Once Again, There Are Changes to HAMPby Tim Manni
Just yesterday we asked readers if principal reductions were a strategy that could improve the Federal loan mod effort. Given that the Treasury just announced new wrinkles to the HAMP today — including a provision that pays incentives to lenders who reduce a borrower’s principal — their answer seems to be “yes.” The Treasury’s new plans for HAMP focus its support mainly on both underwater and unemployed borrowers.
As the housing crisis and the solutions to solve it have evolved over the last few years, it has become evident that both underwater and unemployed borrowers continued to be under-served. The administration is hoping that the strategies announced today will finally address the challenges facing these borrowers.
Renae Merle and Dina ElBoghdady of the Washington Post did a great job of breaking down the four key measures of today’s announcement that will impact those borrowers who owe more than their houses are worth (emphasis added):
Underwater borrowers now make up about a quarter of all homeowners, according to First American CoreLogic. Economists consider these homeowners at higher risk of default because they cannot sell or refinance their home when they run into financial troubles.
The first key element is that the government will provide financial incentives to lenders that cut the balance of a borrower’s mortgage. Banks and other lenders will be asked to reduce the principal owed on a loan if the amount is 15 percent more than their home is worth. The reduced amount would be set aside and forgiven by the lender over three years, as long as the homeowner remained current on the loan.
Until recently, administration officials had been reluctant to encourage lenders to cut the principal balance, worrying that this would encourage borrowers to become delinquent. But as federal regulators have struggled to make an impact on the foreclosure crisis, those qualms have weakened.
Second, the government will double the amount it pays to lenders that help modify second mortgages, such as piggyback loans, which enabled home buyers to put little or no money down, and home equity lines of credit.
These second mortgages are an added burden on struggling homeowners, especially when their total debt, as a result, is greater than their home value.
Federal officials have estimated that about half of all troubled homeowners have a second mortgage and last year launched a program to encourage lenders to restructure them. That effort has struggled to get off the ground.
Third, the new effort also increases the incentives paid to those lenders that find a way to avoid foreclosing on delinquent borrowers even if they can’t qualify for mortgage relief. For example, the administration is scheduled to launch a program next month encouraging lenders to have borrowers sell their homes for less than the mortgage balance in what is known as a short sale.
Fourth, the administration is increasingly turning to the Federal Housing Administration to help underwater borrowers who are still keeping up their payments. The aim is to help these borrowers refinance into a more affordable loan. The FHA will offer incentives to lenders that reduce the amount borrowers owe on their primary mortgages by at least 10 percent.
For those borrowers who have more than one mortgage on their house, the FHA will allow refinancing of the first loan only. The new loan and any second mortgage could not exceed 15 percent of the home’s value. This approach is meant to benefit not only borrowers but also lenders by allowing them to offload mortgages that might otherwise fail.
Under the changes announced today, lenders and servicers will have to reduce monthly payments to 31% of a borrower’s gross domestic income. Until now, monthly payments were still reduced to 31%, but lenders and servicers were only financially responsible for lowering payments to 38%, with the government covering the rest.
According to several sources, lenders may even begin to allow borrowers to skip payments. “In some cases, administration officials said, a lender could allow a borrower to skip payments altogether,” writes the Washington Post.
As usual, we anticipate a host of unintended consequences to accompany today’s changes. “With every round of changes to HAMP, with every new set of rules, lenders are becoming less and less inclined to purchase mortgage-backed securities because there’s no way to know what investing in these things will return over time,” said HSH.com’s Vice President Keith Gumbinger.
The Wall Street Journal has provided a list of FAQs regarding HAMP’s new rules.