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.  As of February 2010, 29% of the 3.4 million mortgages that are 60+ days overdue had started a trial modification or had accepted a permanent modification - close to 1.1 million homeowners are under a trial period, and over 170,000 modifications have become permanent.  The Treasury Department estimates that approximately 1.8 million loans meet all of HAMP's eligibility requirements and could ultimately be modified.  On March 26, 2010 the program was expanded to also include temporary assistance for the unemployed, and to provide further incentives for the lenders to reduce the principle of the mortgages rather than just re-structure the interest and period of performance of the loan.

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 (HAMP) 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 (HAMP) 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 borrower's 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.

NEW: Alternative Principle Write-Down (as of March 26, 2010)

• For borrowers whose mortgage exceeds 115% of the market value of their home (e.g. you more than $115,000 on your mortgage and similar homes are now selling for $100,000), the servicer needs to estimate the value of a modified loan that:
• Writes-down the principal on the loan to 115% of the market value of the loan
• If the resulting mortgage payment at the 115% level exceeds 31% of the borrower's gross income, then as indicated earlier, the servicer will reduce the interest on the loan, and if necessary extend the term of the loan or forebear an additional amount of principal to arrive at the 31% of gross income level.
• If the value of the modified loan resulting from this process is higher than under the "standard" HAMP process (e.g. start with interest reduction, and term extension, etc. as presented above), then the servicer will have the option to offer this approach to the borrower (the servicer, as we discuss below will receive an additional incentive from the government to cover the amount of principal reduction.

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

NEW: Alternative Principle Write-Down (as of March 26, 2010)

• Initially the lender will treat the principal reduction as a forbearance (that is the borrower still owes the principal, but the lender delays payment) - the forborne amount will be forgiven over 3 years in equal increments if the borrowers continues paying the mortgage.
• Second lien-holders will have to extinguish the principal on their loans if principal is reduced in primary loan - secondary lien-holders will be provided incentive payments as detailed below.
  

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).

NEW: Alternative Principle Write-Down (as of March 26, 2010)

• For lenders that reduce principal on primary or secondary loans, Treasury has increased the incentive payment to support the program.  For reductions of principal:
  
• Below 115% of loan-to-value (LTV, value of loan when compared to home market price), lenders get $0.21 for every $1 they reduce below that amount;
• Between 115% and 140% of LTV, lenders get $0.15 for every $1 they reduce;
• Over 140% of LTV, lencers get $0.10 for every $1 they reduce the principal amount;
• Second lien-holders of loans in default over 6 months receive $0.06 for every $1 of principal independent of LTV value.
  

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.

NEW: Alternative Principle Write-Down (as of March 26, 2010)

• Servicers and lenders will be prohibited from pursuing foreclosures before borrowers have been evaluated and declared ineligible for HAMP, ore while borrowers are on their trial modification period.  Furthermore, it provides additional guarantees and wait times before lenders and servicers can start foreclosure procedures.
• Establishes clear(er) guidelines on the type and level of communication effort expected of servicers to identify and contact borrowers eligible for the HAMP program.
• Makes borrowers undergoing bankruptcy proceedings eligible for HAMP evaluation.
• For borrowers that have already received a permanent modification or are in their trial period under the HAMP, servicers will be required to evaluate whether they could benefit from the "Principle Write-Down" alternative.
  

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.