regulators of tax-exempt trusts.
For instance, some in the industry might have worried that a trust could cease to
qualify as a tax-exempt REMIC if a significant portion of its qualified mortgages
were modified in accordance with a broad-based plan, rather than on a loan-by-loan
basis. This potential liability could deter servicers from engaging in loss mitigation,
including making use of those measures outlined in the ASF Plan.
In an attempt to allay liability concerns, the HOPE NOW Alliance requested
opinions from the Internal Revenue Service (IRS) on the tax implications of its
particular modification plan, as well as from the Securities and Exchange
Commission (SEC) on the accounting ramifications of modifications of loans held
in securitization trusts. Tax implications depend on the interpretation of the Real
Estate Mortgage Investment Conduit (REMIC) rules, which govern limitations on
tax-exempt passive trusts. Accounting implications depend on the interpretation of
Financial Accounting Standard (FAS) 140, which governs the treatment of asset sales
to passive trusts.
The IRS stated in Revenue Procedure 2007-72 that it would not object to the
Framework by challenging the tax status of affected trusts. This IRS statement
assured participants of the ASF Plan that loan modifications provided in accordance
with the Framework’s specific criteria will not result in loss of the tax status of the
REMICs and other trusts.¹⁶ Rev. Proc 2007-72 was limited to the AFS Plan.

¹⁵ “Statement of Principles, Recommendations and Guidelines for the Modification of
Securitized Subprime Residential Mortgage Loans,” American Securitization Forum, June

2007.

¹⁶ Rev. Proc. 2007-72, Internal Revenue Bulletin: 2007-52, December 26, 2007.

The IRS then issued a separate revenue procedure (Rev. Proc 2008-28) to clarify
more general tax issues relating to modification of securitized mortgage loans.¹⁷ The
IRS identified conditions under which it would not challenge the tax status of the
trusts that hold securitized loans, or assert that anticipatory loan modifications create
a tax liability on prohibited transactions. The conditions enumerated in Rev. Proc
2008-28 are (1) the mortgage is for a single-family (1-4 unit) dwelling; (2) the
dwelling is owner-occupied; (3) overdue mortgages make up less than 10% of the
trust’s assets at start-up; (4) there is reasonable belief that the original loan will result
in foreclosure; (5) the loan modification is less favorable to the holder of the loan
than the original loan; and (6) there is reasonable belief that the loan modification
reduces the risk of foreclosure.
The SEC, which has oversight authority over organizations that coordinate
accounting standards, provided a letter dated January 8, 2008, stating that it would
not object to loan modifications on the basis of FAS 140, but specifically abstained
from passing judgment on possible alternative plans or the rights of third parties such
as investors. Like the IRS’s tax opinion, the SEC’s accounting opinion might need
to be supplemented if significant features of the plan are changed.
Although the SEC has stated that it would not object to the ASF Plan based on
the NPV test, servicers who provide fast track loan modifications may still face from
objections from other parties. Secondary mortgage market investors could still
challenge servicers who provide these modifications on a contract violation theory
if they could show that the gains from avoiding foreclosures have a reasonable
probability of outweighing the losses from freezing payments at lower rates.¹⁸ For
example, if a secondary mortgage market investor could show that only 35% of loans
in a particular trust that were modified under the fast track plan would have resulted
in foreclosure in the absence of some kind of workout plan, while the remaining 65%
of those modified mortgages would not have resulted in foreclosure, then that
investor could argue that these modifications did not increase the NPV of the trust,
and thus the fast track rate freezes were provided in breach of the governing PSA.
Number of Loan Modifications
The HOPE NOW Alliance has accumulated data on the number of loan
modifications and repayment plans that have been initiated by servicers per quarter.
Table 1 presents the quarterly statistics for prime and subprime loss mitigation,
including both loan modification and formal repayment plans. The data show that
loan modifications and formal repayment plans have been increasing steadily in each
successive quarter since the issuance of the Framework. Total workout plans rose
from 398,691 in the third quarter of 2007 to 502,520 in the first quarter of 2008.
Second quarter 2008 data are not yet available but an additional 182,901 mortgages
received workout plans in April 2008. The April results brings the total number of

