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tdoucet`s Blog
Changes to HAMP - Principal Reductions??
On January 26th, the Obama Administration and the Treasury Department announced changes to the Home Affordable Modification Program and the Home Affordable Refinance Program to encourage more troubled homeowners to apply.
The Obama Administration first introduced HAMP and HARP as its signature attempts to stem the rising tide of nationwide foreclosures. The programs encourages mortgage servicers--companies that receive and process mortgage payments--to cut interest rates, extend repayment terms, reduce principal, or defer portions of borrowers' mortgage debts to keep borrowers in their homes.
HAMP originally focused only on lowering payments on borrowers' first mortgages, while HARP primarily assisted borrowers whose mortgage balances exceeds their homes’ values. The new rules include "more flexible debt-to-income criteria" to include borrowers' additional monthly debt payments such as second mortgages and medical bills.
The new rules also include assistance on rental properties, such as those occupied by a tenant and vacant properties which the borrower intends to rent. This hopes to aid low-income and moderate-income renters, investment property owners, and communities hit hardest by the foreclosure crisis, recognizing single-family homes as an important source of affordable housing.
The Administration anticipated HAMP would aid up to 4 million homeowners. Instead, only about 900,000 have received modifications, and many underwater borrowers have been ineligible to participate. Much of the funds set aside for this program have gone unused.
The Treasury department is offering sizable portions of unused HAMP and HARP funds to encourage FHFA to allow its servicers to forgive principal along with other modification measures.
HARP will now allocate the unused funds to encourage servicers to forgive portions of outstanding mortgage debts on homes that have lost 25% or more in value since 2009. This will allow underwater borrowers who are current on their mortgages to refinance into low-interest government-backed loans.
Servicers, now including those under Fannie Mae and Freddie Mac, will receive up to triple the incentives for agreeing to reduce principal for underwater borrowers.
This new measure is controversial, because principal reductions have repeatedly been rejected by the Federal Housing Finance Agency. The FHFA has claimed all along that principal reductions would increase losses to the Fannie Mae and Freddie Mac, and to taxpayers. Their own analysis on effectiveness of loan modifications indicates that principal forgiveness provides no greater benefit to borrowers than payment forbearance.
The deadline to apply for both programs has also been extended to December 31st, 2013.