In case you missed the news, the government wants to keep you in your home; like it or not. They've employed several programs to carry out the task, each seemingly more aggressive than the next. Personally the whole thing reminds me of a bad pot of soup. Chef Obama and his sous chef Mr. Geithner keep adding salt and pepper until the whole mess is inedible, all the while wasting the remaining ingredients in the kitchen leaving cupboards bare and guests unfed.
The newest push comes in the form of the Home Affordable Refinance Program or Hamp. Per the Treasury press release, the Billion program aims to forestall foreclosures and help responsible families stay in their homes. The program will do so by partnering directly with the lenders carrying non-performing loans, via the Gse's (Fannie and Freddie), Fha, and the Fdic.
Current Fannie Mae Refi Plus Programs
How does it work you ask? Hamp will reach from 3 to 4 million at-risk homeowners using a five prong strategy. Here are the highlights:
Five Prong Strategy
1. Originate clear and consistent guidelines for loan modifications
2. Require that banks use the Us Treasury guidelines when modifying loans
3. Allow judicial modifications while bankruptcy when borrowers have no other options
4. Require strong government oversight at banks to monitor compliance
5. Strengthening Fha programs by providing hold for local communities
Who is Eligible for the Program
* At risk homeowners suffering from serious financial hardship. These hardships includes financial shock from temporary loss of income, those experiencing increases in monthly expenses, and/or those suffering from cost shock resulting from an interest rate adjustment or reset on their mortgage. The at risk definition also applies to homeowners deemed "underwater" (with a combined mortgage balance higher than the current store value of the house).
* Homeowners facing imminent default of their mortgage. You are not required to be behind on your mortgage payments to be eligible for a loan modification. Quite the opposite in fact. Studies show that modifications are literally more likely to corollary when done by borrowers before they miss payments. Therefore regardless of either you are current or behind on your mortgage, you may call your lender to ask a loan modification.
* Owner busy homeowners Only! No flippers - The government calls this a "common sense restriction." If you are a speculator, which I assume is their broad term for investor, and/or a house flipper you are out of luck when it comes to the Hamp program. This isn't to say banks won't modify your loan too, rather the incentives from the Hamp program will not apply.
* Fha conforming loans Only! No jumbo mortgages - Another of the so called "common sense restrictions" the Hamp program does not help homeowners who needed jumbo loans when purchasing their home. The incentives in the program are targeted towards helping buyers within the Fha loan limits. To clarify, it does not Require that a homeowner have an Fha loan, simply that the loan balance fall within the loan limits of the Fha program guidelines.
* High debt level borrowers who agree to enter Hud certified consumer debt counseling - This is a special provision for individual homeowners who also meet the other provisions of the program. If their back end debt, which includes all monthly expenses in increasing to their mortgage, is equal to 55 percent of more of their total income, homeowners will be required to enter debt counseling to receive a loan modification.
How it Works
The simple goal of the program is to keep homeowners paying on their mortgages. The principles is that most defaults are not a corollary of homeowners choosing to walk away because they owe too much on their home, rather a confidence that these defaults occur because the borrower cannot meet the monthly financial obligation. By adjusting monthly payments, fewer defaults will occur and housing markets will be stabilized.
The government and lenders will share the attempt to lower monthly mortgage payments to between 31 percent and 38 percent of a borrowers' gross monthly income. The first burden will be on the lenders with the government batting clean up. Steps involved in reaching this goal are as follows:
1. Lenders will sacrifice interest rates on the current loan to as low as 2 percent hoping to reach Dti ratios of 31 percent
2. If interest rate reductions don't perform the goal, amortization periods will be extended to 40 years to reach the proper ratio
3. If after completing steps 1 and 2 Dti ratios still have not reached 31 percent, lenders may forbear necessary at zero interest until ratios are met
4. The federal program will supplement lenders efforts by sharing the costs involved with reducing ratios from 38 percent to the desired 31 percent ratio
5. Modifications will be kept in place for 5 years. After 5 years interest rates can be increased by 1 percent each year to the conforming loan observe rate in place at the time of modification.
Incentives for Success
As incentive to loan servicing companies, the Hamp program will bonus each servicer with an upfront fee of ,000 for each successful modification made within the guidelines. Further servicers will be given an Further ,000 per year up to 3 years, called a "Pay for Success" incentive as long as the borrower successfully remains in the program. These success incentives will also be available to servicers who modify, Fha, Va, or agriculture branch loans, and/or refinance loans according to the Hope for Homeowners programs.
Lenders and servicers willing to reach out to borrowers not currently in default may receive an Further ,000 incentive cost (,500 to mortgage holders and 0 to servicers) by completing successful loan modifications before a borrower misses a payment. Borrowers themselves will receive Further incentive by successfully staying in the modification program. An Further ,000 per year, up to five years, will be given to borrowers going straight towards reducing the necessary balance on the mortgage loan.
Addressing Further Value Erosion
One of the superior issues regarding lenders is the risk of Further value erosion if modifications fail and they are forced to ultimately foreclose at a later date. To address that issue the Us Treasury branch will fund up to Billion dollars for a program set to partially offset losses realized by lenders who touch steeper losses on foreclosed loans after completing a modification. Structured as a simple cash payment, it will be received by mortgage holders on each modification, related to the declines in the home price index.
Junior Liens
Although junior lienholders are not required to participate, lenders and servicers participating in the Hamp program will receive Further incentive to extinguish junior liens in order to sacrifice the overall indebtedness of the borrower. Servicers will be reimbursed for the release according to a specified program and will receive an Further 0 cost for obtaining the release from a valid second lienholder.
Thoughts and Issues
Preferential treatment towards one class of borrower and geographic difference across the 50 states are the two most glaring problems with the Hamp program. Although well intended and very much needed in the residential markets, the program will continue to be viewed as biased and raise resentment among the majority of borrowers, currently not eligible for the program. Clearly directed towards homeowners in the most dire of circumstances and with the fewest alternative solutions, wealthier borrowers and more sophisticated professional investors are left to fend for themselves.
If lenders and the federal government encourage Hamp qualifying borrowers to place themselves in a good financial position by changing the terms of their agreed up on loan, and then paying them to do so, shouldn't wealthier borrowers and investors be encouraged to do the same? If one group of borrower is "villainized" while others are forgiven for the same behavior isn't it human nature for that first group to safe themselves against perceived unfair attacks?
The message of the current supervision is hope and change. Those of us encouraged by the message hoped that convert would apply to all of us equally when reflected in collective policy. Their required program includes the stemming of a financial meltdown in the financial markets driven by catastrophic losses in the residential real estate markets. Unfortunately the piecemeal coming to the problem has only encouraged more bad behavior by many who feel left out or villainized.
In principles we all pay taxes and we all have an equal vote. In custom the policies and programs which spend tax payer money and address issues facing all groups of American citizens should be available equally and without bias or should not exist at all.
Highlighting Hamp - Home Affordable Refinance program
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