5 important updates to MHA Borrower Income Verification

Both in the course of my volunteering with Los Angeles Neighborhood Housing Services and in my capacity as VP of AssetPlanUSA, a premier foreclosure alternatives service provider, I see struggling homeowners who are facing financial hardship and earnestly trying to negotiate the “system.” Below I have highlighted the 5 most important updates to the “Borrower Income/Asset Documentation and Verification of Eligibility” from Making Home Affordable Supplemental Directive 10-01 (effective date January 28th, 2010). It is important to note that this guidance supersedes the ‘Borrower Income/Asset Documentation and Verification’ section in Supplemental Directive 09-07 and applies both to the evaluation of borrowers currently in active trial period plans as well as to evaluation of borrowers being evaluated for verified income trial period plans. Later this week, I will post my thoughts about the Second Lien Program (“2MP”).

1) When evaluating a borrower’s eligibility for HAMP, servicers should use good business judgment consistent with the judgment employed when modifying mortgage loans held in their own portfolio [page 4].

Commentary: Several recent Treasury supplemental directives use the phrase “good business judgment.” In some ways, Treasury is giving the servicers enough rope to hang themselves with.

2) Copies of two recent pay stubs, not more than 90 days old at time of submission, indicating year-to-date earnings. Servicers may accept pay stubs that are not consecutive… Servicers may use year-to-date earnings to determine the average periodic income [page 4].

Commentary: This is a helpful update. In the course of my volunteering with Los Angeles Neighborhood Housing Services, I know that many occupations have been cut back to accommodate “flex demand” (see recent WSJ article on manufacturing “bull-whip”). So many pay stubs are not equal, but can demonstrate the ability to pay if the year-to-date earnings are taken into account.

3) Self-employment income. The most recent quarterly or year-to-date profit and loss statement for each self-employed borrower. Audited financial statements are not required [page 5].

Commentary: The clause “Audited financial statements are not required” is helpful guidance, but Treasury could perhaps add the phrase “the borrower does not need to use tax records to validate profit and loss statements.” Many struggling homeowners are starting part time service-based small businesses. Innovation is the by-product of economic malaise. The result is that previous years’ tax statements will not show this income, because in many cases, these enterprises are newly formed.

4) 20% Threshold for Passive and Non-Wage Income… does not have to be documented if the borrower declares such income and it constitutes less than 20% of the borrower’s total income [page
6].

Commentary: Again, for the reasons mentioned above, many homeowners have become entrepreneurs, in order to remain willing mortgage-paying HAMP participants. Perhaps there could be a clause added that year-end tax returns should verify some sources of extra income. However, I believe that passive income below a certain amount is not required to be reported. I am NOT a tax professional, and borrowers should speak with a tax professional with regards to their own situation. My comment here is for the sake of considering improved policy, during the next wave of revisions.

5) Unemployment Benefits… The unemployment income must continue for at least nine months from the date of the application [page 5].

Commentary: Having collected unemployment for 3 months after my active duty military commitment, I know a little about the unemployment benefit process. My period of eligibility was NOT nine months, and the purpose of unemployment benefits was to be a bridge to employment. In general, the language or intent of the unemployment system is not meant to ensure continued income for nine months.