Proposed Changes to HAMP

It was reported earlier this week, that the Obama administration may seek further changes to its Home Affordable Modification Program ("HAMP"). These change may prohibit the referral to foreclosure "until a borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed."In testimony before a House Committee, a Treasury representative testified that the administration expects to release new guidance for improved protection of borrowers under HAMP. The proposal include

• Requirement of a reasonable effort to solicit borrower for HAMP (already implicit under present policy)
• Prohibition of referral to foreclosure until the borrower is evaluated for HAMP or reasonable contact efforts have failed
• Cessation of foreclosure action once borrower in trial period plan
• Written certification that a borrower is not eligible for HAMP before an a foreclosure sale may proceed

Among the reported HAMP changes as to bankruptcy are:

• Servicers must consider borrowers in bankruptcy upon request
• Servicers may use bankruptcy schedules instead of "request for modification" form
• Trial period waived for borrowers that have completed three or more months on bankruptcy plan where payment is greater than HAMP payment
  Trial period may be extended up to 5 months in order to obtain delay in obtaining needed court approvals.
  

HAMP presently sets a standard for affordablity and sustainable modification at 31% of gross monthly income. HAMP matches the reductions in monthly payments dollar-for-dollar with the investor in reducing the payments from 38% to 31% of gross monthly income. HAMP requires participatingn servicers to evaluate every eligible mortgage using a Net Present Value test. If the test is positive, "the servicer must modify the loan."


HAMP offers services a "pay for success" incentives with an up-front payment of $1,000.00 for each modification after completion of the trial modification period, and up to $1,000.00 a year for three years. Homeowners may also earn up to $1,000.00 toward principal reduction for each year, up to five years, that they remain current on the mortgage payments.


Over a hundred servicers together with thousands of Fannie Mae and Freddie Mac servicers are participating in HAMP and about 89% of all outstanding residential mortgage are covered by the HAMP program. The U.S. Treasury Dept. reports though that only about 116,000 homeowners have received permanent modifications.

Some "Chatter" on Mortgage Principal Reduction

The Washington Post reports today that the FDIC is developing a program to test whether principal reduction on "underwater" mortgage balances owed by distressed homeowners "is an effective method for saving homeowners from foreclosure." The program would reportedly only apply to loans acquired by the FDIC from a failed bank, which would amount to less than one percent of outstanding mortgage.

But the Washington Post notes that this "effort adds to the growing debate about whether principal reductions should become a large part of mortgage-relief efforts." Apparently, some in the mortgage industry have recently become more willing to grant principal reductions. It is reported that during the third quarter of 2009, thirteen percent of mortgage modifications included a reduction in principal. It is also reported that Wells Fargo has increasingly used principal reductions with option ARM mortgages, which it primarily acquired from Wachovia in 2008.

Another Mortgage Modification Proposal

The Mortgage Bankers Association (MBA) announced today a proposal for a new voluntary forbearance program that would allow qualified borrowers who have lost their jobs to remain in their homes while they seek new employment.

According to the proposal, loan servicers would reduce the borrower's mortgage payment to an affordable amount for up to nine months while the homeowner seeks employment. "The program is designed to allow borrowers time to find a new job, after which they could hopefully qualify for a loan modification." The borrower would be reevaluated as to employment and income status every three months for a total forbearance of nine months. Once reemployed, the borrower would be evaluated for a modification under the federal government's Home Affordable Modification Program (HAMP).