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New Guidance Rolled Out in Effort to Improve HAMP Results

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In the current mortgage crisis, millions of responsible homeowners who have been making their monthly payments and fulfilling their obligations have seen their property values fall, and now find themselves unable to refinance at lower mortgage rates. As part of its efforts to ease the plight of responsible homeowners, on March 26 the Administration announced new guidance for the Federal Housing Administration (FHA) and Home Affordable Modification Program (HAMP) programs. The changes are designed to offer assistance to up to four million struggling homeowners who, through no fault of their own, have been affected by the economic crisis. The program modifications enable mortgage lenders and servicers to work with homeowners who are unemployed or who owe more on their mortgage than their home is worth. The federal government and the private sector will share the costs. The federal portion of these modifications will be funded through the Troubled Asset Relief Program (TARP).

Who qualifies for HAMP relief?

The HAMP modifications aim to assist a targeted group of homeowners who live in their homes and are experiencing a reasonable level of difficulty. For example, the bill seeks to exempt real estate investors, those who default on vacation homes, speculators, and persons living in million-dollar homes. And some people simply bought more than they could afford and will not be able to afford to stay in their homes.

The measure seeks to provide responsible homeowners with opportunities to refinance or obtain a modification and prevent foreclosures that could be avoided. Unemployed homeowners may qualify to have their monthly mortgage payments reduced or eliminated for three to six months while they look for work.

Eligible homeowners for modifications under HAMP must:

  • Owe monthly mortgage payments that are greater than 31 percent of their income
  • Have a mortgage balance less than $729,750
  • Live in an owner-occupied principal residence of one to four units
  • Demonstrate a financial hardship
  • Be current on mortgage payments
  • Qualify for a standard FHA-backed loan once the principal is reduced

What are banks asked to do?

In order to succeed, the HAMP modification requires the participation of lenders. For qualifying homeowners whose mortgages exceed the value of their homes, banks will be asked to reduce the principal loan balance. A new mortgage would be written with a loan amount and monthly payments that are lower than the original mortgage. Under the HAMP regulations, the new monthly payment cannot exceed 31% of the homeowner's income. The combined value of first and second mortgages can be no greater than 115% of the current value of the home.

There is a built-in probationary period: homeowners who get a modified loan must make full monthly payments for three years before the principal is reduced permanently.

How much money is involved?

To underwrite the cost, the new mortgages will be insured by the Federal Housing Administration (FHA). This represents a major change from past initiatives, where loan modifications under HAMP involved lengthening the term of the mortgage or reducing interest rates. They did not involve a government subsidy or lowering the principal owed. Up to $14 billion of TARP funds are earmarked for subsidies to lenders who agree to write down at least ten percent of a first mortgage. The trade-off is that while loan holders would take an up-front loss, the risk of the modified loan defaulting would be assumed by the government. The principal-reduction program is voluntary, not mandatory, and that there is no guarantee that homeowners will not default on the new refinanced loans.