The Home Affordable Modification program will help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. Working with the banking and credit union regulators, the FHA, the VA, the USDA and the Federal Housing Finance Agency, the Treasury Department today announced program guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications. This program will work in tandem with an expanded and improved Hope for Homeowners program.

With the information now available, servicers can begin immediately to modify eligible mortgages under the modification program so that at-risk borrowers can better afford their payments. The detailed guidelines (separate document) provide information on the following:

Eligibility and Verification

• Loans must have been originated on or before January 1, 2009 
• First-lien loans (first mortgage) on owner-occupied properties (a home you live in) with an unpaid principal balance up to $729,750. Higher limits allowed for owner-occupied properties with 2-4 units. 
• All borrowers must fully document income, including signed IRS 4506-T, two most recent pay stubs, and most recent tax return, and must sign an affidavit of financial hardship 
• Property owner occupancy status will be verified through a borrower credit report and other documentation; no investor-owned, vacant, or condemned properties 
• Incentives will be made to lenders and servicers to modify at risk borrowers who have not yet missed payments when the servicer determines that the borrower is at imminent risk of default 
• Modifications can start from now until December 31, 2012; loans can be modified only once under the program (no repeat offenders)

Loan Modification Terms and Procedures

• Participating servicers are required to service all eligible loans under the rules of the program unless explicitly prohibited by contract; servicers are required to use reasonable efforts to obtain waivers of limits on participation. 
• Participating loan servicers will be required to use a net present value (NPV) test on each loan that is at risk of imminent default or at least 60 days delinquent. The NPV test will compare the net present value of cash flows with modification and without modification. If the test is positive, meaning that the net present value of expected cash flow is greater in the modification scenario – the servicer must modify, absent fraud or a contract prohibition (ask your lender for more specifics) 
• Parameters of the NPV test are spelled out in the guidelines, including acceptable discount rates, property valuation methodologies, home price appreciation assumptions, foreclosure costs and timelines, and borrower cure and re-default rate assumptions. 
• Servicers will follow a specified sequence of steps in order to reduce the monthly payment to no more than 31% of gross monthly income (down from 38%!) 
• The modification sequence requires first reducing the interest rate (subject to a rate floor of 2%), then if necessary extending the term or amortization of the loan up to a maximum of 40 years, and then if necessary forbearing principal. Principal forgiveness or a Hope for Homeowners refinancing are acceptable alternatives 
• The monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner’s association and/or condominium fees. Monthly income includes wages, salary, overtime, fees, commissions, tips, social security, pensions, and all other income. 
• Servicers must enter into the program agreements with Treasury’s financial agent on or before December 31, 2009.

Payments to Servicers, Lenders, and Responsible Borrowers

• The program will share with the lender/investor the cost of reductions in monthly payments from 38% DTI to 31% DTI 
• Servicers that modify loans according to the guidelines will receive an up-front fee of $1,000 for each modification, plus “pay for success” fees on still-performing loans of $1,000 per year 
• Homeowners who make their payments on time are eligible for up to $1,000 of principal reduction payments each year for up to five years (WOW!) 
• The program will provide one-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers for modifications made while a borrower is still current on mortgage payments (This is huge!). 
• The program will include incentives for extinguishing second liens on loans modified under this program. 
• No payments will be made under the program to the lender/investor, servicer, or borrower unless and until the servicer has first entered into the program agreements with Treasury’s financial agent. 
• Similar incentives will be paid for Hope for Homeowner refinances.

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Foreclosures are those properties which have been forfeited by the government or the banks from the owner of the property because of the non payment of the Taxes, Utility bills or the installment of the loan taken on that property. The properties which are included in Foreclosures are House, Land, Plot, Shop, Building, Flat, etc.

There are many types of Foreclosure. However, two of main foreclosures which are mostly used in USA are: Judicial sale and Power of Sale.

Judicial Sale – In Judicial sale the Court is interfered to supervise in the matter of foreclosure. The Court informs all the people linked to the sale of the Foreclosure such as the mortgager that is specially the bank, the lien holders, the owner, etc. Then will all legal actions the parties are notified to come on a mentioned date to the court for the hearing. If any of the parties are not satisfied with the ruling a case can be filed in the Federal court.

Power of Sale – In Power of Sale the Mortgage holder of the property which is commonly the Bank has the right to sale the property to anyone or by means of Auction without the inference of the Court. Only the house owner is notified of the Foreclosure. The Bank looks for the highest bid amount. When someone finally agrees to purchase the property, the bank subtracts the interest amount and the amount of mortgage and the rest of the money is given to the purchaser.

The bank gives the loan to people and keeps the files of the property on which the load is getting sanctioned as a Security purpose. This means that the property is mortgage. The person taking the loan is known as borrower. The Bank gives the money on monthly installment basis which includes the money of the loan given plus the interest which the bank has fixed every month from the borrower. The bank which gives the loan is known as the Lender.

When the borrower is unable to pay the installment set by the bank which consists of loan and Interest for about the mentioned time which is normally a period of three months, then the bank is fully authorized to forfeit the property and it can be sold to any one if they have a buyer or the property is Auctioned to get the highest bid possible.

