The Obama administration has announced major alterations to its Home Affordable Modification Program (HAMP), including new incentives for principal write-downs, a two-stage forbearance program for unemployed borrowers and the requirement for servicers to proactively solicit all borrowers who meet the program's eligibility profile and have missed two or more payments.
The program enhancements are complemented by adjustments to Federal Housing Administration (FHA) programs that will allow lenders to provide additional refinancing options to homeowners who are in a negative-equity position.
‘The changes are wide-ranging and significant, and have the real potential for bringing the foreclosure crisis to a much quicker end,’ Mark Zandi, chief economist at Moody's Economy.com, told ABC News, saying the enhancements could help as many as 1 million to 1.5 million more borrowers.
The overhaul, announced Friday by the Treasury Department, caps off a week during which HAMP was the focus of two federal agency reports and one House committee hearing. On Thursday, the Government Accountability Office predicted continued challenges for the program, specifying difficulties around trial modification conversations, controlling redefaults and addressing the needs of underwater borrowers. Through the end of February, approximately 170,000 borrowers had received permanent modifications.
A report from the office of the Troubled Asset Relief Program's Special Inspector General, also released this week, questioned the effectiveness of HAMP's affordability structure and further criticized the Treasury's approach to measuring the program's reach and success.
The changes announced Friday represent a departure from the stance taken previously by Treasury officials, who have repeatedly denied that HAMP would be expanded to include principal write-downs. The principal relief is aimed at borrowers with loan-to-value ratios of 115% or greater. Servicers and investors will receive incentive payments for each dollar of principal written down. According to the Treasury's fact sheet, servicers will be required to run the standard net present value test and an alternative NPV that includes incentives for principal write-downs and compare the results. If the NPV is higher under the alternative approach, the servicer has the option of using it.
The write-down amount is first treated by servicers as a forbearance. The amount is forgiven in three equal steps over three years, provided that the borrower remains current on payments. The alternative modification approach, structured similarly to the principal-reduction modifications announced Wednesday by Bank of America, will become operational later this year, though no specific effective date is readily apparent.
John Taylor, CEO of the National Community Reinvestment Coalition, applauds the administration for the new program adjustments but says he is not optimistic the incentives will be sufficient enough to entire loan principals.
"Will they help 7 million people who are at risk of foreclosure? I will be pleasantly shocked if investors step up for half a million borrowers," Taylor says. "The real acceleration in the number of foreclosures prevented will come with mandatory principal writedowns."
The federal plan for unemployed borrowers is similar to the approach proposed last month by the Mortgage Bankers Association, in that it reduces a borrower's mortgage payments to a 31% debt-to-income ratio for a minimum of three months and a maximum of six months. Servicers participating the Making Home Affordable program are required to offer the forbearance assistance to all unemployed borrowers who meet HAMP's eligibility criteria, provide evidence that they are receiving unemployment insurance benefits and request the temporary aid within the first 90 days of delinquency.
Borrowers who become re-employed during or after the three- to six-month period are then to be considered for HAMP modifications.
The Treasury says it will also increase its monetary incentives to servicers and investors participating in the Second Lien Modification program (2MP) and the Home Affordable Foreclosure Alternatives (HAFA) program. The changes made to the 2MP incentives follow announcements made this past week that Chase, Citi and Wells Fargo have committed to modifying second liens, joining Bank of America, which announced its participation earlier this year.
Together, the four servicers account for more than half of second-lien loans, the Treasury's assistant secretary for financial stability, Herbert Allison, testified before the House Committee on Oversight and Government Reform this week.
Borrowers' relocation assistance payments under HAFA will double from $1,500 to $,3000, the cap on subordinate lienholder payoffs will be raised from $3,000 to $6,000, and servicers' incentive payments will be bumped from $1,000 to $1,500.
The new FHA refinance option, which is voluntary for lenders, encourages lenders and borrowers to restrcuture underwater mortgages.
"These adjustments will provide more opportunities for qualifying mortgage loans to be responsibly restructured and refinanced into FHA loans, as long as the borrower is current on the mortgage and the lender reduces the amount owed on the original loan by at least 10 percent," the Treasury fact sheet says, adding that the option should be available by the fall.
On Wednesday, the Treasury also released new guidance designed to improve borrower outreach. The instructions, Supplemental Directive 10-02, prohibit servicers from referring a file to foreclosure unless the borrower has been deemed ineligible for HAMP, and expand relief to borrowers in bankruptcy.
"Expanding refinance opportunities for FHA borrowers and creating a HAMP component encouraging the reduction of mortgage principal, gives servicers yet more tools they can use to help underwater borrowers," says John Courson, the MBA's president and CEO. "As it relates to the program to offer incentives for principal write downs, each servicer will need to determine whether this is the best approach to help the individual borrower, keeping in mind any contractual restrictions or requirements from the mortgage investor."