As an example of how the restructuring proposal would work, we started with a 2-28 loan with 28 years to maturity and $200,000 outstanding. We assumed that the current (fully indexed) rate is 8%, so the current monthly payment on the loan (including taxes and insurance) would amount to $1,744.

For a borrower with monthly income of $3,500, the initial DTI on the loan would be 50%. If this loan were restructured with an interest rate equal to the Freddie Mac 30-year fixed survey rate (i.e. 5.88%), then the borrower would need exactly a 20% reduction in principal in order to achieve a final DTI of 35%. Therefore, the write-down on the $200,000 loan would be $40,000 and the remaining principal would be $160,000. During the first five years after restructuring, the new payment on the loan (including taxes and insurance) would be $1,222. After this time, the borrower would begin repaying the $40,000 principal loan at the Treasury rate and the monthly payment would rise by $235. The DTI including this additional payment would be 39% at the beginning of year 6 assuming annual income growth during the first five years of 1.5%.

Alternatively, for a borrower with monthly income of $3,200 (lower than in the previous example), the initial DTI on the loan would be 54%. In order to achieve a final DTI of 35% after restructuring, the borrower would need a 20% reduction in principal as well as an interest rate 88 basis points below the Freddie Mac survey rate. The resulting loan would have a remaining principal balance of $160,000 at a 5% rate, so the monthly payment would be $1,136 during the first five years. Once the $235 payment to the Treasury commences at year 6, the initial DTI would be 40% under the assumed 1.5% annual income growth.