The FDIC Loan Modification Program, attempts to reduce the homeowner's front-end debt-to-income ratio (DTI) using a standardized modification process. This process uses a net present value (NPV) tool to evaluate the merits of modifying each delinquent mortgage relative to foreclosure. If modifying a mortgage yields a positive NPV, the program mandates that a modification be initiated. Under the program, the following steps are taken to modify a mortgage:
1. Interest Rate Reduction: To reduce the home- owner's front-end DTI ratio to 38 percent, the servicer can reduce the interest rate on the mortgage, but the interest rate cannot fall below a floor of 3 percent.
2. Extended Amortization Term: If the home-owner's front-end DTI ratio still exceeds 38 percent after the interest rate on the mortgage has been adjusted, the mortgage will be amortized out to a maximum of 40 years, with a term no greater than 30 years.
3. Partial Payment Forebearance: If the home-owner's front-end DTI ratio still exceeds 38 percent, the last option is to split the debt into an interest-bearing, amortizing portion and a zero percent, zero payment portion of the loan. The repayment of the "postponed" principal will be due when the loan is paid in full.