It’s up to the purchaser to clear the entire loan on the property by paying it off or the purchaser also has the right to keep the property in the same condition by paying the same amount of installment every month which was asked by the bank before. If the purchaser wishes clears the loan amount of the bank, in return the bank will be giving the documents of the property to the new purchaser. The purchaser can later transfer the ownership of the property on his name if he wishes.

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The intent of Chapter 11 Bankruptcy reorganization is to allow relief to the debtor in possession while the business attempts to continue operating under court supervision. Once the petition for bankruptcy is filed, the court issues an automatic stay to prevent creditors from foreclosing on assets or taking legal action against the debtor. The valuation can assist the courts when deciding whether the creditors can lift the stay or the debtor can obtain financing to continue operations.

A valuation expert assists the courts in determining the facts of the case, and can enter the proceedings at any stage of the initiation process. Of course, any valuation must be prepared in accordance with applicable bankruptcy law and procedure, as well as meet the accepted methodologies and approaches while continuing to remain impartial. Though many experienced valuators shy from the court setting, their expertise and assistance to the courts can significantly affect the proceedings by informing the bankruptcy judge, debtor in possession (DIP), the committee of unsecured creditors and/or equity-holders, as well as secured creditors of the value under various assumptions: liquidation of its assets, going concern or combination of both.

In order for a petition to be confirmed by the courts, the plan of reorganization must meet certain tests that are legally fair and equitable. Chapter 11 is not exclusive of reorganization, and the Code implicitly recognizes that in some cases, value may be maximized through some combination of reorganization and liquidation. A business may be worth more if sold in whole as a going concern, and valuation experts can calculate its fair market value during the confirmation phase. The courts need to know if the business can satisfy its creditors within various scenarios of risk and the “going concern” sale is a popular trend. A debtor in possession’s plan must maximize the value of the assets as well as save the residual estate of the pre-bankruptcy owners.

The complexity of bankruptcy law involves tension between these two concepts of going concern and asset liquidation. On one side is the efforts to maximize the value of assets and the other is to save the residual stake of the pre-bankruptcy owners. Saving the going concern means continuing to operate the business which means continuing to incur risk. Creditors are typically risk adverse. However, if the business is liquidated today, the creditors get nothing; if the business continues they may get something, but the creditors bear the risk of loss.

Continuing a business has inherent risk: company-specific risk, risk of changes in the economy and interest rates, all of which must be factored into the decision during the confirmation stage of bankruptcy. The professional valuation provides a tool to the courts to analyze from experienced and impartial analysis the underlying value based on these different assumptions, risks and standards of value.

Motions by secured creditors to lift the stay seek to foreclose on the assets of the company. The creditors can seek relief by demonstrating “cause, including lack of adequate protection.” The judge has the discretion and can rely on the valuation to seek the details of equity standing of the business. The actual condition of the business is not usually as simple as it appears based upon the financial statements and tax returns filed with the courts. The definition of value is the first and foremost issue at the inception of the bankruptcy process. “Value” can mean different things to different parties: fair market value, market value, fair value, true value, investment value, intrinsic value, fundamental value, insurance value, book value, use value, collateral value and so on. There are income, asset and market-based methods of business valuation. The premise of value utilized in the valuation process assumes either a “going concern” or “liquidation” of the subject. The Bankruptcy court utilizes the outcomes of these different assumptions-based approaches to make its determination.

At the beginning of the bankruptcy, a valuation may determine whether the creditor can lift the automatic stay and if the debtor can use cash collateral or obtain DIP financing. At the confirmation stage, the valuation can assist in the tiers of debtor’s capital ownership structure. Chapter 11 allows the debtors to attempt to preserve the business while working out the debt repayments. Preserving the business can yield a greater return to the creditors than selling off the business assets in a liquidation. It is difficult to determine whether the business can rebuild successfully and steps taken during the valuation can bring forth details regarding the management team, estimated future income stream and market conditions. Many factors relating to the condition of the business are analyzed for purposes of the valuation; trends in the industry, competition and other companies in the same or similar industry. In addition, any contingent liabilities are searched for and considered for the likelihood of occurring and their effect on value. The process will also search and value unrecorded assets of the business such as intangibles and intellectual property including copyrights and trademarks.

In re Exide Technologies, 303 B.R. 48 (Bankr. D. Del.2003) Chapter 11 case illustrates the importance of valuation at confirmation, and provides guidance on valuations in this context. The details of the Exide case, capital tiers, obligations and reorganization plan were complex, which made the computation of value even more critical. There were significant differences of opinion between the valuations prepared by the debtor versus those done by the creditors. In the end, the court favored the Committee’s valuation. In each valuation the same three methods were utilized: Comparable Company Analysis, Transaction Analysis and Discounted Cash Flow. The experts differed in the underlying data and multiples used in applying these methods. The court sided with the adjustments that took a forward-looking approach and addressed the “taint” of the bankruptcy on the company’s worth, while avoiding subjective adjustments to get to a “market” value based upon historical performance exclusive of the bankruptcy.

Confirmation is not the end of the bankruptcy process as much as all parties would like to think. Distributions to creditors can come under challenge with claims of fraudulent transfers and inappropriate preference payments. Transfers by the DIP for “less than reasonable equivalent value” under 548(a)(1)(B) or constructive fraud will have to defend those claims relevant to the value. Preferential payments or transfers made within 90 days before the bankruptcy or determination of insolvency can be challenged by the creditors as well.

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