Track the Stimulus

An important part of Obama's housing plan (the Homeowner Affordability and Stability Plan, HASP) is the "Home Affordable Modification Plan (HAMP)".  It calls for $75 billion to be set aside to help "responsible" homeowners avoid foreclosure.  $50 billion of these funds will come through the TARP.  The mortgage modification plan will help homeowners that are struggling to make their mortgage payments either because of a change in their situation (e.g. loss of income), or because the terms of their mortgages called for much higher monthly payments after an introductory period, as it was rather common in the sub-prime mortgage market.  Starting in August the administration is making public the number of modifications carried out by servicers participating in the program - up to the end of July, only 9% of the 2.7 million mortgages potentially eligible had started a trial modification, the Treasury department hopes to more than double this number by November.  You can see the whole list of mortgage servicers, and how well they are doing at our "Mortgage Servicers" page.

Who qualifies for a mortgage modification / home affordable modification (HAMP)? 

• Homeowners whose mortgage payment (including taxes, insurance, and homeowners/condo fees) exceeds 31% of their gross income (their income before deductions);
• People who are delinquent on their mortgages and those who while not yet delinquent on their loans have a high likelihood of becoming delinquent;
• Only owner-occupied homes qualify (i.e. no speculators, or "house flippers") - homes can range from 1 to 4 unit homes;
• Homeowners whose unpaid principal on their homes is less than $729,500 ($934,200 for 2 units; $1,129,250 for 3 units and $1,403,400 for 4 units);
• Loans have to have originated before January 1, 2009.
• In addition, people that have very high total debt levels as defined by total monthly debt service payments (e.g. house, car, educational, credit cards, etc.) that exceed 55% of gross income will be required to enter a debt counseling program.

• Homeowners are only eligible to participate in the program once; if after modification the borrower fails to stay current, the borrower is no longer eligible to apply for a modification under this program.
• If the homeowener has a second lien, the homeowner will be able to participate if the holders of the second  lien take a subordinate position with regards to the modified loan.
  

What kind of home affordable modification do they get? 
In short, the mortgage modification program will provide: lower monthly payments, incentive payments, and in some cases a reduction in the principal owed - financed by taxpayers and the lending institutions (which themselves are receiving government aid, so ultimately the taxpayer is footing most if not the whole bill).

How does the home affordable modification plan works? 

• Lenders/servicers will ask for proof of income and residence from the homeowner to ascertain whether the individual meets the plan's requirements;
• Unpaid interests, taxes, and insurance will be capitalized (e.g. will be added to the principal owed); in addition delinquency charges to third parties and escrow advances by the servicers will also be capitalized, but not late fees or other default charges;
• Lenders will compute the interest rate required to reduce monthly mortgage payments so that they will not constitute more than 31% of the borrowers gross income.  The lowest interest rate that can be charged is 2%, if the required rate is lower than 2% the servicer will proceed to:
• estimate whether by increasing the time of principal repayment (amortization) to up to 40 years will bring the required rate to 2%, or if that is not the case,
• to determine the level of principal deferral (foreberance) that will be necessary to bring the required rate to 2%
  
• A net present value test will compare whether the modification of the loan (e.g. reduction of the interest rate + reduction of principal if required) will be more beneficial to the lender/investor than selling the home in a foreclosure (the parameters of the test are specified by the guidelines and are approved by the regulatory authority);
• If the test is positive:
• then the homeowner will enter a trial period at the new modified interest rates and payment for a period of three months;
• If the homeowner is current (e.g. has not missed a payment) at the end of the trial period, then the a new loan agreement with the modified loan payment structure will be executed, and the servicer will also include escrows for taxes and insurance.
• If the test is not positive then the servicer may choose to either modify the loan under a different plan, or foreclose.
  

What are the terms of the home affordable modification plan (HAMP)? 

• The modified mortgage rate will be maintained for 5 years; starting in year 6 the rate will increase gradually (up to 1% per year) until it reaches the rate that conforming loans would have gotten at the time of the modification (based on the Freedie Mac Primary Mortgage Survey).
• Borrowers whose principal on the mortgage was deferred will have to pay the amount deferred (forebear) either when the modified mortgage matures or when the property is sold - this payment will be in the form of a balloon payment, but the deferred principal on the modified mortgage will not accrue any interest
  

How does the Treasury support the home affordable modification plan (HAMP)? 

• Services will receive up to $4,000 in incentives to modify these loans: $1,000 up-front and $1,000 per year for three years, if the borrower stays current;
• Another goody - mortgage holders receive $1,500 and servicers $1,500 if they modify a mortgage before it goes into default;
• Borrowers that stay current on their loans after being modified will receive $1,000 per year for up to the five years to be applied against the principal on their loans;
• The Treasury (i.e. taxpayers) and the lender will share the cost of reducing monthly payments from 38% of the borrower's gross income down to 31% of gross income.  The government will provide this incentive for up-to five years.  
• If the servicer chooses to reduce the principal amount on the loan, the Treasury will participate in an amount equal to its cost if the monthly payments had been lowered from 38% of gross income to 31%.
• The Treasury department will create a $10 billion insurance fund to protect mortgage holders if the value of the houses underlying the loan modifications declines further in price (the mortgage holder will get an insurance payment linked to declines in the home price index).

Anything else? 

• All financial stability plan recipients will have to follow the guidelines for loan modifications;
• Bankruptcy judges will be able to modify loans - also known as cram-down, judges will be able to reduce the principal on their loans and the value in excess of the new principal value will be treated as unsecured debt - if modification options are not successful in avoiding foreclosure;
• There will be $1.5 billion in assistance for renters impacted by the foreclosure of property owners.

NOTE: Just to be clear - we are NOT a government sponsored site, and we try to keep the information on the site accurate and up-to-date.  Nevertheless, there may be errors, and you should check the information on qualifications and other details for the plans with your mortgage agent.  For homeowners the government provides a simple self-assessment test at: http://www.makinghomeaffordable.gov.