The waterfalls—there are a few—are described in the MHA Handbook for Non-GSE Loans and in Fannie Mae’s and Freddie Mac’s Servicing Guides. These documents are all publicly available and regularly updated.
Standard Waterfall for HAMP Tier 1For a HAMP Tier 1 modification (think “HAMP Classic”), the standard waterfall works like this:
STEP ONE: First, the servicer capitalizes the arrears. What does this mean? The servicer adds up the missed principal and interest payments, costs already incurred, and any amounts the servicer advanced (or expects to advance during the trial period) for property taxes and insurance. The total arrearage is added to the unpaid principal balance (UPB).
For example, suppose Beatrice owes $100,000 on her loan and has missed $20,000 in payments, but there are no expenses or escrow advances. After capitalizing the arrears, her new UPB is $120,000. Notice that Beatrice will now be paying interest on her missed interest payments.
(Note: For purposes of this article, we are ignoring Beatrice’s total debt ratio and the net present value of the modification. Both factors could disqualify Beatrice for a HAMP modification even if the waterfall produces a housing ratio of 31% or less.)