In a move that runs contrary to the so-called rumors making the rounds several weeks ago, last Friday the White House announced it would make yet more revisions to the Home Affordable Modification Program, otherwise known as HAMP. The latest proposal expands the number of American homeowners, burdened with significant debt loads, able to seek financial relief by obtaining better mortgage terms through mortgage modifications.
In addition, in a turnabout of previous policy, some investors become eligible to have their loans modified. This change applies to homes currently occupied by tenants, or vacant units slated for rental at some point in the future.
When the Treasury Department launched the first HAMP initiative in February 2009, it only applied to owner-occupied homes. It has fallen far short of its expected target of helping as many as 4 million homeowners modify their mortgages. The final number of households who benefited from the program came in around 900,000.
Broader Eligibility Criteria
The original HAMP centered on reducing the debt-to-income ratios of homeowners, to 31% of their gross monthly incomes. Borrowers already below the 31% cap could not qualify for mortgage modifications.
In mid-November 2011, the administration released the revised version—HARP 2.0. Like the original program, only owner-occupied units qualified. Although the revisions remove some of the obstacles, which prevented many homeowners from modifications, many housing advocates criticized the revised program as not inclusive enough to help a significant numbers of borrowers.
It is still too early to determine just how much of an effect HAMP 2.0 will have because most lenders have yet to roll out the program. However, early signs point to yet more failed solutions, which do not address many of the underlying issues faced by homeowners.
The latest revisions calculate other debts, such as medical bills, credit cards, home-equity loans and other debts into the equation to determine debt-to-income ratios.
Reduces the Effect of Investment Foreclosures
According to government officials, expanding the program to include investors counteracts the significant effect foreclosed rental properties have on tenants’ in the low to moderate rental market as well as the neighborhood, says Treasury Department Assistant Secretary Tim Massad.
Furthermore, regardless of whether the foreclosed property is owner- occupied or a rental unit, it has the same negative effect on the neighborhood.
Investors will have to “prove a hardship” and meet other conditions to justify taxpayer assistance on loan modifications. He estimates about 700,000 investors of rental homes across the nation might qualify for mortgage modifications.
Raises Incentives to Encourage Mortgage Reductions
To make the new program more attractive to private lenders, and to Fannie Mae and Freddie Mac, the new program pays three times the current incentives offered for principal reductions. Under the previous versions of HAMP, Fannie and Freddie did not receive the enticements banks and private mortgage lenders received to reduce the principal.
As it turns out, the incentives of between 6 cents and 21 cents for each dollar of mortgage reduction did not result in a sizable number of reductions.
The Obama administration determined it needed to sweeten the pot to get private lenders to offer more loan reductions. The new strategy calls for Freddie and Fannie to allow loan servicers to reduce principal, as a part of the overall mortgage modification process. The new incentives increase to between 18 and 63 cents, per each dollar of loan reduction.
Mortgage reduction has been a key component missing from the previous programs. With an estimated 11 million homeowners saddled with “underwater mortgages,” even having their loans modified to low- interest rate mortgages, left many people concerned about owing more than the value of their homes.
Early signals from the Federal Housing Finance Agency, which is the conservator for the bankrupt Fannie Mae and Freddie Mac since 2008 has not immediately signed on to the program. It released a statement saying that it would take the new changes to HAMP under consideration. It pointed out in the statement released after the news conference presenting the new program that forgiving mortgage debt was not as effective as “principal forbearance”
Principal forbearance reduces the principal amount during the period of the loan. However, if the homeowner borrows on the equity, sell the home or goes through foreclosure, he or she must pay back the amount of the reduction.
George Mason University real estate Professor Anthony Sanders believes subsidizing real estate investors during a time when rents are trending up constitutes a bad idea.
The expanded HAMP will not cost U.S. taxpayers additional money because more than $19 billion of the original $29 billion allocated for the program has gone unused.