¹⁷ Rev. Proc. 2008-28, Internal Revenue Bulletin: 2008-28, May 16, 2008.
¹⁸ As previously mentioned, the NPV standard is applicable to the typical PSA. Other
standards may apply, which may affect liability pursuant to a contract violation claim.

borrower workout plans to 1,558,854 compared with 573,133 foreclosure sales.
However, it is difficult to identify how many of these measures were made pursuant
to the ASF Plan and how many were performed through alternative channels.
It is unlikely that many of the loan modifications that occurred during the fourth
quarter of 2007 or earlier came as a result of the ASF Plan because the plan was not
announced until December 7, 2007; the IRS Bulletin was not published until
December 27, 2007; and the SEC letter was not issued until January 2008. In
addition, servicers would have needed time after the Framework’s issuance to
analyze their loan files, identify mortgages meeting the plan’s standards, and set up
policies necessary to implement the plan. Rather, the majority of the modifications
and loss mitigation measures that had taken place up to the end of 2007 were
probably based on individualized analysis and an agreement, similar to the ASF Plan
but that apply exclusively in California, which was instituted prior to the Framework.
It is also unclear how many of the modifications from the first quarter of 2008
were fast track modifications. According to HOPE NOW, 431,171 subprime 2/28 and
3/27 mortgages in the U.S. were scheduled to reset to a variable rate at some point
during the first quarter of 2008.¹⁹ While approximately 203,000 of these loans were
either sold or refinanced, only 14,418 of them were modified, either under the fast
track plan or otherwise adjusted.²⁰ A partial explanation for this relatively low
number of modifications of subprime mortgages with hybrid ARMs may be the
decrease in short term rates, most notably of the London Interbank Offered Rate
(LIBOR), the index to which the majority of these mortgages’ rates are tied. In
December 2007, the six-month LIBOR was around 4.8%. That rate had dropped to
just over 2.8% by April of 2008.²¹ This reduction has resulted in a diminished “reset
shock,” which likely has held many of these mortgage payments below the 10%
increase necessary to qualify for a fast track modification. Additionally, the falling
rates likely kept the payments of many of these subprime mortgages at an affordable
level for borrowers who may not have been able to afford payments that reset to the
higher December 2007 rate.

¹⁹ A 30-year mortgage with a 2 or 3 year introductory period is called a 2/28 and 3/27,
respectively.
²⁰ HOPE NOW has not delineated how many of these 14,418 modifications were fast track
modifications pursuant to the ASF Plan.
²¹ Although, LIBOR is not the reference rate used for all adjustable rate mortgages, it is used
for the majority of mortgages eligible for HOPE NOW according to industry data.

Table 1. Quarterly Loss Mitigation Actions, 2007
Repayment Plans Plus200720072007 2007 ‘08 Q1(up to
Loan ModificationsQ1 Q2 Q3Q404/28)
Prime 130,000 133,000 150,349 173,499 206,495
Subpri m e 184,000 202,000 248,342 301,244 296,025
Tot a l 314,000 335,000 398,691 474,743 502,520
^Source:^HOP^E^NOW^A^lli^aⁿ^c^e. ^T^h^{e n}^u^m^bers^f^r^om^{2007 qu}^art^e^rs^{1 an}^{d 2 are es}^tⁱ^m^at^es^m^a^{de by}
^H^O^P^{E N}^O^W^bas^e^{d on}ⁱⁿ^du^s^t^ry^dat^a^.
The arguably limited necessity of fast track modifications under current
conditions illustrates how the limited scope of the ASF Plan could lead to proposals
to change its features, which could lead to another round of requests for SEC and IRS
letters. In addition, it can be argued that different root causes of mortgage problems
in different parts of the country complicate the creation of a uniform solution. As an
example, subprime loans make up a relatively small share of California’s total loans
as compared to other states, yet alternative mortgages made up a relatively large share
of California’s prime and Alt-A markets. Not only did many of these prime loans
have adjustable rates, but some had introductory interest-only features. The rapid
increase in prime and Alt-A loan delinquencies in California and other states that had
experienced rapid runups in house prices could lead some to question limiting the
scope to subprime loans or adjustable rate loans. Arguments may also be made for
new programs that address the specific problems occurring in a particular geographic
region.