OCC to Allow 50% Risk Weighting on Some Modified Loans!

The OCC has issued an interim final ruling allowing mortgage loans modified under Making Home Affordable Program to retain the same risk weighting that the loan had just prior to modification. Mortgage loans are weighted at either at 50% or 100%, depending on certain criteria, such a delinquency status. Loans with a higher risk weighting require more capital and, as such, are less desirable. Previous OCC guidance required that a 50% risk weighted loan that had been restructured be classified as 100% risk weighted. At a time when banks are under the microscope for their capitalization levels, every little bit helps.

The Making Home Affordable Program, announced on March 4th, is a partnership between the Treasury and lenders with loan services to offer at-risk homeowners loan modifications under which the homeowners may obtain more affordable monthly mortgage payments. The program has stipulations around debt to income levels as well as monetary incentives to both borrower and lender to promote performance of the loan.

The Program requires that a borrower’s front-end debt-to-income ratio on a first-lien mortgage modified under the Program be reduced to no greater than 31 percent—which should improve the borrower’s ability to repay the modified loan—and, importantly, provides for Treasury to match reductions in monthly payments dollar-for-dollar to reduce the borrower’s front-end debt-to-income ratio from 38 percent to 31 percent.

Will all these changes help borrowers and lenders...time will tell.