Government Unveils New Loan Modification Plan
Faced with growing criticism and general dissatisfaction, the federal government just released an overhauled version of its Home Affordability Modification Plan (HAMP). Through a variety of new initiatives, the new-and-improved HAMP will seek to address those borrowers that are unemployed and/or whose mortgages are underwater, as it is believed these two phenomena are directly behind the surge in foreclosures.
In its existing form, HAMP has long been recognized as a failure. It has absorbed $50-75 Billion, and permanently modified only 168,000 mortgages, far less than the stated goal and original promise of 3-4 million. As if this were note enough, an estimated 52% of modified mortgages went on to default (a second time) within 9 months. Overall, the program has been plagued by reports of inefficiency and inconsistency, with borrowers and lenders equally unhappy.
The program’s biggest shortcoming has arguably been its approach; it seeks to lower the monthly payments of borrowers by lowering their interest rates. It does nothing to address the fact that high interest rates were behind the first wave of foreclosures, but that the second wave has been driven by unemployment and falling housing prices. It should come as no surprise then, that foreclosures have continued to rise in spite of the program’s best efforts. “The number of borrowers who were 90 days or more past due on their mortgage payments, a key measure of future defaults, swelled 20.4% in the last quarter of 2009 over the previous quarter,” bringing the current total to 1.5 million.
The new program aims to redress these failures. Borrowers who are unemployed can expect to receive a break on their mortgage payments for 3-6 months while they look for work, provided that they are already receiving unemployment benefits. The goal (for all borrowers) is to reduce their monthly mortgage payment to 31% of income, which is level that experts have deemed affordable. Underwater borrowers (11 million, or 20% of total mortgages) can expect to have the principal on their loans reduced to no more than 96.5% of the value of their homes, and 115% where there is a second mortgage. Some of these borrowers will unfortunately still be underwater after receiving modifications, but to a lesser extent than before.
Other new initiatives include a requirement for lenders to include principal reduction (in addition to interest rate cuts) as a basic component of future loan modifications. At the same time, lenders will be prohibited from“starting or continuing foreclosure proceedings on a borrower who enters the Home Affordable Modification Program. Companies servicing mortgages also must screen borrowers who have missed two or more payments to determine whether they are eligible. If so, the servicer must ‘proactively’ solicit them to participate.” Yet another initiatives will aim to modify second mortgages.
While all of this is great news to borrowers (that is to say, those who are delinquent, unemployed, and/or underwater), it may not be such a great deal for taxpayers. The program will be directly funded with a $14 Billion allocation, most of which will go towards incentivizing lenders to continue modifying loans. Most of the program, however, will be implemented at no upfront cost to taxpayers, with the help of the FHA. Underwater borrowers will be able refinance their loans into FHA mortgages provided that investors are willing to reduce the principal in a way that complies with FHA lending standards (i.e. LTV should not exceed 96.5%). Of course, the risk is that many of these borrowers will default anyway, at a huge cost to taxpayers.
Concrete details of the program are still forthcoming, and we’ll keep you posted as we hear more.
