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HAMP Waterfall

The term "Waterfall" is used within the HAMP program to describe the sequence of steps taken to reach the target of a 31% housing debt to income ratio. Before beginning the "Waterfall" process, a determination must be made that the loan meets the eligibility criteria.

The following steps are taken, in order, until the 31% target is reached:

HAMP waterfall illustration

  1. Capitalize accrued interest and other eligible expenses to determine the modified loan amount.
  2. Reduce the interest rate to reach the 31% target housing debt-to-income ratio in increments of 0.125% subject to an interest rate floor of 2%.
  3. If the 31% target housing ratio has not been reached, extend the term of the loan up to a maximum of 40 years.
  4. If the 31% target housing ratio has not been reached, then reduce the principal through an agreement between the borrower and the servicer. This agreement (forbearance agreement) would require that the amount of principal reduction be set as a balloon payment at the end of the loan term or when the loan is otherwise paid off. See agency requirements for LTV limits.


NPV Process

If the target DTI is reached through one of the waterfall steps, then an NPV test is run. The NPV test compares the net present value of cash flows with modification and without modification.

For GSE loans, the NPV test is performed but the modification process continues regardless of the results of the NPV test.

For non-GSE loans, if the modified value is greater than the non-modified value (NPV test is “positive”), the Servicer must begin the modification process under HAMP by setting up the trial period. If the modified value is less than the non-modified value (NPV test is negative), the Servicer may choose to proceed with the modification or submit the loan to MGIC for our Second Look Process. Servicers should submit these loans using MICA’s Second Look Instructions & Template.