REQUIRED READING: When the federal government first introduced the Making Home Affordable (MHA) program in 2009, the Home Affordable Modification Program (HAMP) was the centerpiece of the comprehensive program. HAMP's government-backed incentives for mortgage servicers were intended to boost the number of loan modifications and provide alternatives for lenders and borrowers that would minimize avoidable foreclosures and slow what was viewed at the time as an unprecedented foreclosure crisis.
In theory, HAMP's appeal was easy to understand. Eligible homeowners could receive permanent loan modifications that would enable them to stay in their home, and lenders, servicers and borrowers would be able to avoid the time and expense of a sustained legal proceeding. The upshot would be to keep borrowers in their homes and keep real estate owned (REO) inventories from swelling unnecessarily. While forecasts varied, the program was widely projected to help anywhere from 4 million to 5 million homeowners.
At least, that was the plan. The reality is a bit more complicated – and a good deal less rosy.
The number of permanent modifications is actually significantly lower than hoped: as of early this year, approximately 910,000 modifications were completed. The reasons for that relatively modest impact are much debated, but that backdrop is a particularly important context for the recent changes to HAMP.
Formally announced in March and effective June 1, the most recent version of HAMP – dubbed HAMP 2.0 by the industry – is not a new program so much as it is a planned expansion of the original program. There are a number of important changes in store that could have a significant impact on the servicing industry. What makes the expanded program such an interesting and important initiative is that it represents, in effect, the government's willingness to ‘double down’ on the original program.
HAMP 2.0 is generally more flexible, more permissive, and will certainly allow a much larger pool of borrowers to modify loans. It remains to be seen if the original program was a good idea that was imperfectly implemented and administered, or a fatally flawed idea that was doomed from the start. Notwithstanding, an expanded HAMP will likely provide some clarity – or at least more fodder for debate.
But what are the important details and changes in HAMP 2.0? How will the newly expanded program differ from the original? And, perhaps most importantly, will a new and improved HAMP be an effective mechanism to boost loan modifications and trim foreclosure numbers, or will the expanded program simply prompt more questions from its critics?
Key changes for HAMP 2.0
The new and expanded HAMP 2.0 program extends the application deadline for applying for a HAMP loan modification for a year (to the end of 2013) and includes a number of new features, including relaxed eligibility criteria, new categories of properties, and increased investor and servicer incentives. The general goal of the changes is to loosen some of the requirements of the original HAMP, open up program participation to a wider pool of candidates and facilitate greater numbers of loan modifications. Those changes include the following:
More properties qualify. The original HAMP was only available for primary residences and rental properties were specifically excluded. Rental properties can be considered for HAMP 2.0 provided that certain criteria are met: The property must be currently occupied (either by a paying tenant, legal dependent or immediate relative); the borrower/applicant must not own more than five single-family properties; and the borrower/applicant must ‘intend’ to continue to rent the property and not use it as a secondary residence for a minimum of five years. Secondary properties, such as vacation homes or time-shares, are not eligible for a modification.
Relaxed eligibility criteria. Borrowers whose HAMP applications were denied, or who were participating in a HAMP modification and subsequently defaulted, were previously ineligible for subsequent modifications. HAMP 2.0 changes that – as long as one year has elapsed from the previous default, applicants will be permitted to reapply under HAMP 2.0, and applicants who have had a change in their circumstances will also be eligible for a new modification.
It is important to note that applicants who were previously denied under the original HAMP will only be eligible for HAMP 2.0 if the original denial was not the result of fraud or non-compliance. Additionally, HAMP 2.0 will be more flexible with debt-to-income ratios. Under the original HAMP criteria, if a borrower's mortgage payment was less than 31% of the household income, the borrower was considered ineligible for a HAMP modification. That changes under the newer, more relaxed set of eligibility criteria. Finally, under the new HAMP standards, borrowers do not need to be in default to be eligible for a modification; borrowers in ‘imminent danger of’ default will be eligible for a modification.
More principal reductions. A focal point for HAMP 2.0 is encouraging lenders and servicers to facilitate not just loan modifications, but also principal reductions. Although the original HAMP has resulted in around 910,000 permanent modifications, a relatively small percentage of those have involved significant principal reductions.
While lenders are not required to reduce the principal under HAMP 2.0, the expanded program encourages principal reductions for homeowners who are underwater by more than 115% and significantly boosts incentives to investors who offer modifications that incorporate reductions. Investors who provide principal reductions will be compensated up to $0.63 on the dollar under the new guidelines, as opposed to $0.18.
Questions remain
HAMP has received its share of criticism for not reaching its lofty goals and not helping as many homeowners as its supporters projected, but there is no denying the fact that nearly 1 million homeowners have received foreclosure avoidance assistance as a result of the program. At the same time, however, while the goals of both the original HAMP and HAMP 2.0 are well intended, the question of whether or not the program is the most efficient and effective way to reduce avoidable foreclosures remains open. The relatively lackluster performance of HAMP to date (relative to earlier projections) has certainly provided ammunition to the program's critics, who suggest that the program's nearly $30 billion budget was a lot to spend for an underwhelming national impact.
In that context, efforts to expand HAMP in ways that will enable more homeowners to take advantage of the program are understandable. Some observers are concerned that "taking advantage" might be exactly what will happen under HAMP 2.0 – and not in a good way.
While officials at the U.S. Department of the Treasury have explained that HAMP 2.0 guidelines will make it possible to reach out to struggling homeowners earlier, there is a very real danger that the relaxed criteria might be too relaxed: suggesting unscrupulous or undeserving borrowers might be able to take advantage of the program.
The relaxed eligibility standards also open the program up to questions about the degree to which HAMP 2.0 will stay true to the original program goal of keeping more people in their homes. The inclusion of rental properties and the significantly relaxed standards will certainly be seen by some as a blurring of the line between assisting responsible homeowners who just need a hand up, and encouraging strategic defaults from irresponsible investors looking for a way out.
Additionally, those who question HAMP's effectiveness will likely be scratching their heads over the decision to make previous participants who defaulted eligible for the expanded program. Borrowers who have defaulted in the past are more likely to do so again, and questions are being raised about whether or not it makes sense to lower participation criteria to such a degree.
While significant questions remain, the final chapter in the HAMP story has yet to be written. Homeowners, investors and servicers would all benefit from a program that fairly and efficiently reduces avoidable foreclosures. It will be interesting to watch over the course of the next few years if HAMP 2.0 is able to effectively achieve those goals.
Deanne R. Stodden is the managing partner at Denver based Castle Stawiarski LLC. She can be reached at dstodden@cmsatty.com.
