In March 2012 the Obama administration outlined changes made to its Home Affordable Modification Program, or HAMP, to help people avoid foreclosure. This new revised HAMP will reach more distressed homeowners and will now offer incentives to Fannie Mae and Freddie Mac to forgive debt on homes with mortgages that are upside down, also known as principal reductions.
HAMP was introduced in March 2009 as a way to help homeowners on the verge of foreclosure lower their mortgage payments. For homeowners who are accepted, the program offers a three-month trial period of reduced mortgage payments. If they make all their payments, the reduced payments should become permanent.
It has helped more than 950,000 homeowners modify their mortgage loans, but the program originally intended to help between 3 and 4 million homeowners. Since less than $11 billion of the $29 billion set aside for the program has been spent, no new funds need to be allocated for the program.
Help will now be available to homeowners who didn’t successfully complete a HAMP trial period or who fell out of a permanent HAMP modification due to missed payments.
HAMP also includes Home Affordable Foreclosure Alternative, or HAFA, for homeowners who are unable to pay their mortgage and need to transition out of their homes. HAFA allows a homeowner to do a short sale on a home and not pay the deficiency balance. HAFA was updated this year to better streamline the process for homeowners seeking a short sale. These updates include the elimination of occupancy requirements for eligibility and up to $8,500 for second liens.
Problems with HAMP
The revised HAMP aims to correct some of the problems the program has had in the past.
Loan servicers failed to follow HAMP standards, lost borrower documentation, caused delays and in the end didn’t prevent foreclosures. Homeowners who applied for HAMP often ended up even more in debt when loan servicers would charge them late-payment fees. Data released by the Treasury Department shows that more failed HAMP trials ended in foreclosure in November 2011 than in November 2010. One of the reasons for this is that Fannie Mae and Freddie Mac charged servicers for taking too long to complete the foreclosure process. Bank of America, for instance, had to pay Fannie and Freddie $1.3 billion in foreclosure delay penalties in 2011.
Principal Reduction
Lenders will now get added incentives to reduce the principal on a homeowner’s mortgage. When a lender reduces part of the principal owed on the mortgage they will get paid 18-63 cents on the dollar, three times the payment offered previous version of HAMP. Fannie Mae and Freddie Mac loans will now be included in the principal write down as well. These loans had previously been excluded.
To date the FHFA (the regulator over Fannie Mae and Freddie Mac) have been completely against principal reduction. However they are now considering it and have recently put out a statement saying would decide by the end of April.
Another change will include the requirement that other types of debt will now be considered in the approval process. In the previous version of HAMP, a homeowner’s debt to income ratio had to be over 31% based on the first mortgage debt only. The new version of HAMP will now factor in other types of debt such as medical bills and second mortgages.
Help for Unemployed Homeowners
The HAMP update will expand the population of homeowners who will be eligible for the Home Affordable Unemployment Program, or UP, which grants borrowers who lost their job a forbearance period which reduces or suspends their monthly mortgage payment. The forbearance period can be as long as twelve months, allowing borrowers to find a job without worrying about losing their homes to foreclosure. Loan servicers will now be required to consider a borrower for UP regardless of whether the borrower has a monthly payment that is less than 31% or more of their gross monthly income. Borrowers who had a payment default on a HAMP trial period plan or lost good standing on a permanent HAMP will also be considered for UP.
Summary of Revised HAMP:
- Rental Property owners may now qualify for HAMP. Previously only owner-occupied homes were eligible for modifications.
- Homeowners whose payments are below 31% of their income but who can’t afford the monthly mortgage because of other debt, medical bills or a second lien, will now be eligible for the program.
- HAMP has been extended through Dec. 31, 2013.
- HAMP will offer incentives to Fannie Mae and Freddie Mac to reduce principal amounts on underwater mortgages.
- Incentives to services that write down principal amounts will triple from the previous version. HAMP will pay between 18 and 63 cents for every dollar servicers take off the mortgage principal.
- For the HAFA Program, second liens can now get up to $8,500.
- There are no longer any occupancy requirements for HAFA eligibility.
- The deadline for HAFA has been extended to December 31, 2013 to submit a Short Sale Agreement or a written request for a consideration for a Short Sale Agreement to be eligible for HAFA.
Homeowners will be able to apply to the expanded program starting June 1, 2012. The deadline will also be extended for another year, until December 31, 2013.
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