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March 27, 2010

HAMP: What the loan-mod changes mean

The Home Affordable Modification Program is aimed at keeping struggling borrowers from losing their homes, but the number who've had their loans permanently modified is a tiny percentage of the total the federal government believes is eligible.

Yesterday the Obama administration announced changes to HAMP in hopes of turning things around.

The HUD press release is ... well, not exactly clear-cut about what those changes are. So here's the translation offered by the Consumer Federation of America:

· Requiring participating servicers under HAMP to offer at least 3 months’ forbearance of mortgage debt for unemployed borrowers, and encouraging such assistance for up to 6 months.

· Requiring participating servicers to use principal reduction as a primary means of reducing borrowers’ payments where loans are more than 115 percent of the current home value.

· Offering borrowers that are current on their mortgages but with debts greater than their home’s current value the opportunity to refinance into a lower cost, long-term fixed rate mortgage insured through the FHA if the current lender will agree to reduce principal owed by at least 10 percent and the total combined debt including any second liens would be no greater than 115 percent after the refinancing.

· Requiring HAMP servicers to work with borrowers in bankruptcy on mortgage modifications, and waive the trial period for such modifications if consumers have been successfully performing under bankruptcy settlements.

· Increasing the incentives to get second lien holders to reduce their claims to facilitate modifications.

· Clarifying that HAMP servicers must suspend all foreclosure actions and notices for borrowers that have sought modifications or are in trial modification periods, and requiring a written certification that a borrower is not HAMP eligible before an attorney or trustee can conduct a foreclosure sale.

Barry Zigas, director of housing policy for the consumer federation, thinks these changes will make a difference.

"Borrowers who are unemployed and those that find their homes are worth far less than the remaining debt on them are now those driving delinquency and default numbers," he said in a statement.

Some offered a thumbs down. Dean Baker, co-director of the Center for Economic and Policy Research, is particularly critical. (Baker, if you'll recall, is the economist so convinced we were in a bubble earlier in the decade that he sold his home in 2004 to rent instead.)

His criticism is aimed at the "substantial incentive" provided for companies holding first mortgages to reduce principal by having FHA "guarantee a new loan at 97.75 percent of the current market value."

"By substantially reducing the required payment on the first mortgage, the program will be creating a situation in which the second mortgage -- which would be worth little or nothing in foreclosure -- will suddenly again hold considerable value," he said in a statement. "This will be a huge windfall for second mortgage holders. It is worth noting that the major banks have vast portfolios of second mortgages."

This is great for those lenders, he says, and lousy for taxpayers (he says FHA will probably take a big hit from this plan). He doesn't even think it's great for the borrowers involved:

If the purpose of this modification program is to help homeowners, then any policy must ask two simple questions.

1) Is the homeowner paying less in ownership costs than they would to rent a comparable unit?

2) Is the homeowner likely to end up with equity in their home if they sell it in the next 3-5 years?

Both of these questions require an assessment of specific housing markets. If the market is still bubble-inflated, then the answers to these questions will be no and any money spent on modifications will be helping banks, not homeowners.

For some reason there is an enormous reluctance to ask these basic questions about the housing market. The failure to ask these questions in the years 2002-2006 provided the basis for the housing bubble.

Posted by Jamie Smith Hopkins at 7:00 AM | | Comments (5)
Categories: Foreclosure help, The foreclosure mess
        

Comments

The real question that should be asked is how many lenders will actually participate in the program? Millions of homeowners were eligible for the original HAMP Program. Only a small percentage of eligible homeowners were approved, and of those who were approved, permanent modification was even more scarce.

The real problem that exists are not loans that are based on principal and interest, but the interest only and pay option ARM's. What this plan fails to address is that these payments are already extraordinarily lower than they should be. For example, on a $250k loan at 4.5% interest only, the payment without escrow would be $937.50 per month. If you reduce the balance by 10% to $225k the payment of principal AND interest at 5% would be $1,207.85 without escrow. The kicker is the FHA mortgage insurance, which will make that payment even higher. To give an even more drastic example, say the balance is written down to $200k. That payment principal and interest without escrow is $1,073.64. Again, with FHA monthly mortgage insurance, that payment will be at least an extra $100 per month.

The interest rate comparison should be fairly accurate, as 4.5% was a common interest rate for a 3 or 5 year ARM interest only. Today's interest rates are around 5% and could be even higher before this takes affect.

If these examples show payments are higher even with writing down principal balance, what makes anyone think they can afford it if they can't afford the lower payment? The only loan types that will actually benefit from this program are those 30 year fixed (principal and interest) and 15 year fixed. It is still possible that many people were put in a 30 year fixed with stated income and stated assets. Those people won't qualify. Those that can verify their income (if still employed), will qualify while the rest won't. Also, it will take a few months for this plan to be implemented. I have said that we are going to see a new wave of foreclosures and I believe the administration knows that it is on the horizon. This plan may be set up to try and prevent it, but since when has the government ever been successful in implementing any plan or program?

The bottom line is that the plan still fails to address the toxic mortgages: interest only and pay option ARM. This new plan will only benefit a small percentage of homeowners. While I am sure that some people will keep their home and benefit from the plan, foreclosures will continue to increase year over year when it's all said and done. Some people you just can't help. At what point does the government stop throwing money at a problem that is like an incurable disease? The free market is a beautiful thing. While I hate to see people lose their home, the majority of homeowners in this situation are bound to lose their home anyway.

Also, those second mortgages will still be worthless. If the first mortgage is written down to 97% of the value, the second mortgage will still make it over 100% combined loan to value. Instead, the second mortgage holder should agree to a "short payoff" which would be included in the first mortgage. That won't happen though, as the second mortgage holder would have to realize the losses right away instead of waiting to the very end in the foreclosure process.

Frank-

I am unsure you see what is actually happening right now here in the United States. We are addressing the toxic loans - we are doing so by replacing the money that never existed and was lost (people's equity and bank profits, state tax revenues, etc) with new money hot off the printing presses (being funneled directly to banks via the 0% interest rates). Banks, with the new found money , are forgiving/forgetting/blah blah ,the money they would have never received in the first place from Joe US Homeowner.

To all who actually have money to pay their mortgages and are doing so - why are you? You really don't have to.

To first time buyers - get out there and get in the mix....we need you. Your country needs you..the world needs you. and you need a house!! A bigger house than you can afford! Remember that!! PLEASE BUY!! HURRY !!! WE need you to get the first time and repeat buyer credits so you can pay your CLOSING COSTS (TO US)!! HURRY!!!!!! PLEASE !! HURRY!!!

Frank - again - how dare you bring numbers into the real estate game!!

Yes Bobby, I forgot to mention that the only loans eligible for the HAMP Program are those owned/guaranteed by Fannie or Freddie. Also, the majority of interest only loans are not eligible since they were mainly done as "Alt A" loans. I am pretty sure that ZERO of the pay option ARM's are eligible. Here are the two websites you can verify to see if you are eligible...

http://loanlookup.fanniemae.com/loanlookup/

https://ww3.freddiemac.com/corporate/

Baker's point and assessment questions are spot on. This is another bank bailout being sold to the public as a consumer bailout.

Frank, HAMP is NOT restricted to Fannie and Freddie, HARP is. Check the guidelines under www.hmpadmin.com. As to Alt-A programs, B of A is modifiying a ton of those (Countrywide portfolio) as well as subprime loans. These guys are getting HAMP mods with principal reductions. We should all be so lucky. For everything you never wanted to know about Making Home Affordable, check out HSH.com's modification section.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie
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